Issue 24 • May 20128 COMMUNITY

Buyers’ marketBuyers’ market

citywireglobal.com Results compiled by the Citywire research team

We may live in an interconnected world but sometimes it’s best to keep it pure and simple. Whether looking for equity exposure in Africa, Asia or the Americas, who are fund selectors’ favoured single-country specialists and why?

Editor’s Verdict‘Building blocks’ is a phrase we’ve been hearing a whole lot more of recently. As selectors take an increasingly DIY approach to their asset allocation, broad emerging market and global equity exposure it seems is frequently being supplemented with clear-cut single market boosters.

But do these specialists have to be there on the ground? Or does a more international take on the theme often fit the bill?

This month we decided to put it to the test, quizzing selectors on who they place their high conviction country bets with and why. From the views expressed on these pages accessibility is

a big draw, with Templeton’s inimitable Mark Mobius scoring plenty of plus points for his lengthy track record and transparent approach.

The big houses are well represented with DWS, First State, GAM and Invesco all getting a mention while a smattering of niche players reveals selectors have certainly been putting in the hours to uncover some real experts in their fields.

Others however, are less convinced on the idea as Moscow-based Simon Fentham-Fletcher points out by comparing the practice of single-country allocation to fortune telling. Recent economic crises he says have ‘reverberated globally’ making geographic diversification more important than ever.

When it is about pureness and simplicity in equity fund management, Seung Minn’s

Allianz RCM US Equity fund comes into my mind. Based on RCM’s proprietary stock research, Seung identifies either stocks with attractive valuation figures or appealing upside potential with clear catalysts. Due to this approach he buys stocks which are neglected by

the market, which differentiates him from most other fund managers in the peer group. This investment process

sometimes takes time to materialise, the fund might fall behind the

benchmark once in a while, as it did recently. However, in

the medium and long term, Seung has outperformed the market and is our preferred choice in core US equity.

When it comes to Asia we usually rely on two seasoned experts: Templeton’s Mark Mobius and First State’s Angus Tulloch. Both have been pioneers in the region, boasting decade-long experience as the first international investors in Asia. Mobius, whose funds include Templeton’s Asian Growth and Asian Smaller Companies, follows the value approach the firm is renowned for and displays strong knowledge of companies and fundamentals, but most of all a good feel for asset flows and the political atmosphere which can be of decisive influence. Despite his reputation, he has remained accessible and keeps his decisions transparent, which is an essential factor for us.

Tulloch, whose funds include First State’s Asia Pacific Leaders, displays a similarly strong track record and has established a convincing, rigorous process that has been expanded successfully to global emerging market mandates and also product spin-offs with a sustainable touch. Tulloch and his team follow a bottom-up, research-driven approach with a focus on non-cyclical companies with sustained growth prospects that can deviate substantially from the respective benchmarks. As is the case with Mobius, we appreciate the opinionated, individual approach with clearly articulated market views and corresponding meaningful portfolio positions, which in our view adds value and justifies active management over passive index-tracking.

Markus Baumgartner BMW Bank, Germany

Wolfgang Ules Capital Bank, Austria

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In Africa I like Investec’s message, they have an established research team and were quick to spot the opportunities in countries like Nigeria, a democracy that continues to have growing pains but retains a strong long-term outlook. I prefer to split my Middle East exposure to Africa funds rather than using MENA funds; in this way we can ring-fence ongoing geopolitical risk in the Gulf and take deliberate rather than indirect oil exposure. Among Africa funds, I prefer lower weightings in South Africa. For example. I would probably favour DWS Invest Africa (20%) over say JPM Africa Equity (60%) on that basis. Talk of ‘Americas’ and conversations quickly turn to Brazil and understandably so with a rising OECD GDP forecast for 2013, a new iron ore super-deal with China, as well as dominant market shares in wheat, bio-fuel, oranges, sugar, coffee and metals. When looking for Brazil funds I tend to gravitate to larger players like HSBC, Legg Mason, JPM and BNY Mellon. However, many Latin America funds are heavily weighted in Brazil these days; among these being Amundi (73%), BlackRock (70%), Schroders (68%) and Invesco (67%). I don’t know many of these funds that well but I have a good understanding of Mark Mobius’ Templeton Latin America fund from my time at the firm. In Asia Indonesia has a

renewed buzz right now highlighted by David Cameron’s recent trade visit, 6.5% fourth-quarter GDP and a return to investment grade credit status. Very few funds in the UK

offshore space have large weightings to Indonesia; those that do include Ciptadana’s Indonesia Growth with 20 years’ of data, and Eastspring.

One of our favourite portfolio managers at the moment is something of a newcomer in the financial world. Raymond Ma was appointed to take over the Fidelity China Consumer fund in February 2011. He joined Fidelity in 2006 as an investment analyst and was promoted to director of research in 2010. We analysed the manager just after the fund was launched and he realised an outstanding

score on our selection process. As we had no historic quantitative data available we concentrated our research on Ma’s qualitative skills. His ability to detect and select above-average growth companies in his domestic area, a deep general knowledge of the Asian market and research experience were already sufficient to justify an

investment. On top of that his ability to generate ideas on external research and not limit himself to an internal approach, combined with 300 company meetings each year, signalled he was an extremely dedicated and accurate worker. We believe this manager can generate an above average return for investors. After one year since its inception the fund has fulfilled our expectations and Ma’s stock selection was the main driver of the outperformance. In particular we were impressed with how the managers steered the fund through a difficult phase in China’s market.

One of our top pick single-country mutual funds is Fondsfinans Spar. This invests primarily in equities listed on the Oslo Stock Exchange, with no bias either to size or style. Fondsfinans Spar scores extremely high in our proprietary quant model. It has outperformed the market every single year for the last seven years. Over the past 36 months it has outperformed the market in 23 (64 %) on a monthly basis. And the fund continuously outperforms in both up and down markets and delivers consistently high risk-adjusted returns; every period under the current manager, Odd Hellem, has positive alpha.

Focusing on a country generally is akin to a fortune teller saying: ‘I see something but it is foggy.’ It would be a very vague and non-conviction call. Recent economic crises in regions around the world have reverberated globally. Does anyone really believe that Indian equities or other EM countries were not significantly affected by the eurozone’s problems? This interconnection is significantly higher in times of negative tail events. Geographic diversification is not as simple as defining which countries I favour as there are probably only a handful of countries that we can think of that have diversified equity markets. I try to be sector-specific with a clear conviction about where the outperformance will come from and why. For example there is a strong sector and country interplay when it comes to Turkey and financials or Russia and energy. Having made this more specific investment call I go for established players that have been in those markets for a while such as Templeton. These are firms that know both sectors and geographies because, where possible, they use managers that are based in their markets of business.

When investing in emerging countries such as the main markets in Africa, Asia or LatAm the main characteristic we usually look for is local expertise. We believe it is crucial to share the local culture to properly understand the nature of the underlying investments as well as factors that can affect them. This stance aligns with our multi-boutique approach. We try to find the best firms for every asset class that can offer specialised expertise to global investors. Our current selections along these lines include Legg Mason, as it is a fixed income specialist in Asia, and BNY Mellon for LatAm and especially for Brazil. Africa is likely to be a strategic region in the coming years and although we are still underweighted in this market we would like to highlight DWS for its Invest Africa fund.

With its high conviction portfolio of 25 to 45 holdings, the GAM Star China Equity is a good choice to gain exposure to the world’s strongest growth market. The fund is biased towards China’s relatively under-researched mid-cap sector and favours domestic consumption markets which will make a bigger contribution to future GDP growth. The

investment strategy also focuses on themes such as internet and telecom equipment makers and RMB internationalisation. The fund is positioned for growth and is

overweight sectors such as financials (mainly Hong Kong financials and properties which will benefit from the liberalisation of the RMB), consumer staples and discretionary (luxury goods) and information

technology – all of which are poised for double-digit earnings per share growth.

We prefer directly investing in markets that are more liquid and more mature like India, China, Korea and Brazil, and we have a more regional approach when it comes to frontier markets. For single-country exposure we use funds like PineBridge India Equity or Mirae Asset-Korea Equity. Single-country funds brings us pure exposure to the country’s economic conditions, a deeper understanding of the long-term opportunities and quick reaction to future developments. Both funds have local expertise in place and we believe they act like an interpreter for us, the final

investor. Global investors tend to overreact to new information whereas specialists on the ground are less likely to misread the news and more able to take advantage of the long-term

opportunities. Problems with liquidity and access make it

difficult to construct a pure exposure to Africa and Eastern Europe. In this situation we apply a regional approach. We use funds like

JPMorgan Africa Equity to benefit from markets like South

Africa, Nigeria and Kenya.

Helge B. Rutgersen OX Norway, Norway

Simon Fentham-Fletcher Renaissance Asset Managers, Russia

Jon Beckett, Senior reviewer for the Chartered Institute for Securities and Investments, Scotland

Xavier Fàbregas Caja Ingenieros Gestión, Spain

Hansen Wang HSBC Private Bank, Switzerland

Ionel Sbiera Invest AM, France

Anne Drisler Baumann & Partners, Luxembourg

The eurozone: ‘I suspect Greece will leave in the next 12 months’

Threadneedle’s Mark Burgess speaks to Citywire online

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Buyers’ market

When it comes to single country offerings in Brazil and India fund of funds investors have a clear preference for the big international brands.

US players such as BNY Mellon, JP Morgan and Franklin, as well as HSBC, appear on both tables (right) while neither Brazilian nor Indian

fund houses have made the list. Topping the Brazilian equities table is Rogerio Poppee’s BNY

Mellon Brazil Equity fund, which has attracted 28 fund of funds investors with a combined €43.7 million.

The most popular fund on the Indian equities side is an ETF, Lyxor’s MSCI India, which has 25 fund of funds investors and has pulled in €22.5 million.

However, when it comes to cash per selector, veteran investor Hugh Young’s Aberdeen Global – Indian Equity portfolio takes the spotlight with €56.1 million invested from 11 funds of funds.

Brazil and India still boast strong, growing economies so which country-specific products are fund of funds investors targeting?

Hugh

Young

We take a structured approach to fund selection and look at managers who invest in regional equity markets like Europe, North America, Japan, Asia Pacific and the emerging markets. We prefer managers with a clear regional focus and a well-defined investment process. Style and size are also important considerations and we want to know exactly what drives the funds. This is key, especially in the choppy markets we are facing now. A further key question is: Can the fund manager outperform in a down market? This question feeds into our strong focus on risk-adjusted performance figures. At first we analyse a lot of risk and performance figures for different periods. The outcome is a short list. The second step is the qualitative analysis of the fund manager’s investment process and the

team. Additionally we look at performance attribution analysis which leads us to

our top picks. Specialist managers on our list include Cormac Weldon, who runs the Threadneedle American Select fund, and Angus Tulloch, who oversees First State’s Asia Pacific Leaders fund. Both

managers and their teams do an excellent job, even when the

going gets tough in their respective markets.

Christoph Nocker Hypo Tirol Bank, Austria

One of a fund selector’s key tasks is to select the best managers by geographical criteria. I don’t have any preferred product manager for the African markets and prefer to gain exposure via emerging market funds. However, I invest directly in Asian and American markets. I usually select funds focused on continents and big areas instead of single countries. Almost all investment managers offer funds investing in these areas. After an initial quantitative screening of the investment universe I home in on the best funds by looking at their goals, management style, investment process and risk controls. It’s important for me to understand all of these so I can be confident of the fund’s performance in challenging market periods. My favourite Asia and South America managers in equities are Templeton (Mark Mobius’ team) and Invesco. Both are good managers and have management teams based in the countries where they invest giving them a good understanding of those markets. If I have to invest in North America I would choose the Allianz US Equity fund run by Seung Minn.

Davide Montaldo Banca del Piemonte, Italy

For more information on fund inflows/outflows see Ed Moisson, p58

BRAZILIAN AND INDIAN EQUITIESFUND OF FUNDS FAVOURITES

THIRD PARTY FUNDS OF FUNDS’ MOST POPULAR HOLDINGS SOURCE: Lipper

FUND SECTOR: Brazilian and Indian equities

Fund held No. FoFs invested* FoF assets** (€m) Manager

Brazil

BNY Mellon Brazil Equity 28 43.7 Rogerio Poppee

JPM Brazil Equity 18 47.1 Luis Carrillo, Sebastian Luparia

iShares MSCI Brazil 16 39.1

HSBC GIF Brazil Equity 14 34.5 Natalia Kerkis

Lyxor ETF Brazil (Ibovespa) 14 55.2

Amundi Fds Equity Brazil 13 28.2 Lionel Bernard

India

Lyxor ETF MSCI India 25 22.5

HSBC GIF Indian Equity 23 31.8 Sanjiv Duggal

Franklin India 22 77.1 Stephen Dover, Purav Jhaveri

JPMorgan Funds - JF India 16 19.6 Edward Pulling, Rukhshad Shroff, Rajendra Nair

Aberdeen Global - Indian Equity 11 56.1 Hugh Young

Note: Analysis based on universe of 2,000 European third party funds of funds * i.e. number of third party funds of funds investing in the underlying fund ** i.e. assets in underlying fund sourced from third party funds of funds

FUNDS SELECTORS ARE WATCHING

Funds Managers Citywire country ratings

Allianz RCM US Equity Seung Minn —

Ciptadana Indonesia Growth —

DWS Invest Africa Sebastian Kahlfeld —

Fidelity China Consumer Raymond Ma —

First State Asia Pacific Leaders Angus Tulloch —

Fondsfinans Spar Odd Hellem —

GAM Star China Equity Michael Lai, Mansfield Mok —

JP Morgan Africa Equity Oleg Biryulyov, Sonal Tanna (Biryulyov)

Mirae Asset-Korea Equity Sung Woo Kim —

PineBridge India Equity Elizabeth Soon

Templetn Asian Smaller Companies

Mark Mobius

Templeton Asian Growth Mark Mobius

Templeton Latin America Mark Mobius

Threadneedle American Select Cormac Weldon —

SOURCE: Citywire