Emerging MarketsSep 27 2017

Interview: Henderson's Glen Finegan warns against EM 'cheerleading'

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Interview: Henderson's Glen Finegan warns against EM 'cheerleading'
“The career path for me was staying to run a closed book of business, or taking a little risk”

Sentiment around emerging market equities has improved notably over the past 18 months, but finding the best way to invest in developing world companies remains up for debate. It is a space where even the most cost-conscious of fund buyers tend to make the case for active management. But given the asset class’s reputation for volatility, selectors typically look to seasoned hands to pick stocks.

Glen Finegan – the former Stewart Investors man charged with leading Janus Henderson’s march into the emerging market arena – has spent more than 15 years as an emerging market specialist. Leaving Stewart in 2015 meant he became a figurehead for the first time, and presented a different challenge: trying to convince fund buyers that he could replicate his past success at a new firm.

Mr Finegan has carried the risk-conscious Stewart style across to Henderson. Having taken over a minimal amount of assets from the company’s former Gartmore team, his six-strong unit now manages more than $4bn (£2.9bn) in assets, including £472m in the firm’s retail fund. But the manager says he’s not a champion of the space, and although his career has been devoted to emerging markets, he remains wary.

“We’re not cheerleaders for this asset class – it is risky – so the only sensible approach is to invest accordingly,” he explains. 

“It’s clear that the world’s population growth is in the developing world and that’s a powerful tailwind. But you have to think about the risks and rule of law, and shareholder protection. Too many portfolio managers become chief marketing officers for their asset class and that’s dangerous.

“We put capital preservation ahead of capital gain, so we come at investing from more of an absolute return approach. Historically, this has delivered relative outperformance when markets have been falling, [but] we will underperform when emerging markets are in fashion and there is an element of momentum. The moment people get excited, we tend not to be there.”

So how did Mr Finegan, only midway through his career and having spent time in Singapore with Stewart Investors, find himself in Edinburgh building a new franchise?

His career began as an engineer working in the oil industry covering countries such as Nigeria, Egypt and even Azerbaijan – an aspect which he claims gave him “a taste for the developing world”. Itchy feet swiftly followed: “Engineering school wasn’t very good at communicating the world outside engineering,” he says.

Having already begun investing as a personal pastime, he then started encountering investment professionals outside of work. “It occurred to me they were doing for their job what I was doing for my hobby. It became obvious that maybe following the engineering route wasn’t for me.”

A short period later in 2001 Mr Finegan became an analyst at what is now Stewart Investors, under the guise of Asia-Pacific veteran Angus Tulloch.

“I was lucky enough to get a job with someone who was such a good investor,” he says. “You need a good apprenticeship in this industry and there are very few great investors around. Over that time I learned from Angus and the team about turning my hobby into a profession.”

By 2009 Mr Finegan had impressed and was appointed investment manager on the firm’s Global Emerging Markets fund. By 2011 he was working on its flagship Gem Leaders portfolio alongside Jonathan Asante. Following the fund’s soft closure three years later, Mr Finegan says he reached a crossroads in his career.

“When I left we were running tens of billions of dollars and the funds were closed. The career path for me at that stage was staying there to run what was essentially a closed book of business, or take a little risk, make for an interesting second half of a career and see if I could build a franchise,” he says.

Following a year’s break from the industry and numerous discussions with Mr Tulloch, Mr Finegan parted ways with Stewart. By 2015 he was back in the UK at Henderson, looking at redeveloping an emerging markets business previously managed by the former Gartmore team.

He explains: “What I was looking for was a blank sheet of paper. I didn’t necessarily want to run my own firm, which was an option. I haven’t run an investment firm and I didn’t know if I would be any good at it, but I do know how to run investment portfolios and an investment team.”

Mr Finegan’s team stands separate from the rest of Janus Henderson. The unit operates its own office in Edinburgh, and its remuneration structure also differs from that seen elsewhere in the business. He describes it as feeding into the “sell early, be defensive and preserve capital” team philosophy. There are no performance bonuses, with staff given a share of the franchise’s profit, which is then reinvested in the emerging markets strategy for three years. All team members have what the manager terms a “significant proportion” of their personal wealth invested in the portfolios.

“This is a boutique investment team operating with corporate support,” he says. “Henderson has a history of individual teams pursuing their own ideas and philosophies, so this idea of autonomous investment was not foreign to the culture, and that was important.”

Following the arrival of former Stewart colleague Stephen Deane in 2016, the team wrote its investment manifesto. Mr Finegan describes the strategy as being “absolute return” focused – it uses a watch list of more than 350 stocks developed by Mr Finegan since 2001. All companies on the list are defined as “good quality”, which means a history of stable returns, shareholder-friendly policies and a conscience. Valuations decide which of the stocks make it into the fund.

“We’re not value investors, but the way we protect from losing money is, first and foremost, avoiding companies that are not good enough quality. We define that by the people behind the business,” he says.

“We’re not just assessing how people treat minority shareholders, but other stakeholders and the environment, too. It’s naive to think a family group that is quite happily using child labour or polluting the drinking water will treat minority shareholders well. That is a risky group and you should recognise that. There are lots of groups that may not have abused minority shareholders, but the way they built their franchise is questionable.”

There are no Chinese internet companies on the watch list, due to the lack of rights granted to foreign minority shareholders. And while Indian consumer companies fit the bill perfectly and heavily populate the list, none of them are currently in the team’s portfolios. 

“There are parts of our watch list that are trading at bubble valuations,” he notes.

Since Mr Finegan’s arrival the franchise has seen sizeable growth, and being able to take in new money has set the manager apart from his former employer. He now runs a St James’s Place (SJP) portfolio previously managed by Mr Asante, meaning the SJP fund has reopened to new clients. The Henderson vehicle was also recently added to FE’s model portfolios for similar reasons.

Yet the six-strong team wants to stay small in size and the manager dismisses the idea he might want to scale up. “We want to stay a small team of like-minded stockpickers. In time we may add one or two more people, but this will never be a huge team and we’re never going to have offices in Sao Paulo and Moscow and Beijing. This is a boutique investment team supported by a large corporate,” he says.

Mr Finegan says he is content building up a book of business with “like-minded clients”. “The value of an equity is really in the terminal value, and that’s in the earnings for the next 20 or 30 years,” he says. 

“If you think emerging markets are going to go up by another 40 per cent this year, you shouldn’t buy our fund. But if you think emerging markets could deliver good returns over the next 10 years – but accept that there will be bumps along the way – we have a very risk-aware approach.”

 

CV: Glen Finegan

2015 – Present

Head of emerging market equities, Janus Henderson

2009 – 2015

Investment manager,First State Investments/First State Stewart

2001 – 2009

Global emerging market analyst, First State Investments