Emerging markets are expected to become an increasingly important part of the global economy. Favourable demographics, rising wealth and the emergence of new consumers, along with increasing urbanisation, are likely to be powerful drivers of future economic development.
Matthew Vaight, manager of the M&G Global Emerging Markets Fund, believes investors should look beyond the 'growth story'. Investment success, in his view, depends on individual companies.
The manager considers three factors which he feels are important in determining whether a company can create value for its shareholders:
- Return on capital - used to measure a company's profitability and the efficiency with which its capital is employed. A company's return on capital must be higher than its cost of capital (the cost of financing a business).
- Valuation - identify firms whose prospects are undervalued by the market.
- Shareholder alignment/corporate governance - management teams should run the company to maximise returns for their shareholders. Companies with lower corporate governance standards will be considered if it is undergoing improvement.
The portfolio is then constructed from four distinct types of company. The allocation to each category will fluctuate over time.
|Improving returns||External change||Companies with unique assets where returns should benefit from long-term industry trends||27%|
|Internal change||Companies which are restructuring or improving capital allocation to improve returns||28%|
|Sustaining high returns||Quality||Well-managed businesses with high, sustainable returns||31%|
|Asset growth||Companies which invest in research, development and innovation to drive returns||14%|
Source: M&G, correct at 31/08/2014
Hyundai is a current holding undergoing internal change. The fifth largest global car manufacturer is now fully utilising its factories, according to Matthew Vaight. The company is also increasingly focusing on quality, research and development, and brand development. Following a recent setback, the manager took the opportunity to add to his position, believing investors are overlooking the company’s increasing efficiency and the improvements being made at an operational level.
SK Hynix, another current holding, is a South Korean memory chipmaker, whose products are used by some of the world's leading technology businesses, including Apple, and Google. According to Matthew Vaight, there are only three key players globally in the same market, and the company could benefit from the growing use of mobile devices, such as tablets. This business falls into the external change category.
Our view on this fund
Matthew Vaight has over six years' experience managing emerging markets and Asian equities. He has managed the M&G Global Emerging Markets Fund since February 2009 (as co-manager until September 2012 and lead manager since then). Over this time, performance has been strong, with the fund growing by 115.6% compared with 84.7% for the sector average and 96.3%* for the benchmark index; though please remember past performance is not an indicator of future returns. The manager has also run the M&G Asian Fund since February 2008.
|Annual percentage growth|
| Oct 09 -
| Oct 10 -
| Oct 11 -
| Oct 12 -
| Oct 13 -
|M&G Global Emerging Markets||23.9%||-16.5%||15.3%||3.5%||1.6%|
|IMA Global Emerging Markets||20.9%||-18.0%||15.3%||0.5%||3.1%|
|MSCI Emerging Markets||23.5%||-17.6%||16.4%||1.6%||2.9%|
Past performance is not a guide to future returns. Source: Lipper IM* to 01/10/2014
We recently met the manager and in our view, he applies a thorough and disciplined investment approach. The results are encouraging so far; however periods of volatility should be expected when investing in high risk areas such as emerging markets. We would like to see Matthew Vaight build a longer track record and see more evidence of positive stock selection over the long term before considering this fund for inclusion on the Wealth 150 list of our favourite funds across the major sectors.