The £319m Hermes Global Emerging Markets fund was launched in December 2008 with the aim of achieving returns in excess of the MSCI Emerging Markets index of between 2 and 4 per cent a year on a rolling three-year basis.
The fund, which was a new entrant into the Investment Adviser 100 Club 2014, has been managed by Gary Greenberg, head of emerging markets at Hermes, since 2011 and has a relatively concentrated portfolio of just 62 holdings.
Mr Greenberg explains the fund aims to take advantage of structural changes in the world economy that are transforming the emerging markets. He says: “These are long-term trends requiring a long-term approach. We believe the best way to add value is through an investment process that integrates top-down and bottom-up analysis, looking for quality companies trading at attractive valuations, in countries with conditions that are supportive to growth. Buying at below their intrinsic value provides a margin of safety in a volatile asset class.”
He describes the fund as a blended style, with a top-down framework that identifies countries with conditions supportive of growth and bottom-up analysis that finds quality companies on attractive valuations. In addition, country selection decisions are supported by quantitative models and qualitative considerations.
But Mr Greenberg notes: “Between 65 and 75 per cent of excess return typically derives from stock selection, with country allocation making up the remainder. Running a concentrated portfolio, it is important to pay attention to the broader picture. Events such as the Tequila and Asian crises prove that macro does matter in emerging markets.”
The fund’s key investor information document places the portfolio at a risk-reward level of six out of seven, while the ongoing charges for the F sterling share class are 1.15 per cent.
The fund has delivered strong short- and long-term performance, with a five-year return to the end of November 2014 of 33.48 per cent, according to FE Analytics data. This outstrips both the MSCI Emerging Markets index return of 24.72 per cent and the IMA Global Emerging Markets sector average of 23.7 per cent. One-year performance has been equally good, with the return of 11.24 per cent more than double the IMA sector average return of 5.49 per cent and the index return of 5.21 per cent.
Mr Greenberg attributes the strong performance to its allocation to Asia, particularly India, South Korea and China. As a result the fund remains overweight Asia excluding Japan and underweight the other regions. He explains: “China remains the biggest overweight position as we expect reforms to eventually rerate stocks. We added to our mainland China A-share holdings in anticipation of the opening up of the market to international investors in the fourth quarter.
“India is our second largest country overweight. The jury is still out on whether or not India will get back on track to high growth. The majority of the market – post its recent rally – looks to be trading at fair value, having priced in some upcoming domestic reforms. Thus our exposure, while overweight, consists of a large proportion of export-oriented companies in software services and auto components, along with some exposure to financials and energy.”
Meanwhile, some of the fund’s Russian stocks, such as Sberbank and Mail.Ru, have weighed on performance in the wake of the Ukraine-Russia situation. The portfolio also remains underweight Brazil after the team sold out of Petrobras. Mr Greenberg notes: “We recently added Banco Itaú, Brazil’s largest private bank with a superb franchise. At a sector level, we recognise energy stocks are cheap from a top-down perspective but we have yet to identify many candidates bottom up.”
Looking ahead the manager remains optimistic: “Emerging market economies are slowing, but growth is still sufficient in many of them to provide a fertile environment for well-managed companies to grow. Under the surface, important long-term decisions have been taken in Mexico, China, India, Indonesia and Poland, endorsing market-friendly and efficient economic policies.
EXPERT VIEW
Jake Moeller, head of UK and Ireland research, Lipper
This fund is genuinely multifaceted, incorporating both top-down and bottom-up methodologies. Hermes has an established stewardship and governance business, which exerts considerable influence without being activist. Modelling is extensive, with a proprietary 18-factor model that includes valuation, profitability, earnings momentum and balance-sheet metrics. The most important element within this is revenue analysis. Company visits are also a crucial part of the review process, with the eight-person strong team’s objective to undertake 1,000 visits a year. Hermes also uses a top-down model that gives each of seven countries overweights, neutral weights and underweights.
