Xavier Hovasse is co-manager of the €218m (£171m) Carmignac Portfolio Emerging Discovery fund, which he runs alongside David Young Park.
This global emerging markets fund aims to beat its benchmark, which comprises 50 per cent MSCI Emerging Market Mid Cap index and 50 per cent MSCI Emerging Market Small Cap index.
Mr Hovasse says: “To be a bit more precise, the fund should give you roughly the market performance in a bull market and a lot of outperformance in a bear market because there are some defensive features resulting from the investment process.”
The manager observes that they are long-term investors looking for under-penetrated sectors. He elaborates: “We buy companies that have a good cash flow profile – [those] which have a capital-lite business model that allows them to self-finance their growth. [We] try to avoid heavy [capital expenditure] businesses, such as homebuilders, oil exploration and mining, and infrastructure, which are usually attractive on paper but are poor investments in a growth environment.”
Macro analysis is part of the process and this is undertaken by a country-risk analyst on the team, Mr Hovasse says. “He ranks currencies and country risk from the least attractive to the most attractive, so we look at balance of payment strength and weaknesses. [Whether it is] a surplus economy or a deficit economy; if there is a current account deficit is it a well-financed deficit? Is it financed by foreign direct investment or is it financed by portfolio flows? The former is much better because it’s usually less cyclical and makes the financing of the current account stronger.”
The manager notes that the portfolio tends to have overweight positions in countries with strong macro fundamentals. These include Columbia, the Gulf countries and the Philippines. He says: “North Asia, generally speaking, is very strong because [it has] surplus economies. We have underweight positions in places such as South Africa, Brazil, Russia and Turkey, which have weak economic macro fundamentals.”
It is worth noting the fund comprises roughly 55 stocks and has low turnover, with Mr Hovasse predicting 42 to 45 of the current holdings will still be in the fund in one year’s time. “I would say that our recent changes have been to decrease places that are dependent on oil because the oil price has fallen dramatically,” he says. “We’ve trimmed some of our exposure in Latin America and Europe, the Middle East and Africa where there’s a lot of reliance on commodities, and we increased those countries that benefit from lower commodity prices in Turkey and Asia.”
The fund is ranked towards the riskier end on a risk-reward scale at level five out of a possible seven and with an ongoing charge of 1.30 per cent.
FE Analytics data shows in the three years to November 28 the fund returned 27.75 per cent to investors, against the IMA Global Emerging Markets sector average of 20.04 per cent. It has continued to outperform in the past 12 months, generating a 13.63 per cent return compared with an average sector return of 6.18 per cent.
“We’ve done very well in stock picking, particularly in India,” Mr Hovasse says. “Our Indian names went through the roof and some of them have doubled. We have very little exposure in Brazil, [but we have] a lot in Colombia and Mexico. The Mexican names have performed very well.”
He acknowledges that almost no exposure to Russia and Brazil at the start of this year also helped performance. “At the start of 2014 Russia and Brazil combined were 2.5 per cent because the lack of fundamentals appeared to us to be very weak,” he notes. “By avoiding those weak markets we could easily perform very well, so the country allocation has been very supportive.”
He believes that 2014 has been characterised by a low-growth and high-liquidity environment. “Low growth is a headwind and high liquidity is a tailwind, and when you have a big headwind and a big tailwind at the same time it’s difficult to see a proper direction for the market,” he says.
“But in that environment, quality usually pays off because cyclical names, geared companies or weak macro countries are going to be hurt a lot in the slowdown. So the fund did quite well because of our quality bias.”
EXPERT VIEW
Jake Moeller, head of UK and Ireland research, Lipper
This fund is exclusively bottom up, although fund manager Xavier Hovasse recognises the importance of understanding political machinations in the region in seeking to constrain his investment universe. This fund has a large exposure to small- and mid-cap stocks with an emphasis on free cash flow. The fund also allows exposure to potentially riskier frontier markets, with exposure currently around 30 per cent. However, it has a lower beta because of the emphasis on corporate self-financing in the stock selection process. The appointment of David Park as co-manager in 2012 helps dilute some of the key-person risk, but this is still a fund for an investor with a longer-term horizon.
