InvestmentsSep 1 2014

Fund Review: Polar Capital Emerging Markets Income

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Since launch, the $669.4m (£401m) Dublin-based Polar Capital Emerging Markets Income fund has managed to significantly outperform its peers in the IMA Global Emerging Markets sector, in spite of a tricky 12 months.

William Calvert, who manages the fund alongside Ming Kemp and Neil Denman, notes that while a fund process always evolves over time to some degree, the aim “has always been the same, to capture the benefits of economic developments in emerging markets”.

The risk reward indicator for the fund sits at a level six out of seven, while ongoing charges sit at 1.75 per cent, according to Polar Capital.

He notes the process itself has not really changed, with the managers trying to align themselves with economic development and government policy in emerging markets. He explains: “We don’t do top-down asset allocation, we consider ourselves to be stockpickers and we are garp [growth at a reasonable price] investors, so we’re not trying to make huge multiples.”

He points out the fund is also more mid-cap orientated, with the team not investing in small caps– and with a domestic focus and an emphasis on investment and infrastructure and away from the consumer-orientated story. “We like companies with high returns on equities, very strong balance sheets and strong management.”

In terms of the macroeconomic environment, Mr Calvert notes it is less of an issue, apart from the impact currencies, in particular currency devaluations, could have on the portfolio.

“Then you lose money you’ll never see again. If you were Indonesian and you had invested in your stockmarket in 1998 at the peak of the market before the Asian crisis, you would have made five times your money. If you were American, you would have about broken even last year. That is how bad the effect of the currency devaluation is, you’ve really got be careful of countries with big current account deficits where that risk exists,” he explains.

But he adds: “When you’re looking at stocks, macro is going to matter if you think interest rates are going up as it will affect it from that perspective. What we categorically will not do is say we have looked at all the data and say, for example, Thailand is an overweight and then you go and find some stocks. That, I think, is a total waste of time.”

Since launch in January 2011, the fund has delivered a positive 14.15 per cent, compared with the 3.26 per cent loss from the IMA Global Emerging Markets’ sector average, placing it in the top quartile of the sector for a three-year period, according to FE Analytics. Shorter-term performance has been less positive with a 12-month return to August 14 2014 of 0.71 per cent, which the manager attributes partly to the aftermath of last year’s “taper tantrum” when emerging markets sold-off in the wake of Ben Bernanke essentially announcing the end of quantitative easing in the US.

Mr Calvert notes the fund had “two very bad months in July and August last year”, as investors were taking an optimistic view of Japan, and the improving situation in southern Europe combined to make developed market growth more interesting than emerging market growth. But he adds: “It wasn’t when the market fell, it was when markets recovered in July and August that there was a rotation away from anything domestic into export earners, dollar earners of any sort and anything that earned its currency overseas and had nothing to do with the domestic growth story. We are heavily orientated towards domestic growth and so we got buried.”

While he notes the market hasn’t entirely come back, he says: “Potentially, we are seeing a completely different set of dynamics in emerging markets to those we’ve seen in the previous four to five years and that’s really interesting.” He notes that in the past five years, the emerging markets have been completely dominated by the consumer stocks, which have become more expensive as they have rerated to record high levels “on the back of companies doing quite well, nobody wanting to buy anything else and, most importantly, on a bit of a consumer boom in most of these countries”.

Expert view

Martin Bamford, chartered financial planner and managing director, Informed Choice

During the past three years, the fund has performed admirably with the backdrop of quite challenging market conditions. Performance over the past year, however, looks disappointing. The right conditions for strong performance from often defensive income stocks tend to differ from those for growth stocks, which goes some way to explaining this poor short-term performance. The fund typically has between 60 and 80 holdings, with no benchmark constraints, so the manager has a good deal of flexibility. It has an historic yield of 3.88 per cent, which is only a little higher than the FTSE 100 average dividend yield. In my opinion, this does not adequately compensate investors for the extra risks to their capital.