This $775m (£549m) Luxembourg-based Sicav has been managed by Will Ballard since 2012. The vehicle focuses on investing in companies with high and sustainable dividend returns to provide a portfolio yield “significantly higher” than that of the MSCI Emerging Markets index.
Mr Ballard explains the starting point for the process is high and sustainable yields, although the team is also focused on corporate governance. “Within emerging markets we see corporate governance almost as the proof that a company is doing what it says it does,” he explains.
With a time horizon of between three and five years, the manager points out the team is driven less by “opportunistic” events such as the potential change of government in Brazil. “If we’re looking to invest in a company for the next five years, we can’t just be looking to gauge market sentiment in the short term.”
Instead he points to investing in companies that generate high cashflows, have good governance and where the interests of minority investors and the management are aligned, as demonstrated by the fact they pay out some of their cashflow as dividends.
Mr Ballard says: “If you look at emerging markets over 20-25 years, everyone thinks of them as a growth asset class. [But] if you divide the returns up into capital appreciation and dividends, more than 50 per cent of the returns over the period have come from dividends.”
While the team looks for high and sustainable dividends in companies, “we also want to buy them cheap”, the manager explains. “It is not a deep-value strategy, it’s just a value discipline. We’re not trying to buy firms that are in distress or are huge turnaround stories, we want high and sustainable returns but we just don’t want to overpay for them.”
The team employs a bottom-up, stockpicking process using a screening procedure to identify firms that fit the fund’s criteria. It then meets the management and performs further in-depth analysis, although Mr Ballard points out it is “impossible to not let your views on the macro influence it”. He adds: “When I’m looking at a Chinese company, for example, it is very hard to make assumptions about the future growth profile of that firm without macro considerations being taken into account.”
The fund’s A-dollar share class launched in 2006 and sits at a risk-reward level of six out of seven, while its ongoing charges are 2.05 per cent, its key investor information document shows.
Volatility in emerging markets has meant the vehicle has struggled, and for the five years to April 7 its A-share class has lost 20.2 per cent compared with the MSCI Emerging Markets index’s fall of 10.2 per cent, data from FE Analytics shows. But year to date the fund has returned 7.8 per cent against its benchmark’s gain of 7 per cent.
EXPERT VIEW Rob Morgan, pensions and investment analyst, Charles Stanley Direct |
| This fund prioritises companies with high and sustainable returns. The vehicle has a value bias, so it is not surprising that some of the stronger, momentum-driven parts of the market – such as e-commerce and internet stocks that have provided strong returns in recent years – are absent. This partly explains the fund’s underperformance versus its peer group and benchmark over three years. Typically, periods of outperformance coincide with falling markets and the fund generally lags in sharp rallies. It would therefore better suit investors looking for a more stable, resilient emerging market holding. |
Mr Ballard explains: “Year to date it has been incredibly volatile. At the start of the year we had a significant sell-off by people concerned about the US tightening rates and Chinese growth slowing. Then we had dovish comments out of the [Federal Reserve], the perception monetary policy will be easier for longer on a global basis, and the Chinese [Monetary Policy Committee] meeting and its commitment to a 6.5 per cent growth rate. So [there has been] a big recovery in emerging market equities, largely driven by material and energy stocks.
“We’ve seen a hugely volatile market reaction and unsurprisingly what you’ve seen from our portfolio is that on the way down at the start of the year we outperformed significantly and on the way back up we didn’t keep up with the market but net year to date we’re still ahead of the index. It is that dampening of volatility that our investment style provides.”
The manager notes the team is quite conservative on China over concerns about the huge amount of leverage in the system, resulting in compressing returns on equity. “When we see deteriorating returns within our companies it becomes difficult to allocate more capital to them. It doesn’t mean we don’t think some of the firms in China don’t have great prospects, because there are always opportunities to be found, we just think that compared with the scale of the opportunity set we find it much harder to find good investment ideas than you would expect.”
