“A desk is a dangerous place from which to view the world” warned John le Carré. Yet most fund managers spend a huge amount of time staring at Bloomberg screens, even though the same information and analysis is equally available to tens of thousands of other investors. It therefore rarely adds value.
The team at Genesis Investment Management, specialists in emerging-market equities, is different. The 12 members of the investment team share just one screen. They spend most of their time visiting companies, talking to management and canvassing the views of customers, suppliers and competitors – in short, seeking original insights into investment opportunities.
A way in for retail investors
The management company is also a partnership. This ensures a focus on long-term investment performance rather than chasing new business through a bloated sales and marketing department or generating ever-rising profits for shareholders. Though the firm manages nearly $20bn of “institutional” money (ie, for large professional investors), there are just four in the client services team.
Genesis does, however, manage an investment trust, Genesis Emerging Markets (LSE: GSS) with £1bn of assets, providing an access point for retail investors. Since the shares trade on an 11% discount to asset value, retail investors can invest on better terms than the large institutional clients and a dividend yield of nearly 2% provides a bit of income.
Long-term performance has been excellent, with an annualised net investment return since launch in 1989 of 11.6%, 2% ahead of the benchmark emerging markets index. Returns in the last year of 13.5%, nearly 10% ahead of the index, have been outstanding.
This followed a few years of mild underperformance. Arguably, Genesis’s collegiate style, reminiscent of academia rather than the Darwinian world of finance, prevented prompt action to correct flaws in investment thinking, but performance has since caught up fast. That does not imply that GSS takes a lot of risk – quite the reverse.
A worldwide footprint
There is no debt to support investment returns and the number of holdings, 112, is large. This allows GSS to invest 6% of the portfolio in seven “frontier” countries and 12% in smaller companies not in the MSCI index. It also enables exposure to be spread: no holding is above 4% of the portfolio. Exposure to China, at 24%, is well below the index’s 32% and to Asia, at 59%, below the index’s 73%. Genesis also keeps an eye on country and sector exposure to ensure a good spread, while economic and political factors account for about 25% of its analysis owing to the impact on currencies, regulation, taxation and the potential for growth.
Mostly, though, the team concentrates on “long-term investment in good-quality businesses with a sustainable competitive advantage and an attractive valuation,” according to Andrew Elder, managing partner. The quality bias means that the portfolio is more expensive than the index (18 times earnings against 12.6), but has a higher return on equity (18.6% compared with 15.8%). Exposure to companies controlled by the state is low, while there is a skew towards consumer stocks, such as Alibaba, New Oriental Education and Vinamilk.
Genesis, then, is not simply relying on the superior economic growth of emerging economies to deliver a favourable tailwind. It works hard to establish a constantly expanding list of opportunities, some of which will turn out to be great investments. These simply cannot be analysed by inexperienced investors thousands of miles away with universally available information. Genesis provides a role model for how it should be done.