Somerset’s Lam holds up in spite of China call

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Somerset’s Lam holds up in spite of China call

Missing out on China’s stellar rally in the past year has hit the Somerset Emerging Market Dividend Growth fund’s performance – but manager Edward Lam has found good opportunities elsewhere.

The £1bn portfolio, which marked its fifth anniversary on March 29, delivered a total return of 17 per cent in the 12 months to May 5, underperforming its MSCI Emerging Markets index benchmark, which rose by 19 per cent, according to FE Analytics.

Looking back on the recent China rally, which has witnessed the Shanghai SE Composite soar by 137 per cent in the past 12 months, Mr Lam admitted, with just 4.1 per cent invested in the world’s second largest economy, he “almost completely missed out”.

“China is difficult to judge,” he said. “It is hard for our type of investment, as it is a very speculative market. Most of the economic data is surprising on the downside.

“I am not saying that we are not interested in getting involved, but it is very difficult to find good quality at the right price.”

While Mr Lam would not label the meteoric rise a bubble, he said it was “reasonably clear” a lot of retail investors were moving out of property and into the equity market.

The weekly number of new investment accounts opened in the A-share market jumped to 1.67m from the historical average of 240,000 at the end of March.

In spite of its recent performance, since inception the Somerset Emerging Market Dividend Growth fund has significantly surpassed both its peer group and benchmark with growth of 41 per cent.

In that time, the average fund in the IA Global Emerging Markets sector delivered a return of 13 per cent and its MSCI yardstick rose 17 per cent.

Part of the reason for Mr Lam’s robust long-term performance has been his decision to avoid higher-yielding stocks.

But as a result, the fund’s estimated dividend yield of 2.3 per cent lags the benchmark’s 2.6 per cent.

The manager said his view on the weakness of dividend-paying stocks had remained largely unchanged since “late 2012/early 2013, when the problem was most acute”.

But he said: “A certain amount of heat has come out of this part of the market. Many are still at a premium, but not to the same extent.”

Mr Lam said he believed emerging markets were “essentially recessionary”, enduring a period of very weak growth.

Korea presently represents his heftiest geographical bet, with an allocation just shy of 14 per cent of the fund. It is a nation he has been adding to.

“In Korea, there does seem to be improvement towards corporate governance and capital management. Certainly companies are much more receptive to discussing issues on shareholder value,” said Mr Lam.

Mr Lam cited Korean group Nexen Tyre, which has a 1 per cent dividend yield, as a stock he was buying into, claiming the group’s efforts to double its production capacity meant the shareholder payout had the potential to rise.