Emerging markets may finally be coming out of a multi-year period of earnings recession, says Edward Lam, Manager of Somerset Emerging Markets Dividend Growth Fund. Because valuations reached such a distressed point during that time, there is now “lots of good value in the markets”.
For example, while Lam previously considered the emerging-markets consumer goods story overrated and popular stocks in this sector to be overvalued, he now thinks there are some areas, such as in China, where they look more promising.
The fund follows a defensive strategy and aims to find income and grow capital over the long term, rather than focusing purely on short-term dividend yield; indeed, at 2.7%, the fund’s yield is relatively low compared to most dividend-focused funds.
Although Lam says his team’s stock-picking process is probably “the same as 90% of emerging market funds”, he believes that where they stand out is in asking difficult questions in order to track down quality companies and in questioning the assumptions that go into many financial models.
For example, he recalls meeting with an oil company in mid-2014, when oil was at the $90-$100 mark. When asked how the firm would react if oil went as low as $50 per barrel, the representative replied that they had never been asked that before.
South Korea is the fund’s largest country allocation, at 21.2%. Lam believes recent shifts in South Korean corporate governance are finally starting to benefit investors. For example, Samsung Electronics has substantially increased its dividend in three of the last four years.
Sector-wise, he likes telecommunication stocks, which make up 8.6% of the portfolio. While regulation is one of the most influential factors for returns in telecoms, Lam also sees room for growth in countries such as Indonesia.
The fund has ongoing charges of 1.3% and an initial dilution levy of 0.4% when bought through major fund supermarkets. See SomersetCM.com for details.
| Top ten holdings | |
|---|---|
| Holding | % of assets |
| Otp Bank | 5.1% |
| SK Hynix | 4.9% |
| Samsung Fire & Marine | 4.2% |
| Samsung Electronics | 4.1% |
| Metro Bank | 4.0% |
| HCL Technologies | 3.5% |
| Sanlam | 3.4% |
| Porto Seguro | 3.4% |
| Turk Telecom | 3.3% |
| Pou Chen | 3.3% |