Philip Ehrmann is head of Gartmore's emerging markets and Pacific desks, which manages a total of £...
Philip Ehrmann is head of Gartmore's emerging markets and Pacific desks, which manages a total of £1bn, including institutional and offshore portfolios. The flagship fund, the Gartmore Emerging Markets unit trust, is now worth £40m. Ehrmann this year won Investment Week's fund manager of the year award, in the emerging markets category. He talks with Jenne Mannion about his plans for the fund and his asset allocation strategy, which at the moment is depending on stock and sector performance, identifying companies on a global basis.
How is the portfolio constructed?
We tend to pick our stocks bottom up and then provide an industry and country overlay. Although we are primarily stock pickers, there will be times when country calls do dominate. Essentially, the emerging markets team is looking for unexpected earnings growth. That is, Gartmore is seeking to identify dynamic companies in industries where growth is evident but not yet priced into the market.
We look for industries where there are dynamic changes occurring, then we will spend a lot of time analysing the franchises or positions of the companies that constitute or dominate that industry.
The country overlay plays a very important role. Sometimes there may be an interesting industry and a company that is doing quite well but there could be something awful that is happening in terms of the local economy, which is likely to affect investors' perceptions.
The best example of that is in 1997/98 during the Asian crisis, where country calls clearly dominated. In contrast, by early 1999, with many of the emerging markets all brought down to the same level with the Asian, Brazilian and Russian crises, risk aversion was very high, and all emerging markets were virtually ground zero in terms of investors' views and feelings. At that point, it became increasingly important to select the companies that had the most dynamic earnings growth and were therefore likely to stand head and shoulders above the others. That is why stock and sector performance dominated in the latter part of last year.
These will be the overriding factors as we are still in an environment where we can identify companies on a global basis.
When we look across the emerging markets, we are generally seeing improving macroeconomic trends, with the exception of Indonesia and the Philippines and a couple of small African and small Latin American countries. We don't see signs of economic stress and strain manifesting itself.
This is in marked contrast to what we are seeing in the more developed world where there are concerns about growth being too strong, and the subsequent impact of increasing interest rates. It is noteworthy that Brazil has reduced interest rates two or three times over the last few months and countries like Turkey and Russia have falling interest rates. In all, the environment is encouraging.
We use the S&P/IFC Investables Index. One of the hallmarks that Gartmore brings to investment management is a keen awareness of the risk associated with individual securities, and indeed sector and country positions. That is one of the reasons why Gartmore divided its investment teams between portfolio constructors and research analysts about two years ago. One of the prime roles of portfolio constructors is to ensure that risk characteristics for a particular portfolio meet the criteria that have been set for it.
We avoid taking extreme positions. The team has aimed to be very consistent in what it has done. While last year was a very good and strong year for our investment process, we were not doing anything markedly different in terms of the risks we were taking at the country, sector or stock level than we had done in prior years.
We use barra analytics and tracking error as our prime risk diagnostic tool. Within that, barra has several factors whereby you can identify which elements are contributing to risk in the portfolio. Those factors include country, industry and stock specific factors.
We have 85 stocks in the portfolio. The top holdings are Carso Global Telecom at 3.8% and Samsung Electronics at 3.7%.
Samsung Electronics is the largest stock in the IFC Investibles Index at around 4.3 - 4.4%. In relation to stock bets, you have to ask yourself the question of whether, if you happen to like Samsung Electronics, should it then be capped out at 5%?
The answer is we don't want to cap it and we are prepared to own considerably more than that amount. There are unit trust rules that cap a single holding at 10%, but in practical terms, we've never been anywhere near that level.
We have taken some profits on Samsung, which has recovered well over the past few years, and are now underweight. This is a stock that we consider will still do well but consensus estimates have caught up with our forecasts of earnings growth.
Other stocks in the top 10 are Taiwan Semiconductor, WalMart De Mexico, Anglo American Platinum, Sk Telecom, China Mobile, Sabanci Holdings, Banco Bradesco and Dimension Data Holdings.
There has been relatively little change in the major categories or elements of our portfolios over the last six to 12 months.
Telecommunications remains an important theme for emerging markets. It stands in contrast to the developed world, in that we are still talking about underdeveloped market places, companies and industries that are domestic in orientation, are benefiting from deregulation and also in many cases, relatively modest levels of co
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