In asset management, certain themes become so often discussed, it might sometimes feel as if there can’t be anything left to debate. Previous examples include active versus passive investing, although with many traditional active houses now offering products such as ETFs, it could be said a line has been drawn under that one at least.
Speaking to Kamil Dimmich (pictured), a partner at North of South Capital, the firm’s global emerging markets equity fund suggests that the jury is still out on value versus growth investing. For well over a decade, growth investing has held sway with investors and given the impact of Covid last year, the beneficiaries of the pandemic were by and large the mega cap US tech names. The epitome of growth stocks.
Mr Dimmich jokes, “We consider ourselves very much value managers, even if that makes us a dying breed out there.” One of the reasons he attributes to the poor performance of value strategies in recent years is due to managers buying lots of companies trading on low multiples but not really putting in a quality control mechanism to make sure these stocks are fundamentally sound.
A look at some of the fund’s top holdings might even surprise some value managers as it contains two major banks, Russia’s Sberbank and the Industrial and Commercial Bank of China. The portfolio of around 100 names also contains other banks in countries such as South Korea and herein lies the reason for their inclusion, rising interest rates (which inform a bank’s key measure of profitability, the net interest margin).
“We think post-Covid, there will be increasing pressure on interest rates upwards, we could potentially break this multi-year trend of deflationary negative rates. And the thing to own in that situation is the banks, so we bought a lot of Korean banks, Chinese banks, that were trading at ridiculously low multiples,” says Mr Dimmich.
As a previous Fundtruffle article discussed, Korea has its own corporate governance issues in the form of Chaebols, huge conglomerates owned by powerful families. Mr Dimmich points out that while Westerners might shy away from owning non-voting (or preference) shares in their home markets, given the discounts to common shares these are a great bargain which can potentially double the income received from distributions as Korea slowly becomes more shareholder friendly.
He also states that Chaebols don’t tend to keep their iron grip on companies just by owning common stock, moreover they own a controlling stake of a company that owns a controlling stake in a related company. He describes the process as ‘circular ownership’.
So why has this fund outperformed the MSCI Emerging World Index (not just the MSCI EM Value Index) so consistently since inception? Speaking to Mr Dimmich, he has a keen understanding of the markets the fund is invested in. He jokes that even when North Korea is threatening “to rain fire and brimstone and wipe South Korea off the face of the earth” the market doesn’t move.
Furthermore, he explains the different economic conditions of the heterogenous emerging market universe to show why some areas are of interest, while others, perhaps less so. Given this is an equity fund, it’s vital to understand the varying dynamics of companies operating in these countries. They will have a different cost of capital and different kind of hurdles as well as varying currency risk. He gives an example of investing in a Brazilian company which might do well but if the Real tanks by 30 percent against Sterling, then Sterling investors are down by 30 percent as well.
Given the above comments, it might seem that this fund has a top-down bias to it. Well, a macro view makes up for about one-third of decision making in the fund whereas as the majority is still good old-fashioned bottom-up stock picking. A heady mix which if done well can certainly produce results as shown here.
Any downsides?
With a fund looking for value stocks in emerging markets (that are still quality companies) it’s perhaps unsurprising that the average turnover rate per annum for the fund peaks at around 50 percent. However, the cost of trading is not down to broker fees, who Mr Dimmich says have been ‘pushed down’ to a low level, it’s other fees like stamp duty, which while not as high as the UK can still reach 30-40 basis points.
However, for investors seeking a truly active fund, a static portfolio in this area is unrealistic and given the outperformance is obviously net of all fees suggests a high level of due diligence when it comes to portfolio construction.
Pacific Capital UCITS North of South EM All Cap Equity
Fund Size $625.1 million
Fee 1 percent
3-year annualised return 13.7 percent
Top holdings Samsung, AliBaba, Gazprom
