Mobius investment trust shares have rebounded since their March lows, although they remain below their 2018 launch price. Fund manager Carlos Hardenberg says emerging market shares won't stay cheap forever.
Mobius (MMIT ) fund manager Carlos Hardenberg has said emerging markets (EMs) were not going to stay cheap after investors deserted the sector amid the coronavirus pandemic panic but have ploughed back in searching for bargains.
The £89m closed-end fund is the flagship vehicle of Mobius Capital Partners, the firm founded two years by the 83-year-old Mark Mobius (pictured above), a pioneering investor in EMs at Franklin Templeton. Fellow founders and co-managers Hardenberg, who previously succeeded Mobius on the £1.9bn Templeton Emerging Markets (TEM ) trust, and Grzegorz Konieczny were veterans of the same team.
The London-listed Mobius fund, unusual in its sector for a focus on smaller and medium-sized companies and high level of activist-style engagement, had a difficult start to its life but has managed to eke out gains in 2020, at least in terms of net asset value (NAV), with a 1.5% rise. That belies the 50% rally from their low of 64p on 23 March to 92p today.
‘We firmly believe this is going to be seen as a really good level to build positions in emerging markets,’ said Hardenberg (pictured below).
The manager argued that the tens of billions of dollars pulled from EM funds in a flight to safety earlier this year, which he called ‘a hefty overreaction’, would return just as swiftly.
‘The catalyst: it’s sentiment. Local sentiment is already improving, which is why we are in a very strong bull market in EM. Foreign sentiment has really not addressed this so far, because there’s still asset hoarding in the US and in Europe,’ he said.
‘But the degree of underweight to EM never lasts very long.’
The manager suggested that once we see ‘somewhat of a normalisation taking place in the global risk environment’, such as with clarity on the result of the US presidential election, investor appetite for more volatile EM shares will improve.
Since launching at 100p in October 2018, the trust’s shares have slid to 85p, although the portfolio’s performance has not been as weak, with the NAV per share falling to 97.1p.
In NAV terms, Mobius’s small gain so far this year makes it the second-best performer in the Association of Investment Companies (AIC)’s Global Emerging Markets sector, just behind the 3.9% rise for Fundsmith Emerging Equity (FEET ), which has started to turn around its lacklustre performance in the crisis.
However, with Mobius’s shares flat overall this year, its discount has continued to widen to 10%, according to Numis Securities, while FEET’s shares are also battling a stubborn 14% discount.
Somewhat surprisingly, the pair of trusts have far lower weightings to China than the wider MSCI EM index, which both reference fairly lightly. China, which has performed significantly better than other large EMs this year, constitutes about a third of the index but just over 18% of investments in Mobius and 6% in the £294m trust set up by Terry Smith, according to May factsheets. According to Mobius, just one of its top ten holdings, Yum China, in the wider index.
The linking factor is a ‘quality’-driven approach, although FEET invests in bigger companies. Hardenberg compared the avoidance of highly leveraged businesses, which have suffered in this environment, to an ‘insurance policy’ and said, beyond the wider issue of poor EM sentiment, building up Mobius’s track record would bring back investors.
‘We have to deliver performance. We have to convince more people the strategy offers diversification,’ he said.
Embracing frontier markets
Large positions that have performed strongly since March include AK Medical Holdings, a Chinese producer of hip and knee implants still run by the founding family. Investments in India have been weaker, particularly wires and cables manufacturer Polycab India.
With more than 10% in cash at the end of January, the managers were in a position to pick up companies on the cheap, especially in the regions where coronavirus is taking the largest toll.
That includes two new investments in Brazil, one company involved in online learning and the other a software business. The fund now has just under 17% of investments in South America’s most populous nation, where Hardenberg acknowledged the number of coronavirus deaths, now topping 50,000, was ‘shockingly high and very concerning’.
The managers have also made two new investments in Turkey, one in a software company and the other in fashion retailer Mavi, which has a strong market in eastern Europe and a presence in the wholesale market in the west.
The fund has also made inroads into frontier markets, with its first investment in Africa, in a Kenyan tech business, as well as building its first position in Vietnam. It has also invested in the health sector in Egypt, not classified as a frontier market.
Hardenberg trumpeted the distinct advantages of investing beyond the confines of what was considered EM, including low correlation, and the third of the world’s population in these regions whose increasing spending would drive growth. He told investors to expect increasing forays into frontier markets.
‘I wouldn’t think it’s going to be 20% of the [fund], but it could easily reach 12-15% in the near future,’ he said.