Emerging markets, and companies deriving a lot of revenue from emerging markets, have gone through a challenging period over the past three years. Investors have generally preferred large, high-yielding companies listed in developed markets, which are perceived to be less risky and offer good dividends in a low-interest-rate world.
This has provided a difficult backdrop for the M&G Global Basics Fund, managed by Randeep Somel. He focuses on companies capable of benefiting from growth in higher-risk emerging markets, regardless of where the company is listed. Over the past three years the fund has grown by 1.6%, compared with 39.0% for the average fund in the IA Global Sector* although past performance should not be seen as an indicator of future returns.
Performance of the M&G Global Basics Fund over the past three years
Past performance is not a guide to the future. Source: Lipper IM* to 02/03/2015
|Annual percentage growth|
| Mar 10 -
| Mar 11 -
| Mar 12 -
| Mar 13 -
| Mar 14 -
|M&G Global Basics||20.04%||-3.00%||3.80%||-8.62%||7.15%|
Randeep Somel continues to believe that over the long term the best rate of return for each pound, euro, dollar or yen companies spend will come from growing their business in emerging markets. He prefers companies with assets that generate, and those he believes will continue to generate, increasing cash flow, which can be used to invest in new assets or be paid back to shareholders. He also likes companies with the ability to raise prices without a corresponding fall in demand for their products and services. This should contribute to a strong competitive position, which could be defended against rivals.
Given the manager's focus on the growth of emerging markets, and companies which supply the 'building blocks' of the world's economy, the fund tends to be biased to companies in the mining & materials, industrials, and consumer goods sectors.Microsoft, the global software giant, features in the top 10 investments, for example. Over 90% of businesses worldwide use a Microsoft product and revenue continues to be strong. To date, revenue from emerging markets has been low, but Randeep Somel sees it as a source of huge growth potential for the future. Overall, the fund is a concentrated portfolio of stocks which allows each holding to have a significant impact on returns, but this is a higher-risk approach.
The manager has also used recent weakness in the mining and resources sectors as an opportunity to increase exposure. Mining giant BHP Billiton was added to the portfolio for its exposure to iron ore. It has managed to keep costs low and remains profitable even though iron ore prices have fallen, unlike some competitors.
In the short term the price of iron ore has continued to fall and the investment in BHP Billiton has detracted from performance. However, the manager believes the company can keep reducing costs through efficiency improvements and should be well-placed to capitalise on long-term demand for iron ore.
Having less exposure to the US than the benchmark MSCI AC World Index has also detracted from returns over the past year as the US stock market has continued to perform well. While the manager has invested in some US companies, on the whole, he is struggling to find attractively-valued businesses listed there, so expects the underweight exposure to remain for now.
Source: M&G as at 31/01/2015
Our view on this fund
We share the manager's view that emerging markets have significant long-term growth potential and there are many companies globally that could capitalise on this, although it is a higher-risk region so volatility should be expected. We removed this fund from the Wealth 150 on 19 November 2013 when long-standing manager Graham French stood down and Randeep Somel took over. We would like to see him build a longer track record of outperformance before reconsidering the fund for inclusion on the Wealth 150.