More than half the trusts in the emerging markets generalist sector have produced negative returns o...
More than half the trusts in the emerging markets generalist sector have produced negative returns over three years. Within this there have been strong performers, in particular Barings Emerging Europe. The trust was top in the sector over the three years to March 2000, delivering a share price return of 84.01%, compared with the sector average of -1.27%.
Managed by Martin Taylor and Rory Landman, the trust has net assets of $449m (£288.3m). It uses 2% actual gearing out of a potential 15% and is trading on a discount to NAV of 22.8%.
Taylor said the trust's investment style combines a bottom-up and top-down approach. In looking at individual stocks the research team and fund managers consider a business' growth, liquidity, currency base, management and valuations. Barings analyses these factors in the context of the macroeconomic outlook, for example, the influence of interest rates on performance.
Taylor said: "Our investment objective is to invest in companies which have unrecognised growth potential."
Although the trust holds between 60 and 70 stocks, the top 20 holdings account for 75% to 80% of the fund, while the remaining holdings represent much smaller bets.
The trust uses an in-house benchmark and at present it is most bullish on Russia, which represents 37% of the portfolio. This position is based on the expected strong growth in the recovering market and reasonable valuations. Other positions in the portfolio include Turkey at 8.9%, Poland at 18.2%, the Czech Republic at 6.6%, Hungary at 24.4%, Greece at 1.8%, Croatia at 2% and Estonia at 2.4%.
The trust's managers attribute the portfolio's strong performance to the in-depth research process in picking stocks and the ability to take heavy bets on promising stocks.
As well as being the top performer in the sector, it is also among the least volatile.
The trust had an annualised standard deviation (ASD) of 42.18%, which was below the sector average of 43.36%. The annualised alpha was also the highest in the sector at 24.10, against the average of 0.28. The beta was slightly lower at 0.94 against the average of 0.99.
Taylor said: "These good results followed many timely decisions on markets and stocks. For example, we sold out of Russia nine months before that market collapsed."
The Fleming Emerging Markets Investment Trust was the second highest performing trust in the sector in the three years to March 2000, producing a return of 21.02% compared with the sector average of -1.27%.
The trust, with £257m net assets, is jointly managed by Austin Forey and Clive Lloyd and has a global emerging markets investment mandate.
When selecting stocks, Forey and Lloyd aim to find companies where growth over at least three years is deemed unrecognised.
Once the preferred stocks are selected, there are constraints on how much the portfolio can deviate from the benchmark, which for this trust is the MSCI Emerging Markets Free Index.
The extent to which positions will differ from the benchmark depend on the risk of the country. For example, the allocation for Brazil will not be more or less than 4.5% of the benchmark. However, with Greece, which represents a smaller part of the index, the overweight or underweight position can be higher. The aim is to have a tracking error, ex-debt, of 7%.
There are 68 holdings in the trust, and no single stock will account for more than 10% of the portfolio, although the managers are most likely to keep their larger holdings closer to 5%.
Forey said: "The countries we tend to be most overweight in are those with the largest and deepest stock markets. That includes Hong Kong, pure Asian plays or Chinese red chips, Mexico, Brazil and Taiwan. We are neutral in South Africa against the benchmark but probably overweight against our peers."
The trust has gearing of 9%, with its potential gearing level standing at 10%. The discount to NAV is 19.4%.
The trust had an ASD of 43.02%, which is slightly below the sector average of 43.36%, over the three years to March 2000. The trust's beta over that period was 1.07, which was higher than the sector average of 0.99. The annualised alpha of 6.71 was higher than the average of 0.28.
Lloyd said because the portfolio holds only large liquid stocks, which are highly affected by market fluctuations, this has contributed to volatility. The £55m Morgan Grenfell Latin America portfolio was ranked fourth of the 19 trusts in the sector over the three years to March 2000, returning 9.77%, compared to the sector average of -1.27%. Launched in 1994, it has been managed by Rosie Bichard since October 1999.
It takes a bottom-up approach to stock selection in Latin America, but after selecting stocks it considers to offer long-term growth potential at a reasonable price, this view is then balanced with a top-down view, taking into account factors like interest rates and GDP.
Once the portfolio is established, constraints will be imposed to ensure the asset allocation does not deviate too far from the MSCI Latin America Free Index. In the case of larger countries, this will be up 10% more or less of the index. For smaller countries, the asset allocation will not exceed or be less than the benchmark by 5%.
The trust has no gearing, although this will be reviewed after its continuation vote in June. The Morgan Grenfell discount to NAV is 20.8%.
The trust had an ASD of 43.09 over the three-year period, which was marginally lower than the sector average of 43.36.
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