Investments  

Michael MacPhee ‘belatedly’ cuts back EM in Mid Wynd trust

Baillie Gifford’s Michael MacPhee has acknowledged his move to reduce emerging markets exposure came too late to fully avoid the recent market sell-off.

Mr MacPhee, who runs the group’s top-performing Mid Wynd International Investment Trust, said domestically focused, consumption-led businesses in emerging markets had struggled lately amid a large market drop.

In the past six months, the MSCI Emerging Markets index has shed more than 8.5 per cent, while the FTSE World index is down more than 3.6 per cent, according to FE Analytics.

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Improved economic data in the developed world, weaker emerging market currencies, and the prospect of higher interest rates in the west, have all combined to put pressure on emerging markets.

Economic growth out of China – although at levels western economies could only hope for – has also slowed marginally and fears about its shadow banking system persist, while political disquiet in several countries have added to investors’ bearishness.

In the trust’s half-year update to December 31, the manager said in relation to his emerging markets exposure, the “disappointments are even more evident when viewed through the lens of returns foregone”.

However, the trust reported a strong six months, with the net value of its assets rising a “very satisfactory” 12.5 per cent compared to the benchmark FTSE World index, which rose 6.6 per cent for the same period in sterling terms, according to the results.

“Domestically exposed, emerging markets consumption-led businesses have struggled lately – [Brazilian dental care company] Odontoprev, [port infrastructure and logistics service provider] Santos Brasil Participações, [Turkish supermarket] BIM Birlesik Magazalar, East African Breweries – and our exposure there has been cut back somewhat, mostly belatedly,” Mr MacPhee said.

“These remain strong franchises, nevertheless, with intriguing long-term prospects built on strong foundations and we anticipate this will be thematically a case of ‘reculer pour mieux sauter’ [draw back in order to make a better jump] when viewed with the benefit of hindsight.”

The manager said the trust’s success in the six-month period “boils down to a small number of great businesses, as it nearly always does”.

“Innovation and creative disruption are the key factors in today’s business world,” he said.

“This has been at the heart of what we have got right and of what has been driving markets.

“Asos has continued to take share away from moribund bricks-and-mortar clothing retailers. Priceline continues to benefit from a huge shift to online travel bookings. Xero, our New Zealand accounting software holding, offers accountants and their clients a simple and effective way to keep books online that is sweeping all before it.”

The manager added that his largest holding, IP Group, which is involved in several medical areas such as DNA sequencing, had made “significant contributions” through its various spin-off companies.

Fundamental pressure

A key market concern regards stock prices being driven up by investors in spite of no material improvement in their fundamentals, such as earnings growth.