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Emerging market investing is too often perceived to be about allocating to countries with rip-roaring GDP growth, says Kim Catechis, manager of the Swip Emerging Markets fund.

That is certainly not a philosophy shared by Mr Catechis who has overseen the £648.6m fund for eight years, since Scottish Widows Investment Managers merged with Hill Samuel Asset management in July 2000.

A fervently bottom-up manager, Mr Catechis believes his team’s strength lies in “drawing our slide rules over companies, peeling away enough layers of the onion, getting to the heart of what makes it beat and finding out what might hurt it”

Unusually, the fund holds between 35 and 45 stocks – “Our comfort level,” he says – a far cry from the typical 80 to 100 stocks or larger portfolios run elsewhere.

Mr Catechis says this strategy is compatible with the original objective of the fund to rely on fundamental in-house research and to reduce turnover by holding stocks for a three-year time horizon. While the average holding period is two and a half years according to Mr Catechis, the fund’s turnover has been 20 per cent year-to-date and 40 per cent over the past 12 months.

Mr Catechis is also bullish in some controversial sectors such as emerging markets financials (5 per cent overweight) and energy (6.1 per cent overweight and largest sector allocation). He says the recent market volatility has produced some attractive pricings on stocks which he has been watching for some time but which previously were “prohibitively expensive”.

One such example is Tenaris, an Argentinean leading pipe manufacturer for the oil and gas industry, which the fund bought at a 20 per cent discount in January, and which Mr Catechis says “is a great way to play the burgeoning exploration that is still going on in oil and gas.”

Swip emerging markets team members act as both portfolio managers and analysts, responsible for researching one individual sector each. Mr Catechis is the fund’s oil and gas analyst. He says, “We are playing energy still because we believe that regardless of what the oil price does, there are some high quality companies in the energy space which are more profitable than their developed market peers and don’t face the same problems that those have.”

He explains that conventional wisdom has been turned on its head in the last five or so years as demand for basic materials pushes the global economy into a new cycle, relegating to history the economics textbooks that espouse the "truth" of end producers achieving better margins than the producers of raw materials. That pricing power has swung back the other way, he suggests, a conviction demonstrated by the fund’s purchase of Brazilian iron ore producer Vale, previously CVRD.

“Iron-ore is a key ingredient for steel and steel is a key ingredient for industrialization and infrastructure investment. China, India, Russia, South Africa are all expanding so the pricing power will stay with iron ore producers,” Mr Catechis says, convinced that the phenomenal growth already experienced in copper, nickel and platinum bodes well for other raw materials producers. Since 2000, the Dow Jones-AIG Commodity index has easily outstripped the FTSE Global 100 indices and marched steadily upwards but whether this is a sustainable trend or buying in at its peak, only time will tell.

Mr Catechis defends his overweight position in financials by saying that many emerging market financial institutions have not developed past “plain vanilla banking” and therefore have very different risk profile to those of the "western" world. “In EM the banks we invest in, like Itau, like Sberbank, like HDFC in India, they haven’t had to invent a new way of making money [such as derivatives in ‘western’ banks],” he says.

For example, he says the 1998 Russian default wiped 40 per cent off of people’s savings and consequently only 18 per cent of Russian adults have a bank account. “There are still people out there who literally keep their money under the mattress,” Mr Catechis says, “We believe that population is now at a stage of maximum confidence since the dark days of 1998 in terms of their future and their ability to invest in their own future. So, we expect mortgages and credit cards to be a great source of revenue generation for Russian banks." And Sberbank controls 70 per cent of deposits in Russia.

Another “prime example of how banking is different in the emerging markets”, Mr Catechis says, is Brazilian Bank Itau. From a capital adequacy ratio of 16 per cent 10 years ago, the bank acquired seven of its competitors, returned $2.5bn to shareholders in dividends, maintained return on equity above 28 per cent and matched the 16 per cent cap adequacy ratio in 2007, “without ever going to shareholders cap-in-hand,” he explained.

This style of play lends itself to Mr Catechis’ patient approach to stock selection. However, controversial sector and country allocations have not prevented the fund from underperforming the MSCI Emerging Markets index over three years, returning £206 net on £100 investment compared with £240 from the index. Over one year and three years, the Swip Emerging Markets fund has ranked 14th out of 33 in the IMA Global Emerging Markets retail sector.

Mr Catechis says country allocation requires “an element of subjectivity” as the usual risk measures of long-dated government bonds and the liquidity of the government bond market is often lacking in emerging markets. Consequently, the Swip team employs analysis produced by independent research boutiques and geo-political specialists to help determine the relative riskiness of investing in country A over country B.

Mr Catechis adds, “Our discount rates applied to countries tends to be higher than those used by the sell side but you would expect that because they are writing research for investment views of 6 months to one year; we take three year view.”

In this fund, the longer view strategy over-rides GDP-led country allocation, allowing the team to take bets on other economic factors such as inflation. Mr Catechis says that if an emerging market can lower inflationary levels of, say, 8 per cent and hold it for a few years at, say, 5-6 per cent, productivity need not rise for the "middle class" to swell with "new money" to be fed into the economy. He says countries such as Brazil and South Africa, which have performed strongly in recent years, have struggled to breach GDP levels of around 3 per cent but have made progress on controlling inflation (although South Africa is suffering a ‘blip’ at present).

One country call which hurt the fund recently is Turkey. Mr Catechis excluded it from the fund based on a lack of clarity about it political stability: In July, it was the strongest performer, up 28 per cent. Equally, Mr Catechis’s conviction about Brazil (overweight 6.9 per cent) and Russia (overweight 12.9 per cent – the largest country allocation) has cost the fund over the short-term, as both underperformed in July. The sector biases have also been hit. Mr Catechis says, “July has been a very harsh month for energy stocks, which have all been marked down and our energy stocks have not been immune to that. We have an overweight in that sector.”

However, he remains sanguine: “When you take a decision, you understand that you may take a hit on a month or 3 months but the important thing is to understand why you received a hit, where it’s coming from, and review your research and ensure your conviction in your stocks is still strong.”