Sam Vecht has been running this £846m fund since April 2009 and performance has varied over that period. He says he seeks to maximise total return by investing at least 70 per cent of the portfolio’s total assets in the equity securities of companies in developing European countries, plus others around the Mediterranean region.
Mr Vecht says: “The fund does not have any particular investment biases that result from our investment philosophy and process. We adapt our stance as economic circumstances unfold. Through a rigorous research process which combines a flexible top-down, bottom-up approach, we identify stocks that offer the prospect of long-term, above average price appreciation.”
While the investment process has evolved since the fund’s December 1995 launch, Mr Vecht stresses four constants: in-depth fundamental research, a team-based approach, flexibility and risk management, as emerging markets are “complex portfolios”.
Clarifying how and when macroeconomic factors come into play, the manager says: “In general, macroeconomic analysis is a more dominant factor in investment decision-making when the outlook is negative. If the environment in a given country is deteriorating sharply, research will be focused on short ideas. If the macroeconomic outlook for a given country is neutral or positive, long stock ideas tend to drive fundamental research.”
In the past year, he has added to positions in Russia. “We have a more optimistic view of the market following the ruble’s precipitous fall in December 2014,” he notes. “The ruble operates in a floating rather than fixed exchange rate mechanism. As the ruble depreciated, this increased Russian corporate competitiveness.” Profitability margins are at four-year highs, he adds.
The fund is considered fairly risky and sits at level six out of seven on the risk-reward spectrum. The ongoing charge is 1.37 per cent on the D2 ‘clean’ retail share class.
This fund has delivered a fairly mixed performance, with returns suffering in the past 12 months in particular. Mr Vecht acknowledges year-to-date the fund underperformed its benchmark, the MSCI Emerging Europe 10/40 index. According to data from FE Analytics to September 23, it lost 29.7 per cent over three years, only slightly better than the 32 per cent decline in the index. Over a 10-year period to September 23, it managed to generate just 1.9 per cent.
When considering which stocks or sectors hurt performance, the manager notes his underweight position in Poland. “We are positive on the prospects for the economy,” he says. “However, the equity market is not representative of this, the larger-cap names being large financial or utility companies that we believe are overvalued.
“Relative performance was also impacted through an underweight position in Hungary, specifically zero exposure to financial OTP [Bank]. The stock is benefiting from the impact of European quantitative easing. However, we are exposed to this dynamic through regional banks which do not have exposure to Ukraine, such as Erste Bank.”
Mr Vecht sees opportunities in an asset class many investors have turned their backs on. “The broad GEM currency sell-off, spurred by a combination of weakened commodity prices and the market’s anticipation that the US Fed will begin to raise interest rates… has continued to redirect capital away from emerging markets. This has resulted in emerging market currencies at or around a 13-year low point. We believe this trend is not sustainable given improving current account balances across emerging markets, with many countries generating high surpluses. This dislocation provides the opportunities to buy currencies that have been abnormally weak and where current accounts are improving,” he explains.
Often, he says, the best time to buy into emerging markets is when currencies are weak, markets are cheap and GDP growth is depressed, with “all three true of the region today”.
“In summary, the outlook for emerging Europe is better than it has been for some time,” he adds. “There are few areas of the world that have been de-rating for eight years and could yet surprise on the upside in 2015. As a result, we are optimistic for the coming 12 months.”
EXPERT VIEW
Lena Tsymbaluk, manager and research analyst, Morningstar
We believe manager Sam Vecht’s main strength lies in his ability to tactically shift the portfolio based on the team’s macro views and his experience in the region. For example, the fund’s timely switch from Russia into Turkey at the beginning of 2014 resulted in significant outperformance that year. Mr Vecht seeks to avoid market-consensus positioning through a slightly contrarian approach and has been able to add value with his off-benchmark positions.
