A uranium producer, Brazil’s answer to Shopify and pilling into China as others back out are some of the big calls new managers on the MI Somerset Emerging Markets Dividend Growth fund have made since taking over last year.
This is a significant step away from the mantra of its previous manager and founder, Edward Lam, who focused on low valuations above all else.
So far it appears to have worked, with the fund turning around its long period of underperformance. Under Lam the fund had struggled long-term, ranking 95th out of 110 in the IA Global Emerging Markets sector over five years (23%) and was third quartile over 10 years (87%).
Over the past three years – towards the end of Lam’s tenure and the first year the new managers have been in charge – the assets under management dropped by two thirds, FE Analytics showed, down from almost £1.1bn in 2018 to just over £300m today as investors sold out following the lagging returns.
Performance of fund vs sector and benchmark over 10yrs
Source: FE Analytics
But since Mark Williams and Kumar Pandit took over the fund it has rallied, returning 35.6% and outperforming both the sector and benchmark. It now ranks fifth best in the sector over one year.
Performance of fund vs sector and benchmark over since new managers
Source: FE Analytics
Pandit said that Lam has been “unlucky”, with the near-term performance because he had been anticipating reflation rates rising and set up the fund accordingly but Covid derailed this.
The former analyst and first-time fund manager, who runs the fund alongside MI Somerset Asia Income fund manager Williams, said the team had not had to shift the style of the fund, but focused more on individual stock selection.
This was one of three “core tenants”, he and Williams have implemented in the fund, the others being an increased focus on the oversight of portfolio construction and risk control, particularly managing the influence macroeconomic events can play on the fund’s performance.
The new managers have already put this into effect, with particular focus on the first and third components.
On the first Pandit highlighted several new names that had been added to the portfolio since the pair took over and said had been major drivers in the performance since then.
“Being stock pickers rather than capital allocators is what I believe is going to drive alpha going forward. “Investing in what has worked historically I don’t believe is going to work in the future,” he said.
One company the new managers added was Kazatomprom, a uranium producer operating in the Republic of Kazakhstan which Pandit said played into the global theme of lowering carbon emissions via new energy sources.
Most managers focus on copper and have bypassed nuclear energy, but Pandit said Uranium will play a bigger than expected role in the carbon-free future. In the past year Kazatomprom’s share price has risen more than 200%, according to Google Finance.
Another stock was Locaweb, which Pandit described as the Brazilian equivalent of US e-commerce giant Shopify. He said there was a massive growth potential for the company, with so few businesses in Brazil currently running an online shop front, but as the technology grows and becomes more prevalent the platform should benefit.
A relatively new company it raised $308m (£230m) at its initial public offering (IPO) in February 2020 and since then its share price has risen 190.4%, according to Google Finance data.
The third new addition was Beijing Kingsoft Office Software, a Chinese software company. The significant crackdown on tech stocks being handed out by the Chinese Communist Party (CCP) has put some off investing in China, but the firm’s focus on office productivity means it could fall on the right side of these regulations, Pandit said.
Launched in 2019 the company’s share price has increased 101.4%, Google Finance data showed.
This final stock pick is part of an ongoing change in direction for the fund, which has increased its weighting to China overall.
Historically the MI Somerset Emerging Markets Dividend Growth fund was underweight the country during Lam’s tenure – when Pandit took over the fund it had 8% invested in China; today it has increased to 20%.
Analysts previously told Trustnet that this historical underweight had helped over the past year as the country’s stock market struggled.
Pandit acknowledged this, but noted that since increasing its allocation to China, the fund had still beaten the index because due to good stock selection, and that the region still offered good buy opportunities for investors.
“I don’t believe that China is not investable,” he said.