Three-year risk/return figures for offshore funds in the global emerging markets sector show relativ...
Three-year risk/return figures for offshore funds in the global emerging markets sector show relatively poor returns from most funds, although the better-performing in the sector have shown extremely strong performance over the last year after the losses nearly all incurred in the second half of 1998.
The best-performing fund in the sector by some distance is the Gartmore CSF Emerging Markets fund, managed since July 1995 by Chris Palmer.
Palmer said: "Since my arrival, which was soon followed by the arrival of Philip Ehrmann as head of the emerging markets desk, a lot of work has been done to re-organise the emerging markets funds. We have been greatly helped by the fact that, over the last two to three years, Gartmore has invested a lot in its research operations, aiming to identify unexpected earnings growth situations, whether at the regional, sector or stock-specific level.
"This process has been successful in the emerging markets, where some companies and sectors such as Taiwanese technology companies and Korean semiconductor manufacturers have managed to become regional and indeed global leaders over the last few years."
At the portfolio level the focus is on undervalued growth, Palmer said. "This is a difficult commodity to identify. However, we believe that by systematic screening of financial attributes of companies, and analysis of the prospects for industries and sectors, we can identify companies most likely to be successful.
"An important part of our process is a regular review, with a thorough reassessment if, for example, an earnings report does not look likely to come through as expected."
On a top-down level there is also an assessment of country and industry fundamentals to determine whether economic growth prospects and regulatory frameworks are supportive of company growth, Palmer said. "We are more highly weighted in the larger Latin American countries Brazil and Mexico, but in Columbia, Venezuala and Peru the structural problems mean the overall macro-background is fairly stultifying."
A major theme in the portfolio at present is restructuring, which is unlocking considerable earnings growth, particularly in Latin America and Korea, Palmer said. "In Korea we have seen many of the chaebols moving to focus on their core competencies, while in Latin America telecom privatisations have led to US and European players managing these companies with a focus on total returns.
"Among the better performers in the sector in return terms, although showing the highest level of annualised monthly standard deviation, is the PCP Emerging Markets fund. This is a fund of funds run by Forsyth Partners' emerging markets fund manager, Rossen Djounov.
In the three years to the end of February 2000, the fund shows a total return of -2.36%. This, however, comes on the back of a one-year return of 125.19%, nearly offsetting the return of -57.31% from March 1998 through February 1999. From March 1997 through February 1998 the return was 2.04%.
The fund shows an annualised alpha of 4.51%, with a beta of 1.29%. The correlation co-efficient was 0.74 while R-squared was 0.55%. Annualised mean return was 12.01%, while annualised standard deviation was 46.7%.
Djounov said: "For a fund of funds to add value is to have some sizeable position in a particular sector or asset class. Our largest overweighting is in the Indian market, where we have 28% of the fund as against the IFC Investable Index weighting of 2.5%. Our position there is on the basis that this market, on the fringes of Asia and not strictly the Middle East, is under-owned by international investors.
"Despite this, it is a large and liquid market, with some excellent companies and a strong domestic ownership. There is a lot of investment from private equity funds and private banks, with the domestic mutual funds market developing fast. As a result, the market does not move much as a result of developments in neighbouring countries.
"The key reason for our interest over the last couple of years is that our research shows there is strong involvement from Indian companies and programmers in the US technology sector. As a result, two years ago we bought into the Unit Trust of India, an IT-focused fund, at $12. The fund is now at around $130 per share.
"As a complementary play we bought into HSBC India Equity, which until three months ago was focused at the other extreme, with an emphasis on the value/cyclical end of the market."
As a result of appreciation in these funds, the PCP fund's original 10%-15% India allocation has risen to current levels.
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