Mobius: Gearing a possibility after strong performance

Oct 2023
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Citywire
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News
Jamie Colvin

The emerging market mid-cap fund has tripled the gains of its benchmark index since launch five years ago.

Gearing is on the cards for the first time for Mobius (MMIT), which previously struggled to negotiate competitive lending terms with banks.

Carlos Hardenberg, who left Templeton Emerging Markets (TEM) to form the £152m trust with Mark Mobius in October 2018, told Citywire that it had been very difficult for him to arrange competitive terms with banks in the past few years as the trust did not have demonstrable performance figures.

As a result, he decided to focus on ‘fundamental capabilities’ and prove he could ‘generate returns and robust numbers’.  

Since launch the trust, which invests largely in medium-sized technology companies across emerging markets, has delivered shareholder returns of 23%, tripling the MSCI EM benchmark index’s 9%. Shares were trading at 122p on Friday, or a 12% discount to the latest net asset value of 141.3p per share.

Thanks to this strong performance the manager said he will ‘consider’ gearing going forward.

The ability to borrow money to invest has always set investment trusts apart from their open-ended peers, but it has become more expensive as interest rates have risen to 5.25% in the UK.

On top of that, while gearing can enhance returns, it can exacerbate losses, heightening risk in markets that can already be volatile.

Hardenberg, however, is not afraid of volatility, which he sees as a good thing because it presents opportunities to buy attractive companies cheaply.

Risk hot spots in emerging markets

The manager acknowledged there are several risky areas in emerging markets but said the more recent trouble for the region has been contained and concentrated among the largest businesses.

In particular, he sees problems with: technology firms, which are seeing ongoing regulatory headwinds; banks, which face increasing disruptive competition; commodities, which are heavily impacted by global trends; and China where they find management teams inaccessible.  

To combat these concerns Hardenberg (pictured below) said he uses a robust and radical quality framework to ‘navigate to the right countries and avoid those most vulnerable, as well as focusing on companies run by role model management teams with no significant leverage, no reputational issues and a strong corporate culture’.

This framework has seen the managers put significant capital into one of the areas of concern, technology, which makes up over 61% of the portfolio, according to the latest factsheet.

Hardenberg said despite the risks technology is the most attractive segment next to healthcare. He pointed to strong thematic developments in that sector, such as semiconductor hardware, companies investing in digitalisation, software and artificial intelligence, as well as the transition to alternative energy.

These themes are represented in his largest holdings which are South Korean businesses, Leeno Industrial, a semiconductor component tester, and Classys, a leading developer of non-invasive aesthetic medical devices, as well as Nasdaq-listed IT consulting business, Epam.

The companies have respective weightings of 6.9%, 5.7% and 5.6%, according to the latest factsheet.

Hardenberg believes investors are too pessimistic about the next five years, emphasising that while caution is important in EM, it is still in the middle of a mean reversion and post-pandemic recovery, which is becoming more evident across Southeast Asia.