Investec’s Saunders makes ‘big bets’ on EM

Mr Saunders, who runs the semi-fettered £107m Managed Growth fund with Max King, believes unloved areas could perform strongly despite caution among some of his peers.

As a result, the manager has been upping emerging markets and natural resources exposure over the past year.

At the end of March, emerging markets made up 14 per cent of the vehicle, and resources almost 3 per cent.

“The value case is very strong,” Mr Saunders said. “We think commodities have turned and, in the final years of this bull market cycle, there’s a reasonable chance you see growth broadening and the value gap between developed markets and emerging markets closing.

“It’s quite a big bet on cyclical versus quality. This cycle has been very developed-markets dominated and quality dominated. If this cycle has more to run, we assume the leadership is going to rotate. The divergence between quality and the risky stuff seems too high, so either quality comes down or cyclicals pick up the baton.”

Wider sentiment has not deterred him from this stance.

“On balance, multi-asset managers haven’t had enough skin in the game in this cycle because of 2008 and the cycle’s unorthodox monetary policy,” he said.

In the past year, the manager has added to holdings in Prosperity Capital Management’s Russian Prosperity and Genesis Emerging Markets funds, with his investment in the former related to what he perceives as market misjudgements.

“The equity market in Russia became too cheap and the currency market became too cheap,” he explained. “We think the sanctions [on Russia] are going to be lifted and oil prices were undershooting.

“The Russian economy has proved to be more resilient than people expected.”

He also bought Fidelity’s China Special Situations investment trust last summer, as investor fright drove down market valuations.

“It’s a very good vehicle,” he said. “Having been overrated it’s now an underrated fund, so the discount is pretty attractive.

“We like the team. Clearly being able to buy that quality of assets into a phase of market weakness was good.”

Such additions have been funded by a cash flows and a reduction of the fund’s weighting to the global multi-asset RIT Capital Partners trust.

The managers also bought Investec’s Global Natural Resources offering as markets tumbled earlier this year.

“We bought that as things collapsed in January,” Mr Saunders said. “That turned out to be fortuitous timing.

“Specialist managers tend to get too close to their areas. When they have had a bear phase, they get a bit beaten up. We have encouraged [the Investec team] to be more optimistic. A lot of people have canned their commodities teams. The BlackRock team have attracted money in this area but they have struggled.”

According to FE Analytics, the Investec Managed Growth fund has returned 21 per cent over three years, compared with 11 per cent from the Investment Association’s Flexible Investment peer group.