SOMERSET EMERGING MARKETS: Globetrotting manager finds gems
The investment house Somerset Capital Management is a boutique asset manager specialized in emerging markets. Co-founded 16 years ago by Conservative MP Sir Jacob Rees-Mogg, it now has £3.3bn of funds and offices in Shanghai and Singapore, as well as the UK.
Its investment managers (who manage a mix of global emerging markets mandates, Asia-specific funds and China-only funds) spend a lot of time meeting with companies in a quest to identify winning companies and vet existing ones.
Among its most frequent travelers is Kumar Pandit, co-manager of the company’s Emerging Markets Dividend Growth fund. Over the past year, he has been to China, India, Indonesia, South Korea, Taiwan and Vietnam to pursue opportunities for the fund.
“Yes, much of the financial analysis on investable companies can be done in the UK office,” he says, “but meeting companies face to face is vital to what we do, whether in their country of origin or at conferences”. in the United Kingdom. We need to understand what management is thinking.’
The fund he runs with Mark Williams is unusual for an emerging markets vehicle. Although he focuses on generating total returns for investors, he is income-oriented. “We want to hold companies that are generating a lot of cash and then use some of it to pass on to shareholders in the form of dividends,” adds Pandit.
It is an approach that has not been without its challenges, particularly the impact on businesses of prolonged Covid-induced lockdowns. But Pandit says the long-term trend among many emerging-market companies in countries like Brazil, South Korea and Taiwan is to pay shareholders a dividend for their support.
Last year, dividends paid to fund investors amounted to around 1.8p per unit, compared to 3.3p the previous year. But encouragingly, this year’s interim payment was an improvement on 2022.
Unlike other emerging market funds such as Mobius, which are nervous about investing in China for geopolitical reasons, Pandit is calmer. He describes the prospect of an invasion of Taiwan by China as a “high-risk, low-probability event”, adding that it would be catastrophic for China in terms of its role in the global supply chain. He believes a more likely outcome is unification through the emergence of a government in Taiwan more receptive to the idea.
Among the fund’s key holdings in China is electric car maker BYD (Build Your Dreams). “It is the largest electric car manufacturer in the world,” says Pandit. ‘Having perfected its craft in the domestic market, BYD now sells cars across Asia, in countries such as Indonesia and Thailand. I’ve even seen advertisements for their carriages in London Underground stations.
What Pandit likes about the company is that it is “vertically integrated,” meaning it makes the lithium batteries that power its cars, rather than relying on one supplier. It also pays a dividend.
The fund’s performance figures are not very good, although Pandit and Williams have improved its relative performance since their appointment as joint managers in November 2020. Under their management, the fund has generated a return of 10 percent, compared to a return null of the mean background. Emerging markets fund.
Pandit believes many emerging markets are now better positioned than developed markets to offer investors attractive returns, as a result of stronger economies, lower inflation and falling interest rates. The fund’s annual charges are just over one percent. Williams also co-manages Somerset Capital’s Asia Income Fund.