This measured approach has insulated the portfolio somewhat, which has returned 9.84% on an annual basis for the 10 years ended April 30, from emerging markets volatility, according to Morningstar analyst William Samuel Rocco. In a report on the fund, he noted, “Although [the fund] has struggled to keep up in go-go rallies due to the managers’ price consciousness and quality orientation, it has generally held up well in downturns for the same reasons and it has often outperformed in moderate upswings. As a result, this fund boasts terrific long-term risk-adjusted returns.”

The kinds of high quality companies Johnson favors aren’t particularly cheap right now, and like their developed market counterparts, emerging market blue chips have risen to fairly high valuation levels during risk-wary times. Nonetheless, Johnson maintains it’s still possible to sift through the investment universe to find good, attractively valued, high-quality, growing companies.

“The perception is that emerging markets are a basket case that have gone through a difficult time,” Johnson says. “But there are a lot of solid, growing companies as well. Things are better at the company level than the country level.”

He cites Egypt’s CIB (Commercial International Bank) as one of those solid companies. Amid political upheaval, the bank, which was added to the fund in the first quarter of this year, has managed to become a leader in Egypt for its profitability, its number of customers, its market capitalization and its loans and deposit market share. Johnson says that with a new pro-business government regime in place, CIB could see an upturn in corporate borrowing.

Other new names added to the fund in the past few months are AirTac, a Taiwanese company that produces pneumatic factory automation equipment, primarily for mainland China, and Bancolombia, a leading Colombian bank. AirTac, the second-largest company of its kind in the world, sells most of its products in China and fits well with that country’s move from labor-intensive production and manufacturing to automation.

Bancolombia, which has been in the portfolio before, has focused on improving the quality of its loan assets and is finding renewed growth prospects with infrastructure lending. It has also boosted its presence as a lender to small and midsize businesses, a growing part of the country’s economy.

Late last year, the fund added modestly to positions in durable growth businesses in Russia. Even though the country is suffering from lower oil prices, such businesses should generate strong returns on capital and have the staying power to endure bad times. Russian holdings fitting the bill include discount grocer Magnit. The chain provides good value and choice to Russian consumers, whose discretionary income will likely continue to fall this year as inflation induced by international sanctions against the country takes its toll. The business, which services 8,000 stores with a fleet of 5,500 trucks, operates with no net debt.

The fund has been underweight in China since the early 2000s, largely because of the dominance of state-owned enterprises, which critics say lack transparency and are often managed to implement government policy and achieve social and political goals rather than to create shareholder value. Often, the fund will substitute Hong Kong-listed companies as a proxy for Chinese companies. According to the latest fact sheet from February, the fund’s stake in China and Hong Kong was 17.6%, while the benchmark index’s stake in China alone was 22.2%.

One of these companies is AIA Group, a Hong Kong-listed life insurer and one of the fund’s top 10 holdings. The company offers low-risk exposure to China’s financial services industry without a direct link to the state-owned banking sector. “A lot of insurance in China is sold as a savings product,” says Johnson. “As Asians gather more assets, the concept of covering risk through life insurance is catching on, and there are not many big players in the field at this point.”

China Mobile, the country’s telecommunications giant, is one of a handful of state-owned enterprises the fund does own. Johnson, who added to the position earlier this year, says recent reforms have improved governance and reduced the corruption at state-owned enterprises, and that the company has a growing subscriber base, lots of free cash flow and the ability to increase dividends. 

 

First « 1 2 3 » Next