The UBS Emerging Markets Equity Income fund launched in January 2011 and has grown to £102m in size.
Co-manager Projit Chatterjee reveals that the aim of the fund is to deliver yield with capital appreciation over time.
“We have a stated minimum of delivering at least 120 per cent of the yield of the MSCI Emerging Markets index. But in reality, we have been delivering more than 150 per cent of the index yield,” he explains. “Yield is a primary objective of this particular product.”
Mr Chatterjee says that he and his co-manager, Urs Antonioli, use a fundamentally bottom-up approach to selecting stocks for their portfolio.
“We are looking at a universe of stocks to select high dividend yields based on past dividends, future dividends, our analyst numbers and market consensus numbers. We are then removing overvalued stocks from these high dividend stocks.
“We are applying a qualitative overlay, which involves our analysts opining on where the dividend numbers might not be sustainable for some reason, where there are other issues with the country or industry that might have an impact on its price. Finally, we construct the portfolio.”
Macroeconomic variables do come into the process, particularly when the manager is looking at valuations.
He continues: “Where we have the qualitative overlay, then macroeconomic issues and policy issues are discussed. So we might, for example, on a bottom-up basis find a lot of stocks in a particular sector that, if there are certain headwinds for that sector coming from macroeconomic or regulatory issues, then we might avoid building up full exposure to that sector.”
On a risk and reward profile, the fund is placed at the riskier end at level six, and has ongoing charges of 1.25 per cent.
Mr Chatterjee insists that it is not a very high turnover portfolio, although every couple of months he does a rebalancing to see whether it throws up any potential buy or sell trades. Over the past year, he has increased the portfolio’s exposure to China by adding property, coal and telecoms stocks.
Having launched in 2011, the fund has only just built up a three-year track record, but in that time it has performed well. The fund is top quartile in the IMA Global Emerging Markets sector with a return of 14.76 per cent over the three years to August 15 2014, compared with a sector average of 11.10 per cent, according to FE Analytics.
The fund has also outperformed its benchmark, the MSCI Emerging Markets index, since inception.
“The fund itself has been delivering close to 5 per cent on an annualised basis,” he says. “We are talking about a 3 per cent-plus outperformance over the index. It’s done pretty well, I would say.
“Even though markets are slightly up it has been meaningfully above the market in this period of time, which is now three and a half years, so that’s a substantially long period of time to be able to judge a product by its track record.”
He refers to last year as being “a little more challenging” as some companies cut their dividends unexpectedly, resulting in stock-specific issues for the portfolio.
Nevertheless, Mr Chatterjee expects that over a full market cycle the fund will come out ahead.
“Another way to look at it is since inception, there have been about 18 down months as at end of June 2014 and out of those 18 the fund has outperformed in 13, so it has been defensive on the downside,” he points out.
He attributes much of the outperformance to good stock selection in the telecoms sector, with the portfolio’s holdings in Thai telecoms companies adding significant value.
“Over a nearer time frame of the past one year, our holdings in a couple of Macau casino operators, which we added to the portfolio last year, added the most value,” he notes.
On his outlook for emerging markets, Mr Chatterjee believes the region remains an attractive investment “destination” for the long term. “Demographics, urbanisation and consumption growth will continue to be strong drivers in the coming decade. Notwithstanding some of the near-term challenges, valuations are attractive both in absolute terms and relative to history.
“What is critical is that countries speed up reform to regain their competitiveness and position themselves for the opportunities ahead,” he adds.
Expert view
Martin Bamford, chartered financial planner and managing director, Informed Choice
This fund is managed by the duo of Urs Antonioli and Projit Chatterjee – both managers with a solid research and analysis background. It has performed slightly above the sector average over the past three years, with a return of 12.77 per cent compared with the sector average of 10.63 per cent. At just more than £100m in size, this is a reasonably small emerging markets equity income fund, which will need to grow in assets to give it long-term viability. The fund invests in 60 holdings and has an actively overweight position in telecoms and utilities, which are both defensive income sectors. More than half of the fund is invested in Asia, with the balance in Europe, Middle East and Africa, and Latin America. The historic yield of 4.8 per cent will be attractive for income-seeking investors and the capital preservation track record looks pretty good, which means this fund could suit income investors who are looking for some diversification away from the traditional home of UK equity income.
