“This means if you are just going for high income in emerging markets, for instance, you might get drawn into certain sectors too heavily,” he notes.
“We’ve always looked at a slightly lower income, but that means you can have a broader sectoral and country spread to have a true emerging markets portfolio. We also had some reservations about income as sometimes high yield can mean high risks. So we want to own companies that have sustainable dividend income, rather than these dividends being cut in one or two years.”
The fund has been co-managed by Mr Denman, William Calvert and Ming Kemp since inception and the process has remained consistent. Mr Denman explains: “We’ve always run money in the same way – we ran it at Axa Framlington in the same manner. We have always had a focus on domestic-orientated companies with strong management, strong business models and opportunities. What we’re looking for is diversification, [which] is key for us. We have a flat portfolio structure so every stock will contribute to performance and income.”
He notes the process is “old-fashioned, not putting all our eggs in one basket”, although this approach tends to give the fund a mid-cap bias. “As bottom-up stock pickers we meet lots of companies and the most interesting ones are generally in the mid-cap space. It’s also where they are under covered,” the manager points out.
Investing in emerging markets means the team is “acutely aware” of the macro environment, particularly foreign exchange risks. It monitors these factors using a macroeconomic framework that looks at inflation levels, government debt levels, fiscal deficits and current account deficits.
The manager adds: “We also monitor government policy and elections to make sure there is no material shift in policy. We want to be investing in countries with sensible economic management and prudent [leaders]. It is why we wouldn’t invest in places such as Argentina and Venezuela. And why we like India, as that leadership and economic framework is pretty solid.”
The fund’s ‘clean’ I accumulation share class has an ongoing charge of 1.2 per cent and sits at the riskier end of the spectrum at five out of seven.
As with most vehicles focusing on emerging markets, this fund has struggled in recent years, losing 4.8 per cent in the three years to October 12 2015 compared with the average loss of 3.6 per cent by the IA Global Emerging Markets sector, data from FE Analytics shows.
However, recent performance is improving and since launch the fund has outperformed the sector with a small but positive 1.8 per cent return from its R-share class, compared with the 12.7 per cent average loss by the sector.
Mr Denman notes one of the biggest changes in the past 12 months has been in Brazil, where the team moved from a large overweight position to an underweight during the election last year when Dilma Rousseff narrowly beat opponent Aécio Neves. He explains: “It became clear it would be too much for Mr Neves to win this time around. He was very much a pro-business leader, far more about a strong and sensibly run economy that lives within its means.
“So we’ve shifted to an underweight regarding those concerns around Ms Rousseff’s second term, and the problems facing the Brazilian economy: very high inflation, political instability, the corruption scandal and the commodity bust. Fortunately, it was a good move because Brazil has been a difficult place – the currency has devalued significantly in the past 12 months.”
The manager notes the team focuses on good quality companies. This has helped performance as it has meant an underweight to commodities and a bias towards firms that are consistent, cash-generative businesses with strong balance sheets and stability.
“We’ve always got to find the right companies,” Mr Denman says. “We’re not going into a country or sector because we think they are attractive. What you avoid is as important as what you buy – it is something that’s often understated.”
EXPERT VIEW
Jon Beckett, UK research lead, Association of Professional Fund Investors
Polar poached William Calvert, Neil Denman and Ming Kemp from Axa Framlington in 2011 for this fund, and what do you get? A target initial yield of 3.5 per cent a year, a broad spread of income sources along the market cap spectrum from different countries, and individual stock risk kept low with individual positions rarely above 2 per cent. But the fund carries a lot of macro exposure. In 2011 it had a fairly bullish consensus view towards China, and 15 per cent exposure, which has been extended to a contrarian 20 per cent and comes through in the top holdings. There is a lot to like about Polar, the team and this fund, but buyers will need to decide whether they wish to buy into the China story, and then act accordingly.
