Fund Manager Interview - Allianz RCM BRIC
In this article James Davies, poses some questions to Michael Konstantinov, manager of the Allianz RCM BRIC Stars, where Mr. Konstantinov gives his views on emerging markets and how he’s positioning his fund.
The Allianz RCM BRIC Stars invests into stocks and shares of Brazilian, Russian, Indian and Chinese companies to achieve its objective of long term capital growth. Since March it has delivered some very impressive figures. Over the years many of our investors have selected the fund to gain exposure to the four main emerging markets as part of an actively managed portfolio, being prepared to accept the higher investment risk associated with an equity fund. The fund is available through Chartwell Direct at 0% initial charge and is one of our Top 100 funds. You can invest by downloading an application form by clicking here or logging into your Cofunds account online. Alternatively, if you have any queries please do not hesitate to contact our Investment Helpdesk on 01225 823915
Why should an investor consider a BRIC fund over, say, a more generalist emerging market mandate or a global equity fund?
Goldman Sachs economists, amongst others, have identified the BRIC economies as being different from other emerging markets because they have the potential to transform the global economy over the coming decades. Any GDP growth in the world throughout 2009 and 2010 will be dominated by these countries; they already account for more than half that of the US, with 15% of global GDP*. Looking at forecasts for GDP growth for this year, three of the 25 developing markets considered have had positive revisions, Brazil, India and China, where as the others still have negative revisions. BRIC markets have outperformed strongly year to date against both emerging market and world indices, as well as over six month, one year, three year and five year periods**. Such performance is due to the BRIC countries having the necessary conditions that enable them to sustain high growth rates over time, such as huge populations aspiring to achieve similar living standards as in developed countries, as well as increasing domestic demand. Whilst a general emerging markets fund or a global equity fund will not allow investors to specialise in the BRIC countries, the Allianz RCM BRIC stars fund is able to invest up to a third in non-BRIC countries that will benefit from the growth prospects in the BRIC countries.
Are you favouring any one of the BRIC countries at present and if so why?
We have reduced our country under/over weights and are now very close to equal weightings in Brazil and China, slightly over Russia, and slightly underweight in India. Over the recent rally we have seen a number of adjustments of valuation and from a risk-reward perspective expect similar numbers across all four markets. We are now concentrating on bottom-up stock picking, where we have seen some companies running ahead of their fundamental valuations so we have taken profits here and initiated some new positions in stocks with good potential upside.
What makes you include a stock within your portfolio?
Our investment philosophy is implemented through a unique process combining systematic country allocation and bottom-up stock selection. The fund uses a country scoring model that analyses the output of independent investment banks, covering macroeconomic and market data, identifying current market environments and pinpointing emerging trends to then rank the relative attractiveness of countries within the emerging markets universe. In our bottom-up assessment of companies we analyse the quality of management, market positioning, margin development and cash flow to establish the potential upside of a stock based on their earnings expectations and valuation. We would then include in our portfolio from this universe the stocks with the highest target upside.
The fund has delivered exceptionally strong returns since March this year; what have been the main drivers of this performance and how sustainable do you believe it is?
Year to date Brazil and India have attributed the most in delivering strong performance***. Key drivers of strong performance since March include the recovery of manufacturing in the BRIC countries as well as strong domestic consumption in China that continues to rise. For example, in Q1 2009 passenger car sales in China surpassed those in the US, and are still increasing, whereas sales in the US continue to fall. Russia has also performed well recently as the oil price moved above $70 a barrel. Our long-term outlook on the BRIC markets remains positive. There are currently no concerns yet about inflation, which is still low. Domestic demand is expected to improve further, as are exports from China and Russia as the global economy stabilises.
Some may be concerned that political and corporate governance issues are more of a factor in emerging markets. Are investors right to be worried or is this issue overplayed?
Investors are right to be aware of such issues and that the risk of investing in these markets is considered higher than in developed economies. We believe however that with this increased risk, come the potential for higher returns than is achievable outside of emerging markets.
* Source: Jim O’Neil, Chief Economist at Goldman Sachs, 23/06/09
** Source: Lipper, 25/09/09
*** Source: Lipper, 31/08/09
Allianz Global Investors: 02/10/09
The views expressed by the fund manager were obtained by Chartwell on 18 September 2009 and are not necessarily the views of Chartwell Group Limited.