Emerging markets finally re-emerged last year after a half decade of torpor – though many think Trump’s protectionism will send them spiralling back down. But not Neptune Investment Management’s Ewan Thompson, whose fund is currently top of the performance tables over both one and three years.
What’s surprising is that Neptune Emerging Markets is just a £10m minnow, given that Neptune has such a strong reputation in this field and that it gave investors a return of 50 per cent over the last year.
But the truth is that investors lost interest in emerging markets after years of underperformance. The fund has shrunk in size by four-fifths since 2010, when it had £50m in assets, and while it’s up 50 per cent over the year, it’s up just 37 per cent over five years.
Back in 2012/13 it was an underperformer, having slipped into third quartile. But a timely overhaul of the portfolio in early 2016 to a pro-cyclical stance has sent it charging up the tables.
Thompson puts it down to a “very Neptune-esque” mix of bottom-up stockpicking with a fairly thick overlay of top-down asset allocation. “You can pick a great stock but then see the currency fall 40 per cent. So we have a strong overlay of which markets we want to be in.”
He also sees little sense in wedding himself to either a value or growth bias. “We are in both camps, with both structural and cyclical stocks.”
It’s a concentrated portfolio, where the mandate says up to 50 holdings but where he rarely goes above 40-45.
Oddly, a Korean stock, Samsung, and a Taiwanese one, Taiwan Semiconductor Holdings, are his two largest holdings. Odd, because few people would now recognise Korea or Taiwan as emerging economies. Thompson acknowledges that it’s anomalous that those markets are still in the MSCI EM index, but says their inclusion is not about benchmark hugging. “I wouldn’t own them if I didn’t like them.”
The start of 2016 was what propelled Thompson to the top of the table. “If you think about 2015, it was a very, very defensive market. 2016 was about recognising the world was changing, especially in terms of deflation. We decided to move to a more pro-cyclical position.
We added to Brazil and Russia, where we had been very light before. We added materials and energy stocks. The portfolio we had in 2015, which did well against the sector, would have struggled in 2016. We had been very big in India, and we took that position back a bit.”
The big decision for any emerging market manager, though, is China. On another planet – Jupiter’s annual investment dinner in March – there was talk of how China’s debt position is still a deep worry, with major question marks over its banks. But Thompson is more relaxed. “We are neutral on China. We do have some banks, and they are not quite as cheap as they used to be.”
He sees some signs of improving NPLs at some banks, and makes the point that while he’s not benchmark-led, it’s worth remembering that the market cap of China’s banks is equal to the entire stockmarket capitalisation of Brazil.
Thompson is also undeweight consumer staples and telcos. “Over the last few years, emerging market investors have huddled into an ever smaller number of companies. So you find consumer staple stocks on 40-50 times earnings, but other parts of the market are on less then 10 times earnings.”
The conventional wisdom around the dollar is that rises in the greenback are bad for emerging markets, as are rising interest rates such as the March Fed hike. But Thompson questions this. As bond yields in the US have risen, emerging markets have also risen, and commodities have also rallied. Yields are rising because the global economy has strengthened – which is good for emerging market equities.
Commodity stocks that he added to his portfolio include Antofagasta, the Chilean copper miner listed in London. Since the start of 2016 it has had a tremendous run in sterling terms, shooting from 350p to 860p. Thompson added it to the portfolio in the last quarter of 2015, as he felt that there would be a rebound in the copper price. Even in dollar terms, copper is up nearly 25 per cent on the year.
What are the threats to the rosy emerging markets story? Thompson says you should start worrying if China slips back towards deflation. Over the past year, he says that producer price inflation has shifted from minus 7 per cent to a positive 7 per cent, and says that dramatic swing is all about the country’s recovery. “The risk would be a major return to deflation, and, say, a collapse in commodity prices.”
The other thing to keep investors worried is Trump. “Clearly what Trump is going to do is on our minds, especially any move towards super-protectionism,” he says, but adds that underlying strong global growth should reassure investors.
Thompson works across several emerging market funds, acting as assistant manager on the much larger Neptune India, Russia and Latin America funds. But he insists that it adds to rather than deflects from his lead role on the emerging markets fund.
“I see it as a phenomenal resource. They are my screen for the market, yet the set up also allows me to focus on individual stocks that I am interested in.”
Neptune has a strength and depth in emerging markets driven by its boss, Robin Geffen, who is among the most truly internationalist fund managers around today. I can’t see this fund staying a minnow for long.
Ewan is head of emerging market equities at Neptune, which he joined in 2006. Prior to Neptune he was an editor for Yale University Press, having graduated from Oxford University with a first in English in 2003. He is also assistant manager on Neptune India, Neptune Russia & Greater Russia and Neptune Latin America.
50% Performance over the last year
£10m Despite Neptune’s strong reputation in emerging markets the fund is a minnow
20% The fund is a fifth of its former size in 2010 when it held £50m in assets
45 Thompson rarely goes above 45 stocks although his mandate allows him to hold up to 50
Despite ranking top of tables following returns of 50 per cent last year, Neptune Emerging Markets is a fraction of its former size thanks to the sector’s fall from favourability in recent years. Manager Ewan Thompson is neutral on China and has recently been adding to his small positions in Russia and Brazil. Samsung and Taiwan Semiconductor Holdings are the two largest holdings.