FE Alpha Manager Graham French announced his retirement from the fund earlier this week, with his deputy, Somel, taking over with immediate effect. Although the £4.3bn fund is the best-performing portfolio in the IMA Global sector since French took over in November 2000, it has been one of the worst performers over the past three years due to its high exposure to commodity stocks and emerging markets growth plays.
Performance of fund vs sector since Nov 2000
Source: FE Analytics
However, Somel says that he will not be making any knee-jerk reactions in order to chase returns and that investors in the fund will still be gaining exposure to the curve of global economic development.
"This fund is on a journey, but one key thing to highlight is that Graham created this fund and he is the primary person I have learnt from," he said. "The process and the philosophy of the fund are not going to change. Period."
"I am very confident that as sentiment begins to turn towards miners and emerging markets, this fund will be strong again," he added.
Somel says that tapping into emerging markets growth will still be the fund’s objective, so over time the types of stocks and sectors he has exposure to may change as those economies develop.
"When this fund was launched, Graham wanted to look at the areas where equities do best, which areas of growth. The answer that came back was emerging markets, which were seeing growth of 7, 8, 9 and 10 per cent."
"That was in 2000, but it is even more relevant today. While the developed markets are seeing anaemic growth, the likes of China are growing at 7.5 per cent and Nigeria is growing at 6.5 per cent."
"The question for us now is what the consumption and growth patterns are today?" he added.
The main reason why French stepped down was because he believes the next area of growth will be areas such as technology, pharmaceuticals and financials; areas he admitted that he had no expertise in.
Somel says that the purpose of the fund will be to develop in line with the middle classes of the emerging markets. While the fund currently has a high exposure to commodity- and energy-related stocks, the likes of banks and technology companies will, over time, make their way into the portfolio.
However, Somel says his investors should not be concerned about this.
"When the fund was launched, 46 per cent of it was invested in the bottom end of the curve in areas such as mining and energy. In order for those economies to grow, they needed to build infrastructure such as cities, roads and ports."
"Those emerging markets now have a developing middle class. As they develop, so will the fund," he added.
One example of one of Somel’s new holdings is Microsoft. He says it is the type of stock that sums up what M&G Global Basics is trying to achieve.
"This fund is all about finding the building blocks of economies and investing in good companies," he said.
"One company we hold is Microsoft, and you may think, 'why Microsoft?'"
"It is one of the world’s most recognisable brands and 90 per cent of the world’s businesses use Microsoft software. However, more importantly, Microsoft highlighted that each of the BRIC economies accounts for $1bn worth of revenue," he added.
Another reason Somel is keen on the stock is because the management team is now less focused on trying to grow and is instead aiming to reward shareholders. The manager says Microsoft increased its dividend by 22 per cent this year.
Somel says there is no reason to worry about this apparent change in direction.
"I should point out that this isn’t going to be a technology fund," he added.
In fact, the manager says he has been buying back into commodity-related stocks.
Slowing economic growth in emerging markets, the stronger US dollar and other factors have led to commodity companies suffering. According to FE Analytics, the MSCI World Metals & Mining index has lost more than 30 per cent over three years, for instance.
Performance of index over 3yrs
Source: FE Analytics
Somel admits it has been a very difficult area to invest in recently, adding that the fund’s exposure to basic materials has been detrimental to its performance. However, he says the current low valuations mean miners are once again looking attractive.
"In 2007, Port Hedland, which is one of the largest commodities ports in the world, shipped 10 million tonnes of iron ore. This year it has shipped 30 million tonnes. The demand is still there and also prices of iron ore are coming back."
"The sector is not only very cheap, but the demand is still there."
Somel points out that commodities companies only have themselves to blame for the fact they are so out of favour. He says they kept buying assets in the good years, which would often turn out to be poor acquisitions, instead of rewarding shareholders.
However, he says a new breed of chief executives are remodelling their business plans.
"Over the past 18 months, 70 per cent of mining companies have had a change in management," Somel said.
BHP Billiton and Rio Tinto are two of the miners he has been buying in the M&G Global Basics fund.
FE Trustnet looked at the investment case for these two stocks in a recent article.
The M&G Global Basics fund has an ongoing charges figure (OCF) of 1.66 per cent and requires a minimum investment of £500.
