Somerset Capital Management emerging market equities manager Mark Asquith has been stockpicking in Brazil and Chile, despite fears of another tumble for his asset class.
The manager said that while another decline in emerging market stocks remained possible, he had made additions in his Emerging Markets Small Cap portfolio, as well as boosting existing positions.
His decisions come at a difficult time for the sector, with the MSCI Emerging Markets benchmark down more than 14 per cent in the past year.
“Although we are perhaps as pessimistic from a top-down perspective as many of our competitors, we are primarily driven by our bottom-up process and when opportunities come along we have to take them,” he said.
“There may still be another leg down the other side of this rally, but good names added to at cheap levels should make money in the medium to long term.”
The tide among emerging markets has begun turning, according to some commentators.
Capital Economics last week reported only a slightly negative net purchase of equities by foreign investors in January, compared with the negative net figure of $10bn six months earlier. The research agency said it expected emerging market equities to grow by 25 per cent in the next two years.
Mr Asquith’s £40m fund had around 10 per cent in cash at the beginning of last year because of “a lack of compelling opportunities”, but more recently the manager has put this to work.
The changes, implemented since October 2015, include the addition of Brazilian food company M Dias Branco and Chilean retailer Forus.
Mr Asquith has also added to existing positions in South African road builder Raubex and South Korean manufacturer SungKwang Bend.
Some changes to the fund, which had 4.4 per cent in cash at the end of January 2016, rest on Mr Asquith’s belief that pressures could be easing for certain cyclicals.
“Some of the value components of the portfolio had fallen particularly hard – such as Raubex, SungKwang Bend, [Turkish glass company] Trakya Cam and [Taiwanese manufacturer] Nak Sealing –which provided opportunities to add,” he explained.
“These are in more cyclical industries, but have strong balance sheets and showed some improvement in earnings trends versus expectations and extremely cheap valuations.”
The fund also benefited from a focus on fundamentally strong companies and limited exposure to China.
“We outperformed the falling market, as we often tend to, because the companies in the portfolio tend to have an average net cash position on their balance sheets of double the universe profitability and double the dividend payout ratio, with strong governance and acceptable valuations,” Mr Asquith said.
“Chinese stocks did terribly in January. We only had one domestic Chinese name.”
At the end of January the portfolio was heavily skewed towards India and South Africa, making up 16.5 and 14.7 per cent respectively, with 5.3 per cent in China.
The Somerset fund has shed 10.5 per cent in the past year, compared with the Investment Association Global Emerging Markets sector loss of 14.4 per cent, data from FE Analytics shows.