The theme of emerging markets offering high levels of growth is “not remotely done yet”, according to Nick Train (pictured), who said the market area will remain a big story for investors over the next 50 to 60 years. 
The FE Alpha Manager, who runs four five FE Crown-rated vehicles, told FE Trustnet that his emerging market revenue exposure has increased over the years because the stocks most exposed to this market area have performed particularly well.
This is despite the fact many investors are concerned about slowing growth levels in emerging regions and their vulnerability to any future rises in dollar strength: an issue that more people are focusing on now that Republican Donald Trump is president of the US, given his support for fiscal reform.
“We’ve quoted Paul Polman, the chief executive of Unilever, saying ‘why wouldn’t you want to be in emerging markets – it’s where all the people are’. If you’re a consumer company, you want to sell to the biggest number of people,” Train reasoned.
“There are billions of people in emerging markets. The United States, is still a fantastic place to invest in with a growing population, but that’s a population of 400 million.
“It’s a hugely important market but, compared to the opportunities in emerging markets, arguably it’s dwarfed.
“So, strategically, the emerging market theme was a stock market favourite 10 to 15 years ago around the turn of the century. People are a bit disenchanted with it at the moment but, actually, from the perspective of economic history, it’s still the big story over the next 50 or 60 years.”
Since the turn of the century up until the start of 2008, emerging market stocks stood head and shoulders above their peers, with the MSCI Emerging Markets index outperforming all other major indices at least five times over with a stellar 231.26 per cent return.
Performance of indices from 2000 to 2008
Source: FE Analytics
Since the financial crisis, however, it has been a different story as investors have grown increasingly concerned about higher levels of volatility and a less stable economic backdrop.
Over the last eight years, the MSCI Emerging Markets index has found itself at the bottom of the pack with a return of 103.61 per cent. In contrast, the S&P 500 index – the top-performer over this time frame, is up 276.16 per cent.
“People’s enthusiasm for emerging markets will ebb and flow but it’s not remotely done yet as a money-making or profit-generating theme for corporations,” Train added.
Food processing conglomerate Kraft’s recent failed big for Unilever – Train’s largest holding in three of his funds and trusts – highlighted to the manager just how desirable exposure to the emerging market consumer is for companies. More than 50 per cent of Unilever’s sales come from emerging markets and the transaction – had it happened – would have been the biggest in history at £120bn, according to the manager.
“I think it’s highly plausible that one reason Kraft was interested in Unilever at this juncture is because they potentially could have accessed Unilever’s emerging market exposures at a time when emerging markets are somewhat out of favour,” Train said.
In terms of Finsbury Growth & Income itself, its underlying revenue exposure to emerging markets is approximately 25 per cent which, while Train adopts a very low turnover approach to portfolio construction, has increased over the years.
“This is not necessarily because emerging markets have been growing. They have, but just not nearly as quickly as they were before,” Train continued. “What has taken the proportion up – and maybe this is a slightly worrisome thing I don’t know – the companies we hold that have this exposure to emerging markets have just done so well in stock market terms.”
Aside from Unilever, companies within the portfolio that have done particularly well over the years and have significant emerging market exposure include Diageo, Heineken and Burberry.
While Mondelez International – a US confectionary company – also has significant exposure to emerging market consumers and has done well over the medium term, it has not yet reached anywhere near its historic highs, according to the manager.
As such, Train has been adding to this exposure significantly, having increased the trust’s position from 2.5 per cent to 6 per cent since owning it (as detailed in an FE Trustnet article published yesterday).
“Mondelez spun out of Kraft and Kraft have done a great job with Oreos in China, for instance,” Train explained. “Oreos are the biggest biscuit brand in China so, putting the two together, you have a very important emerging market footprint.
“What I have to consider is that, within 1 or 2 per cent, Unilever is at an all-time high, Diageo is at an all-time high, Heineken is at an all-time high, Mondelez is slightly further form its all-time high but it is still higher rather than lower. Burberry is very close to an all-time high which is another emerging market-exposed company.
“But, we really strongly believe in the long-term potential in these companies. Heineken was bought in 2011 which, by our standards, is a new holding. Burberry is quite a big holding and that was bought in 2008 for the first time. I would the think a clear majority of holdings – perhaps 60 per cent of them - we have had for at least 15 years. There has been some change over 17 years but it has been glacially slow.”
Since the turn of the century, FE Alpha Manager Nick Train has outperformed his peer group composite by 319.44 percentage points with an average total return of 498.23 per cent.
Performance of Train vs composite since 2000
Source: FE Analytics
Finsbury Growth & Income is trading on a 0.2 per cent premium, is 3 per cent geared and yields 1.8 per cent. It has an ongoing charge of 0.74 per cent.