A call to crank up emerging market exposure at the expense of US holdings has started to pay off for Guinness Asset Management’s global managers after the Chinese equity market’s recent steep rise.
Ian Mortimer and Matthew Page, who run the group’s $139m Guinness Global Equity Income fund, started shaving their US exposure 18 months ago in favour of emerging market stocks and some plays in Europe.
The rationale was that US stocks had started to look expensive, a trend that has continued unabated and pushed the country’s stocks to high valuations.
Mr Mortimer acknowledged in some cases the move had been a challenge, particularly with his investment in China National Offshore Oil Corporation (CNOOC), which he bought in October last year.
The manager said it “was not great timing because of the oil price”, which was still falling dramatically at that point, but the process he used to analyse stocks meant he was confident it would rebound.
“But what we have seen is very good results come out from [CNOOC] in the past two to three weeks,” he said.
“There were worries about its ability to grow production, as well as a thought in the market that it was fairly profligate and margins could erode.”
Data from Bloomberg shows that since mid-December CNOOC’s stock has risen 33 per cent, which will have been a tailwind for the fund.
Mr Mortimer’s investments in other Chinese stocks, such as China Mobile and Li & Fung, which are all listed in Hong Kong, will also have been a driver of performance in recent months given the Shanghai Composite index has risen 135 per cent in the past year in sterling terms, data from FE Analytics shows.
The Guinness fund has returned 59.4 per cent since its launch in December 2010, which puts it fourth out of 20 funds with a relevant track record in the Investment Association Global Equity Income sector, according to FE Analytics.
Mr Mortimer said he was still invested in US stocks, though, and only had 40 per cent at the end of March compared with 60 per cent for the fund’s MSCI World index benchmark.
“If you are a value investor and you look at the US, especially dividend-paying stocks, it is hard to fund value,” he said.
He added there were just four companies in the US market now yielding more than 4 per cent, three of which were tobacco stocks.
The manager said he had held Reynolds American since the launch of his fund, but sold it in the third quarter of last year “purely on valuation”.
“It is trading at the highest multiple it has ever done,” he said.
“[Reynolds American] has continued to go up since we sold it, potentially by as much as 30 per cent and, it has really outperformed the broader market. But that seems like a reflection of people getting pushed into buying higher-yielding equities, regardless of the valuation.”