Fund profile: Hermes Global Emerging Markets

Despite being launched at an inauspicious time for emerging markets - December 2008 - Hermes Global Emerging Markets has fared very well over the past seven years, returning more than 100 per cent compared to 66 per cent from the average fund in the Investment Association's global emerging markets sector.

This has much to do with the expertise of Gary Greenberg, who has managed the fund since its inception and who brings over 20 years' experience of investing in emerging markets to the portfolio.

Greenberg also adds a sustainable edge to the fund, as he focuses carefully on environmental, social and governance (ESG) factors as part of his investment process.

In terms of portfolio construction, Greenberg describes the fund as '70 per cent bottom up, 30 per cent top down', meaning he focuses largely on companies themselves rather than what is going on in the wider economy.

GREAT COMPANIES

He says he simply looks for 'great companies' to invest in, which he defines as those with good products, solid balance sheets, a strong reputation and a positive market perception.

Currently the manager has around 60 holdings - a typical number for the fund - with the top 10 accounting for around 30 per cent of the total portfolio.

His two largest holdings are in fairly well-known companies: Chinese internet firm Tencent and Taiwan Semiconductor Manufacturing, which together account for close to 10 per cent of the fund. Financials also feature quite prominently within the portfolio, with HDFC Bank, Bank Rakyat Indonesia and KB Financial all top holdings.

Despite his company focus, Greenberg insists that the macroeconomic picture remains important, as 'assuming the top-down situation is dangerous and lazy'.

To help him assess a region, he uses Hermes' in-house quantitative model, which looks at major countries and sectors through metrics including GDP, debt, current account balance, equity valuation and company profitability.

The manager says that the fund's ESG focus also tends to exclude a number of regions from consideration.

Frontier markets including Nigeria and Pakistan are apparently particularly problematic from an ESG standpoint, due principally to a lack of transparency, as are more developed countries such as Russia and Korea, where family ownership tends to lend itself to nepotism and corruption.

CHINA OVER INDIA

As of 31 July, Greenberg has 27.3 per cent of the portfolio invested in China, which is 3 per cent more than the fund's benchmark (the MSCI Emerging Market index) and makes it his largest regional weighting.

This has, however, come down significantly since the beginning of June, when he was running a 10 per cent overweight to the benchmark.

Successfully calling the top of the market, Greenberg reduced a number of his domestically listed 'A share' positions before the Shanghai Composite index began its recent steep decline.

In the face of recent volatility, Greenberg says that he still generally 'feels fine' about China. 'The economy is challenged but growth is still there,' he says. 'Government reforms have taken a back seat but they will get going again. The economy must and will be freed up.'

The fund's second largest regional weighting is to India. It occupies 17.2 per cent of the portfolio and is a significant overweight compared to the benchmark, which is 8.37 per cent invested in India.

Greenberg says that this is a purely bottom-up rather than a macro or top-down call as, crucially, he does not believe that reformist prime minister Narendra Modi will be able to 'pull it off' in terms of driving through the structural changes he identified during his election campaign.

The manager is also increasingly bearish on Latin America. Currently, the only exposure he has to the region is in Brazil, which occupies 5.6 per cent of the portfolio (2 per cent underweight compared to the index), and he has no plans to change this.

'The bottom line is that most of South America is commodity-driven - which in the current market is not working in its favour - while political instability seems to be ticking back up,' he says.

Over the longer term, Greenberg says that Latin America will recover, although he adds that this is 'more a statement of faith' than one based on evidence. In the meantime he is happy to stay significantly exposed to China despite the naysayers, and will use any weakness to top up favoured positions.

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