InvestmentsSep 1 2014

Fund Review: SLI Global Emerging Markets Equity Income

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This £323.3m fund is a relatively new entrant to the market, having been launched at the end of 2012 by Mark Vincent. The manager says the fund’s inception reflects the investment house’s belief in the long-term investment case for emerging markets, which is not traditionally considered an income asset class.

Mr Vincent adds: “With respect to the income target, the aim is to deliver a yield which is meaningfully higher than the benchmark [the MSCI Emerging Markets index]. The formal specification is that it’s greater than a 15 per cent premium to the benchmark (but in practice it’s typically significantly higher than that – a 30-40 per cent premium to the benchmark) and also to have a focus on dividend growth.”

Mr Vincent describes the process behind the fund as having two pillars, with 50 per cent of the fund invested in high, sustainable dividend ideas and the other half invested in dividend growth ideas. “So it’s a little bit different from some propositions that are out there,” he explains. “Some have a hurdle rate, where a stock needs to yield a certain amount to get in the fund. I deliberately don’t do that and I think that makes the opportunity set broader.”

He points out that with 50 per cent of the fund, he has the flexibility to buy a company that he believes will show dividend growth in the future, even though, for example, it may be yielding only 2 per cent today. “So you get paid, effectively, from a growing dividend stream, which is more valuable than a stagnant one,” he remarks.

While devising the fund, an important consideration was what investors are looking for in emerging markets. “One of the reasons,” he says, “is because of the medium-term superior growth prospects that are on offer.”

Macroeconomic factors are secondary to bottom-up fundamental analysis of stocks, he adds, and company meetings are an important part of this process. That said, macro factors can influence his investment decisions in two ways.

“To the extent that there’s a significant macro driver at the stock level, we would consider that as we do our stock analysis and think about whether that was priced in or not,” he elaborates. “But then it comes in more at the portfolio construction level, where you’re thinking about the top stocks that I like, each one for company-specific reasons.

“What does that look like when I assemble that into a portfolio? Am I comfortable with the macro risk that such a portfolio would imply? In cases where we might not be, then we make adjustments at the portfolio construction level.”

Mr Vincent says that an emerging markets income fund should not be overly defensive, although he suggests the yield offers some volatility mitigation. This could be why the fund sits towards the riskier end of a risk-reward profile at level six, although ongoing charges are 0.99 per cent, according to the fund’s key investor information document.

While Mr Vincent acknowledges that the formal track record of the fund is not very long, its performance since inception has shown him how it behaves in different market environments.

According to FE Analytics, in the year to August 11 2014 the fund has delivered 4.37 per cent to investors against an average return in the IMA Global Emerging Markets sector of 3.25 per cent.

The manager maintains that buying into the fund does not mean investors are simply buying the benchmark. He notes: “One of the things I’m particularly pleased about is that it has tended to outperform when the markets have gone down, which you would generally hope that an income fund would, but we’ve also added value when the market’s gone up quite significantly.

“If you look at the last few months when the market was up 7.5 per cent or so, the fund has kept pace with that and actually slightly outperformed the benchmark, whereas most of the other income funds out there have been a bit behind over that period.”

Expert view

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

This fund has a very short-term track record, with Mark Vincent running the portfolio for less than two years. The performance during this very short space of time has been hovering around the sector average. With 103 holdings, this fund is quite diverse, which should appeal to more cautious investors. It also has good geographic diversification, with relatively small exposure to each country in the emerging markets space. The fund has quickly reached a sustainable size of more than £300m and the ongoing charges look reasonable for a fund in this sector.