Like the medieval emperor whose name it borrowed, Charlemagne Capital knows a thing or two about emerging markets and is an operator that is increasingly difficult to overlook
Charlemagne can list King of the Franks, King of Italy and the first Holy Roman Emperor on his impressive CV. It is probably also fair to say that he knew a thing or two about emerging markets having explored a few in his time at the helm of Europe. Charlemagne Capital may not have achieved quite his global domination, but it also knows a thing or two about emerging markets.
The emerging market specialist boutique has a fair few grandees of its own. The chief executive is Jayne Sutcliffe, who began her career with Asian specialist Thornton Management and in 1990, co-founded Regent Pacific Group. It also lists entrepreneur and fund manager Jim Mellon among its seed investors and board members. Mellon, who is thought to be worth £500m+, co-founded Thornton Management alongside a vast range of other enterprises.
Legend has it that the capital for the business was raised from a lucky gamble in the Russian bond market. According to a Financial Times interview with Mellon, on a visit to Moscow, Mellon and Sutcliffe went down to the vegetable market where old ladies were trading coupons for about $25 each: “We bought a big bag of coupons, and handed about 80,000 to a broker who put them into the auctions, held by the central government. At the time, the average Russian did not think they were worth more than a bottle of vodka.”
They made back some eight times their original investment and that provided some of the seed capital for Charlemagne Capital when it launched in 2000.
It may have been seeded on a lucky punt but the group’s fund management approach is altogether more cerebral these days. The fund management team has been together a long time – about 20 years – led by chief investment officer Julian Mayo, with only the occasional new recruit, such as Mark Bickford-Smith who joined Charlemagne 18 months ago from T Rowe Price. The investment team is now 15-strong.
Mayo says: “We are focused exclusively on emerging market equities but this is sliced and diced in different ways across the group’s funds, which specialise in different geographic regions, sector or themes (such as dividends). This includes regional products in the Middle East, Africa and we also have a frontiers fund.”
The group now has five onshore listed funds – Africa, Eastern Europe, Latin America, New Frontiers and Emerging Market Dividend as well as a range of institutional mandates and specialist vehicles.
The group currently has about $2.4bn (£1.6bn) under management, which, argues Mayo, is a good size: “We are big enough to be a reasonable player, but we are nimble enough to invest in smaller companies. The best opportunities are in the second tier and as they fall under the radar of investment bankers and asset managers. It means that our fund managers can dig deeper and find areas of the market that others overlook.”
However, funds under management have suffered as the popularity of emerging market investment has waned. A recent interim statement showed an 8 per cent drop in AUM during the first half of the year. The group remains profitable but says it needs to generate stronger flows to support its current cost base.
The group has been listed on the Alternative Investment Market since 2006, but 40 per cent of the company is owned internally by the partners. Over the past five years, the shares have traded as high as 37p, but they are now bumping along at about 11p as illiquid Aim shares have fallen out of favour. That said, performance has been better recently as stockmarket performance has improved.
The group’s client base is diversified across Europe, Asia and the US, but is predominantly European. Mayo says the group is making progress in terms of getting onto the main platforms. It is now on the Hargreaves Lansdown site, for example, and those of the major wrap platforms. Institutional assets still make up the bulk of the group’s funds under management at $1.3m, The OCCO and Magna ranges of funds have about $512m and $306m each, with the remainder in specialist mandates.
The investment process is now well-established and consistent across all the funds. Mayo says: “All the funds are run by the same team and there will be cross-fertilisation. So the Eastern European fund provides ideas for Mark and me, for example, on the Dividend fund. It is all about generating ideas, and working together.”
The investment approach is to buy companies trading at a discount to their net asset value. Mayo says: “We have a bottom-up stockpicking approach and research is at the core of our processes. We do not have an explicit style bias, but we do focus on quality: if I had to categorise it as anything, I would say it is a Garp-like approach, but we do not use Garp screens and it is quite eclectic. We are much happier buying an expensive stock that we really like and understand, rather than the me-too companies seen in other portfolios. We will pay up for quality and we believe that is particularly important in emerging markets.”
The asset allocation is a function of the stock selection. The group tends to own companies with a much higher proportion of genuinely private investment, rather than the large state owned enterprises that dominate the index. Mayo says that in some of bigger markets such as Brazil and China, state-owned these companies are particularly prevalent. In China, more than half of the market is in state-owned enterprises – the big four banks or mobile phone companies, for example.
He adds: “We would rather be invested in a company run for the benefit of shareholders than companies that are run for broader community reasons. Gazprom in Russia has been over-spending for years, for example.”
Mayo argues this is because it is run in the interests of the wider Russian state, or community, rather than the interests of minority shareholders. Looking beyond the major stocks can really bear fruit. For example, Mayo says, Brazil has a whole raft of good private sector businesses from which to choose.
The process has borne fruit. The flagship Magna Emerging Markets Dividend fund is top quartile over one and three years. The performance of the Latin American fund looks weak relative to the Global Emerging Market sector, but better next to other Latin American funds, while the Frontiers fund has had a strong start and is top quartile over one year. The Africa and Eastern European funds are still small and have something to prove.
Mayo argues that emerging markets in general are due for a stronger run, having been in the doldrums the past few years. He says: “It is interesting that a lot of experts have suggested that emerging market underperformance has been about a fear of the wind-down of monetary stimulation. People are trying to have it both ways. In fact emerging markets have underperformed for quite a long time including in a time of super-liquidity. Certainly, the big beneficiary of liquidity has been developed market balance sheets, but I think the monetary argument is a red herring.
“We need to look elsewhere for the source of underperformance in emerging markets. Earnings have been disappointing in emerging markets since 2011. There has been a lagged effect of rising commodity prices and higher wage rates. The latter has been a deliberate policy. It is more towards fairness and redistribution of wealth. It is easier to do with economic growth.
“Wage rates have increased over the last two years quite significantly and this has put corporate profits under pressure. However, it sets the scene for better economic performance. The economies have had to rebalance from a focus on exports to new economic models. The economies will be much more balanced, rather than growth being the primary goal.”
Mayo argues that from a valuation perspective emerging markets are still trading below their historic averages. He says that history suggests that when they have been trading at this sort of level, in the next one to two years they tend to perform very well.
He adds: “Emerging markets have barely ever been cheaper on a 10 year view. The discount of emerging markets relative to developed markets has never been higher. EM have even traded at a premium at times. Now they are trading at 10 times, while the US is trading at 14-15 times.”
He also says the emergence of a dividend culture in emerging markets will be supportive. Partly this is a reflection that the quality of management has improved and is responding better to shareholder pressure. Companies are much more profit-focused: “The obsession had been with growth, they did not care about the bottom line,” says Mayo. “It was all on measures such as prestige, image and scale. Now it is much more focused on shareholders. The dividend story is here to stay.”
Charlemagne is undoubtedly building traction. The Magna Emerging Markets Dividend fund recently hit its three year anniversary and is top quartile in the IMA Global Emerging Markets sector. The fund is now £105m and likely to gather momentum from here. The Magna Latin American fund was recently awarded a bronze fund rating from Morningstar OBSR, citing the team’s ‘long-standing working relationship and in-depth knowledge of local markets’ plus ’the managers’ ability to identify under-researched ideas through the bottom-up driven process and their willingness to invest early.” It has also recently received a gold rating from S&P.
Investors have historically been unimaginative in their emerging markets exposure, tending to stick to the well-recognised names of Aberdeen and First State. There is increasingly a broader choice in the sector, and Charlemagne is one of a number of groups it is increasingly difficult to overlook.
The independent views:
Alan Borrows, fund manager, Miton Distribution fund
We have been using the Magna Emerging Markets Dividend fund and it has done a great job for us. We had been looking at it for quite a while, but when Mark Bickford-Smith joined from T Rowe Price, we felt it finished off the team nicely and gave us the final push to invest. It is a big tick in the box if a manager comes out of a large organisation and really wants to make a difference again.
As income managers, we have found that historically we have been well-served by funds in Asia, but there has been a paucity of managers in emerging markets, so this fund – which sought to pay a growing dividend over time – ticked a lot of boxes for us. We have been very pleased with its performance during the time we’ve been invested.
James Calder, head of research, City Asset Management
We use Charlemagne’s Emerging Market Dividend fund, which we picked up quite early and have backed over the past couple of years. For us, we like smaller companies and smaller funds – we believe it is part of where we add value to pick up this type of fund before anyone else. We are still positive on emerging markets despite the short-term setbacks, we believe there is a strong structural story with a rising middle class and higher GDP levels.
We like Charlemagne’s value defensive approach. Also, yield is such an important factor – and this fund throws off a very attractive yield – in a more challenging environment our clients like the reassurance of getting a yield from their investment. We also like that Charlemagne is an emerging markets specialist – it is all they do. It is a big team, and they are very cerebral.
Simon Evan-Cook, investment manager, multi-asset team, Premier Asset Management
We have been in the Magna EM Dividend fund for some time. In general, we like the discipline of equity income and believe in the long-term outperformance of dividend strategies. We like Charlemagne’s unconstrained approach and that they are not wedded to a particular benchmark. The funds are concerned about volatility, value and generating an income. They understand the quality of the companies in which they invest and mitigate many of the risks of investing in emerging markets. They are interested in companies that are growing their dividends and are long-term investors.
In general, we are overweight emerging markets and have been topping up following the recent falls – we think there is great value there. However, we have stuck with more conservative funds.
Charlemagne Capital is an emerging markets specialist boutique. It currently has around $2.7bn under management across a range of funds and institutional mandates. It was founded by Jayne Sutcliffe and partners in 2000. It floated on Aim in 2006, but management and staff currently own around 40 per cent of the shares.