Fund focuses on assets and track record to identify best stocks from each region, currently favouring telecoms and Japan
A bias toward emerging markets at the expense of the US over the past three years has contributed towards strong performance in the Aberdeen World Equity fund, managed by Stephen Docherty.
Although the manager has held this stance for several years, he says this is a by-product of the stock selection process, rather than intended top-down views.
Portfolio construction is based on a disciplined evaluation of companies through direct research visits. Top-down factors are secondary, with diversification rather than formal controls influencing geographical and sector weightings.
Although Docherty and other members of the global equity team are based in Edinburgh, they liaise with regional equity research teams located in Bangkok, London, Philadelphia, Singapore and Sydney. These regional research teams feed into the global research process.
He says: "Each regional team has its own unconstrained portfolio and identifies the best stocks from the wider universe in each area. These are put in a pot and we end up with a starting list of about 330-350 companies. Our role is to condense that down to about 50 of the best."
This is achieved by a cross-comparison of companies in the same sector to locate the best opportunities.
He says: "Compare Petrobras in Brazil to BP in the UK for example. BP is a fantastic company but the production growth has not been as strong as it was previously. BP's strategy has been more about trying to buy things in Russia, whereas Petrobras has lots of proven reserves in Brazil and is growing its production.
"In other words, the two companies are at different stages of evolution. BP has been around for a long time, running down its reserves. Petrobras is cheaper on a number of valuations metrics, so we prefer it to BP. This is the advantage of a global fund. You can choose the best opportunities worldwide rather than being confined to one sector." Petrobras is the fund's largest single holding at 3.9% of the portfolio.
In particular, Docherty says the fund looks to hold companies that have good assets and a management team with a track record of running the business properly. He also looks to buy them when they are out of favour, so valuations are cheaper.
Elsewhere in the fund, Docherty says telecoms are emerging as a dominant theme. Over the past 12 months, exposure to this sector has increased from 6% to 11%. This coincides with taking profits in the energy sector. He says the fundamentals of telecoms look appealing.
"Five years ago telecoms were considered to be growth stocks. They have never been so in my view, they have always been utilities. Earlier in the millennium, as a result of all the excesses and buying up licenses and putting optic fibre down, they had lots of debt on their balance sheets.
"Many have since done a good job of improving their situation," he says. "They have very high free cashflow yields and excess cash that they can do things with. In relation to the share price, they are offering high levels of free cashflow and of dividend yield. Dividend yields of 4%-5% are available from companies in the sector and these companies are in a position to grow their dividends further."
Among telecoms, he holds a big position in China Mobile, along with Belgacom, Portugal Telecom and NTT DoCoMo in Japan.
While stock selection is the key source of alpha for the fund, Docherty says the top-down picture is considered. For example, in emerging markets, there are plenty of stocks attractive from a valuation and growth point of view. But the top-down picture for emerging markets in general is more favourable.
"However, many fundamental changes mean these countries are much stronger and less susceptible to one-off shocks. In some ways they have become a lot less cyclical," he adds.
The fund is now 19% invested in emerging markets, compared to the MSCI World index of 6%-7%. This is spread across six stocks, including Petrobras, China Mobile and Samsung Electronics, all of which are in the fund's top-five holdings.
Japan is also a prominent theme, accounting for some 19% of the fund. The manager has taken advantage of weakness in the stock market to add to his Daito Trust and Mitsubishi holdings, while Canon is also a large holding within the fund.
Over three years to 2 October, the fund is ranked 22 of 139 in the IMA Global Growth sector after delivering a return of 63.5%, against the sector mean of 47.3%. The fund maintains its top quartile position over one year, where it is ranked 15 of 154 funds, with a return of 13.2% compared to the 8.8% mean, according to Standard & Poor's.key points
Regional teams identify best stocks in each area
Fund focuses on good assets and track record
Telecoms emerging as dominant theme in the fund
EIS and Seed EIS sectors
'Truly making a difference'
Avoidance, evasion and non-compliance
From 6 April 2019