Stewart Investors is now more cautious on emerging markets than at any point in the last few years as a result of both macroeconomic risks and a lack of stock opportunities, according to manager Ashish Swarup.
Mr Swarup said the cash weighting in his soft-closed £2.9bn Global Emerging Markets (Gem) Leaders fund had been raised to 9.3 per cent as a result of the team’s difficulty in finding new places to invest.
He said: “We are very cautious on markets and cash is at the highest level it has been for the last few years.”
The stance comes despite the asset class having seen a return to form this year. The MSCI Emerging Markets Index has risen 10.1 per cent in local currency terms in 2016, buoyed by market rallies in countries such as Brazil and Russia.
Investor sentiment had gradually become more favourable as a result, but Donald Trump’s US election victory gave new reasons for concern: US dollar strength and the future of free trade policies.
Mr Swarup acknowledged market optimism had come to an end, but added he was more concerned by fundamental issues such as a suppressed global interest rate cycle and a lack of broad-based growth in many regions. He said: “These issues need a resolution, and they are making us very cautious.”
Cash levels have also risen in Mr Swarup’s other portfolios. The £916m Asia Pacific fund, for example, now has a cash weighting of 6.3 per cent.
However, the manager said any broad catalyst for an upswing in sentiment would not prompt him to reinvest. He said valuations would rise too quickly for the team to take advantage of any such change.
Instead, the Stewart Investors team is searching for new companies in which to deploy capital, using its favoured “referral network” approach. This seeks to identify businesses with the required qualities that are introduced to the team by owners, directors or other representatives of firms already held in the Stewart portfolios.
“Honest people tend to only work with other honest people,” Mr Swarup said. The manager added that Stewart Investors has a network of people in its favourite markets who seek to partner firms with the sustainability-focused fund house.
“We have a network that helps us decide which people are crooks and which people are not. Unfortunately, in the markets we deal in, 80 per cent of the businesses are and 20 per cent are not,” he said.
But Mr Swarup – who took charge of the Gem Leaders fund from Jonathan Asante in July 2016 – is eyeing five Chinese stocks, despite the strategy generally struggling to find likeable firms in the country.
The Stewart funds have historically shunned large parts China, Russia and Indonesia, given the high concentration of state-owned companies, and what the firm sees as high levels of corruption. However, Mr Swarup said the five companies, which he did not name, would be added to his portfolios when valuations fell to the right levels.