One of the many deserving winners of Citywire’s Investment Trust Awards last week was Mobius (MMIT). True, it has given back about 17.5% of its net asset value over the past 12 months, but its track record since its launch in October 2018 is very good, with an underlying investment return of 24.7% versus 1.2% for the MSCI Emerging Markets index and 10.4% for the MSCI Frontier Markets benchmark. Only BlackRock Frontier Markets (BRFI) has done better.
The poor performance of emerging markets this year largely boils down to Russia’s invasion of Ukraine and China’s rigid adherence to its zero-Covid policy. Emerging market funds caught with Russian exposure quickly found that it was valueless; repeated lockdowns constrained Chinese demand and caused further damage to supply chains; soaring energy costs impacted energy importers; rampant inflation took hold in some countries and the US responded by raising rates, which strengthened the US dollar – which is always a negative for emerging markets. Investors have exited in droves and valuations are low.
This tale of woe also points us in the direction of the way out of this. Peace in Ukraine, a relaxation/abandonment of China’s zero-Covid policy, or signs that US rates have peaked could all lead to a sharp rally in emerging markets. However, MMIT fund manager Carlos Hardenberg does not see a quick end to the sector’s problems and the portfolio is positioned accordingly.
Hardenberg has just come back from Turkey, which is conducting a so far highly unsuccessful experiment of fighting inflation with low interest rates. He observes that companies can adapt to the oddest of circumstances. Many are struggling, but there are some winners and that gives him ideas for what to look out for elsewhere.
For example, Turkey is benefiting from the trend for near-shoring – bringing production of goods back from Asia and closer to European markets. Hardenberg says that Brazil provides another example of companies that have had to learn to co-exist with a dysfunctional government. He does not see much impact from Lula’s re-election beyond encouraging foreign investors, who have deserted the country in droves, to reappraise the situation.
Hardenberg and co-manager Mark Mobius pay close attention to the macroeconomic outlook when deciding on the shape of the portfolio. They also operate with a strong ESG focus and this influences their exposures. One obvious benefit of this was that MMIT had no investments in Russia at the time of the invasion – this gave a great boost to its relative returns.
Similarly, as the managers find it hard to identify attractive Chinese companies that also measure up on governance grounds, the trust also has an underweight exposure there. MMIT had no exposure to the Chinese educational sector – which was wiped out overnight last year when government policy changed – or to the big tech companies which were knocked by regulatory clampdowns. Other areas that they are avoiding currently include Argentina and Egypt.
The managers’ caution has led them to have quite a high cash weighting of over 13% at the end of September and no gearing. This means that the trust is well positioned to pick up bargains as they appear.
Another major trend of 2022 has been the resurgence of value relative to growth. MMIT had over half its portfolio invested in the technology sector as of 30 September, and this may have been a headwind to returns this year. Much of the technology exposure is software related, with EPAM Systems the largest position in the portfolio at 9.2% of assets. The US-based digital transformation company just released a strong set of third-quarter numbers and a positive outlook for the rest of the year yet is less than half the price it was at the end of 2021.
Other top 10 holdings in this area include management software providers TOTVS in Brazil and Persistent Systems in India. These accounted for 5.8% and 5.4% of net assets, according to the September factsheet.
Hardenberg also sees an opportunity in the area of semiconductors, where buoyant share prices – linked to shortages – have now slumped and valuations are more reasonable despite growing end demand. MMIT backs fabless semiconductor businesses rather than capital-heavy foundries. There is no Taiwan Semiconductor Manufacturing, for example, which features heavily in some competing portfolios. In fact, MMIT has a distinct bias away from the heavyweight companies that dominate emerging market indices and an active share of around 98% relative to the MSCI Emerging Markets index.
While MMIT had just 8% of its portfolio in China at the end of September, it does have some exposure to Chinese consumers through companies such as Hong Kong-based EC Healthcare (medical and dental clinics, aesthetic procedures), which is expanding into the mainland.
MMIT engages with the companies that it holds – on issues as diverse as sustainability, minority shareholder rights, management reward structures, diversity and equality. Sometimes the simplest things can have big rewards – such as persuading a Korean company to translate investor information into English, which helped attract a wider shareholder base and got it re-rated.
MMIT’s portfolio is fairly concentrated with 24 holdings and turnover tends to be low. It trades on a fairly tight discount – currently 4% below net asset value – a benefit of being one of the better-performing trusts in its peer group. In other times, it would have been the natural rollover vehicle for funds exiting the sector, such as Fundsmith Emerging Equities (FEET). Unfortunately, this year’s turmoil prevented that. I would like to see it grow, however.