The Nedgroup Investments Global Emerging Markets Equity Fund, which now marks its first anniversary, has been making portfolio adjustments in light of Covid-19 and is adding to its already overweight exposure to China.
Portfolio manager Ian Beattie explains his outlook for the rest of the year, stating that “We believe that the unprecedented fiscal and monetary stimulus should drive a strong recovery starting in H2 2020. Equity markets will likely discount return to growth as new COVID-19 infections peak”.
Ian runs the Nedgroup Investments fund through his firm NS Partners, which has built up an enviable 24 year track record managing GEM mandates, strongly outperforming the MSCI EM index since inception. It is one of many Nedgroup Investments funds with a history of outperformance; their Global Property Fund sub-advised by Resolution Capital and Global Flexible Fund sub-advised by First Pacific Advisors have both beaten their respective peer groups since inception.
The current portfolio strategy is based on the belief within the team that the policy action by the monetary authorities will be sufficient to tide the global economy over until the virus is suppressed sufficiently to allow a normalisation of people’s lives.
The fund is bullish on China (with its initially draconian response to the pandemic) and its relatively quick emergence from the crisis. It cites several factors for this sentiment, including factories being back up and running, restaurants opening, and China’s outperformance of the MSCI EM benchmark which has been nearing 20% since March, in contrast to other EM countries such as Brazil, underperforming by roughly 40%, and India and Russia, underperforming by roughly 20%. However the fund is now also looking to allocate more to cyclical markets which underperformed at the start of the crisis.
Top three performers in the portfolio were:
1) China Education Group, a higher education college, university and older age group school. It has the strongest financials in the sector, good governance and with best in class reputation.
2) Conch Cement, a regional cement producer with strong market position and pricing that makes a decent return on invested capital throughout the cycle. It is profitable both in good and bad times.
3) Accton Technology, which has done very well with IT being a beneficiary of increased demand for datacentre equipment and 5G investment.
The fund has been capitalising on discounted valuations over the past three months, and has made several transactions. These include:
• A rotation into LG Household & Health Care (1.67%) away from Amore Pacific.
• Purchase of Quanta Computer Inc (1.58%), a beneficiary of data centre capex growth as well as enterprise notebook sales for the work-from-home growth.
• Hiwin Technologies Corp Industrials (1.29%), bought because it’s more cyclical with a very good return on capital and factory automation play.
• NAVER Corp (1.22%), an online gaming business with their social media division popular in Asian markets.
Stock selection has been very positive over this period with some positives on the country selection as well, such as emerging Asia - very strong in China (2.04%), but negative in India (-1.26%) and Thailand (-0.54%). In Emerging markets Europe, Middle East and Africa, it had good performance from Poland (0.74%) with a holding in software gaming company CD Projekt. Country selection has been positive in Latin America (0.85%) and South Africa (0.53%) as well as cash (0.87%).
The fund retains its focus on high quality, high ROIC companies and will look for bargains in quality and growth companies. It was on the right side of the index with performance at -6.2% versus the MSCI Emerging Markets Index return of -12.0% for the year to 30th April 2020. Manager Ian Beattie sees policy response being super bullish and unprecedented, with dramatic changes in store for the future – taxes and deficits and more government interference.
The fund remains overweight in IT, internet, consumer discretionary and staples and underweight in materials, telecom, autos and energy but looks to add to this second group with high quality stocks as recoveries begin. The leverage style factor remains negative, meaning that the portfolio companies have less debt than the index as a whole.