The Guinness Emerging Markets Equity Income Fund is designed to provide investors with long-term capital appreciation and income growth by investing in emerging markets worldwide.Our approach concentrates on businesses that have been most successful in converting the dynamism of emerging markets growth into cash-based profitability over time. Instead of attempting to anticipate the next political development, the next turn in the economic cycle or the next new theme we keep our attention focused on those companies with demonstrable track records of financial success which we think are likely to continue. For us, the investment opportunity lies in the undervaluation of persistent profitability. The Emerging Markets region comprises Asia, Europe, Middle East and Africa (EMEA) and Latin America. Emerging markets are driving global growth, and as these countries develop, incomes rise leading to the expansion of consumption and the emergence of a new middle class. China and India alone account for more than a third of the world’s population. China‘s 19 million passenger car market makes it a magnet for US, European and Japanese carmakers. Its manufacturing capabilities are unmatched in cost and scale, from clothes to electronics to ships. They make China the world’s largest trader of goods valued at over $4 trillion. India has 900 million mobile phone subscribers but only 110-120 million have a smartphone. This is the next big smartphone market – one that will benefit South Korean and Taiwanese companies, which dominate the production of computer chips and personal electronic devices. But high growth and rapid development is often accompanied by volatility and risk. We focus on profitable companies (in cash terms) that have generated persistently high return on capital over the last eight years, demonstrating stability and resilience. Historically, companies in our universe have gone on to deliver significant dividend growth. We believe strong cash generation and its distribution as dividends also provide a degree of downside protection against volatility in local markets. We maintain a high conviction portfolio of around 30-40 equally-weighted positions with a minimum market capitalisation of $500 million, with low turnover and no benchmark-driven constraints on sector or regional weightings.
Why invest in the Guinness Emerging Markets Equity Income Fund?
The Fund is designed to provide investors with exposure to Emerging Markets equities through a high conviction, low turnover portfolio of consistently profitable, dividend-paying companies.
- Focus on consistent high return on capital
- At the heart of our process is a focus on the underlying business and the cash flows generated by that business. We have found that companies that generate returns on invested capital above the cost of capital persistently over time are likely to continue to do so. This gives us the confidence to be able to value the business and hold an investment, potentially over many years, in order to allow sufficient time for the returns the business earns on its invested capital to translate into total returns earned by shareholders.
- Growth and income
- The dividend is a natural outcome for those companies that are generating above cost of capital returns on investment. This then becomes a visible sign of capital discipline and good corporate governance where the management is focused sustaining and growing cash profits. We look for a growing dividend stream to come alongside.
- High conviction
- The Fund typically invests in 36 companies, with each company having an equal weighting. This provides a good balance between the benefits of diversification while also allowing each company to add meaningfully to performance. We don’t have a long tail of small positions and by definition we can never just ‘hug’ the benchmark index.
- Fundamentally driven
- We focus on ‘bottom-up’ stock selection rather than trying to make decisions based on an expected outlook for the region’s economies. We like to invest in good companies that have, in the short term, fallen out of favour, but that have previously shown an ability to weather most economic environments over time.
- Low turnover
- We prefer to invest over the long term. We also recognise the increased costs of trading in and out of companies unnecessarily. Typically we will hold a company in the portfolio for between three and five years.
- Repeatable and independent
- Edmund Harriss and Mark Hammonds have managed the Fund since launch. They have developed an investment process that is clear, robust, transparent, and scalable. Their approach filters out much of the noise and hype that surrounds companies to focus on the true signals that drive company valuations. By performing their own company research and analysis, using their own proprietary modelling systems, the managers try to avoid some of the behavioural biases associated with being unduly influenced by market sentiment.
The Fund is designed to give investors exposure to some of the world’s fastest growing regions, which will have a significant influence over our economic future. However, with change and opportunity comes risk. We seek to manage this by investing in companies that:
- have a proven record of generating returns in excess of the cost of capital;
- can successfully reinvest those returns in order to grow their business; and,
- are committed to paying dividends to shareholders that can grow over time.
Emerging Markets are diversified
Emerging market equities can provide diversification benefits to a portfolio with their exposure to a wider array of economic drivers. Our focus on individual businesses has tended to accentuate the diversification benefits by concentrating on factors specific to a given business in Brazil, South Africa or Thailand rather than on likely beneficiaries of top-down macro-economic themes.
Emerging Market Economies
Emerging Market countries are making significant contributions to global growth. Demographic tailwinds combine with other factors to raise income levels. In India, for example, over one million people per month are entering the workforce. There are many different drivers. Capital accumulation contributes to the strength of emerging market economies in Asia, as foreign investors compete with local companies and individuals to benefit from access to new markets and customers. Rising income levels are leading to increased consumption and the emergence of a new middle class, accompanied by higher levels of wealth. In Latin America, resources and materials exert a powerful pull over Brazil while in Mexico, export manufacturing for its North American neighbour is very influential. Central Europe is sensitive to demand from the Eurozone, Russia is sensitive to energy while resource-rich South Africa has a substantial domestic consumer market. This provides a backdrop to a wide variety of businesses and investment opportunities.
Emerging Markets has diversified
China stands out among emerging markets for its ability to have evolved as the centre of a manufacturing hub that is increasingly mobbing up the value chain. The country’s exports are no longer dominated by unsophisticated goods, as China has developed the ‘know-how’ required to produce ever more complex goods. This ‘know-how’ results from a combination of education, understanding and developing manufacturing processes and the acquisition of technology. As production capabilities improve, so worker’s wages rise. This renders uneconomic manufacturing that is most labour-dependent, which is then relocated to where labour is cheaper.Services play an important role in India, which has developed specialisms in IT consultancy and business process outsourcing. As well as providing employment for millions of people, the skills and expertise in these sectors have pushed India to pioneer the development of a national digital identity programme on an unprecedented scale. Aadhaar is a system for verifying identity that has many applications, including ensuring benefits are sent directly to recipients, making payments, signing documents and completing verification procedures when opening a new bank account. Around 1.2bn citizens (nearly the entire population) have been signed up for the service. Other sources of growth include the significant infrastructure projects being developed across emerging markets to support a population that is increasing, and becoming more urban.
Emerging markets are moving at different speeds
Emerging Markets are not a single block – countries’ economies are always moving at different speeds. Some have more exposure to commodities and cyclical industries, which experience phases of boom and bust. A country’s exposure to external demand—how dependent it is on global trade—can also cause it to undergo faster or slower periods of growth. And political instability can lead to bouts of economic volatility, particularly if foreign investors decide to withdraw capital.
Long-term development is not a straightforward process. As well as demographic factors, development is affected by the political and economic institutions present in an economy. Structural reforms necessary to support business and economic growth are on ongoing process in emerging market countries, whether that is labour reforms in Brazil or chaebol reforms—the large, family-owned conglomerates—in Korea.
It is this long-term development that underpins the growth that is of interest to investors in emerging markets, and it is the ability to access long-term growth that is of most interest to us.
Our investment process naturally steers us away from more cyclical companies, such as those heavily exposed to commodities, and towards companies that have a long-term track record of generating high returns on capital. We believe these companies will be well placed to perform in the future.
Emerging market risks
The growth potential that is on offer in Emerging Markets has to be balanced against the risks. Political, legal and financial institutions in emerging markets can vary greatly in their robustness and transparency. The financial systems, debt level and foreign currency exposures can provide additional sources of uncertainty. In some cases, economies in emerging regions are subject to factors entirely beyond their control – commodity prices, US dollar liquidity and interest rates being examples. To mitigate these, we invest in companies with long track records of profitability which we believe to be the product of individual business attributes or management skill. A demonstrable track record of financial success we think, is an indicator of a company’s ability to survive and prosper in an uncertain world.
Edmund has managed Asian Funds since 1994 both from London and from Hong Kong.
Edmund worked for ten years from 1993 for Guinness Flight, which became Investec after the merger in 1998. After joining the Far East Investment Desk in 1994, he served as a member of the investment team managing the China & Hong Kong Fund (now the Guinness Atkinson China & Hong Kong Fund, for US investors). He moved to Hong Kong and became the Fund’s lead manager in 1998.
In addition, Edmund has managed the Guinness Atkinson Asia Focus Fund (for US investors) since 2003, and the Guinness Atkinson Asia Pacific Dividend Fund (for US investors) since its inception in 2006.
Edmund graduated from Christ Church, University of Oxford, with a Master’s degree in Management Studies and has a Bachelor’s degree in History from the University of York. He is also an Associate of the Society of Investment Professionals.
Edmund is head of Asian and Emerging Markets investments.
Mark Hammonds, CFA
Mark joined Guinness Asset Management in 2012 and is co-manager of the Guinness Asian Equity Income Fund.
Prior to joining Guinness, Mark worked at Ernst & Young, where he qualified as a Chartered Accountant. Mark graduated from Corpus Christi College, University of Cambridge, in 2007 with a First Class degree in Management Studies. He is a CFA Charterholder.
How do we run the Fund?
“We don’t chase yield, we want capital and dividend growth.”
Although the Fund is designed to invest in dividend-paying companies, our starting point in selecting our investment universe is to identify companies with consistently high return on capital. Specifically we look at companies that have a return on capital greater than 8% (in real terms) in each of the previous eight years.
Our analysis shows that companies with persistently high return on capital are highly likely to continue to do so in the future – meaning they will continue to create shareholder value.
|Why 8% and why eight years?|
|8% return on capital…||8% is well above the average real cost of capital of 6%. This means companies who achieve this level are truly creating value for their shareholders.|
|…every year…||Consistency each year excludes highly cyclical companies or those with high but declining or volatile earnings.|
|…for eight years||Eight years of high returns gives us confidence that those returns should persist into the future.|
“There is a long-term investment opportunity in Emerging Markets Equity Income. But opportunity and risk go hand-in-hand. The key in emerging markets is finding proven companies and constructing the right portfolio to manage that trade-off.”
On average, only about 9% of Emerging Market listed companies achieve our threshold. We then exclude those less than $500 million in size or with a debt to equity ratio greater than 1. This gives us a pool of around 360 companies from which to build our portfolio
What about yield?
Companies that earn a consistent high return on capital often distribute a proportion of cash they create in the form of a dividend. In the Fund, however, we focus in particular on those companies that can sustainably grow their dividend into the future.
From this pool we then select candidates for extended research on the basis of value and sentiment. In-depth proprietary modelling of a company’s cash flow, capital budgeting and potential for dividend growth is combined with a subjective analysis of its business model to identify candidates for inclusion in the final portfolio.
By selecting companies from a broad range of industries, countries, and market capitalisation we aim to create a well-diversified portfolio which can provide a reasonable dividend yield and growing income stream at an attractive valuation relative to emerging equity markets.
It is often easier to find companies to buy that look cheap than it is to identify those companies you own which should be sold. We consider sell discipline as important as selecting companies for purchase and continuously monitor the companies we hold in the Fund. The six core reasons we may sell a company are outlined below.
- The company fails to continue to meet our return on capital criteria
- The valuation becomes too rich
- The balance sheet becomes stretched
- The dividend outlook or management policy to dividends changes unfavourably
- The original investment thesis no longer holds, or a new idea is more compelling
- Yield contribution to the portfolio is insufficient
How do we construct the portfolio?
The Guinness Emerging Markets Equity Income Fund is a concentrated portfolio of around 36 equally weighted stocks. This provides a number of useful attributes:
- It reduces stock-specific risk, as we will not be overweight in a small number of favourite companies.
- We will not have a long tail of small holdings in the portfolio, which can be a distraction and a potential drag on performance.
- It instills a strong sell discipline as we must typically sell a position in order to make way for a new one; and we must constantly assess the companies we own in the portfolio in comparison to the rest of the universe available to us.
- We are truly index independent. All companies held are weighted equally without regard to their weighting in the benchmark index, leading the portfolio to have a high active share.
|Fund||Emerging Markets Equity Income Fund||Basis||Total return, in GBP|
|Index||MSCI Emerging Markets||Date (period end)||31.08.2018|
|Sector||IA Global Emerging Markets||Fund Launch||23/12/2016|
Please remember that past performance is not a guide to future performance. The value of an investment and the income from it can fall as well as rise as a result of market and currency movement, and you may not get back the amount originally invested.
|Cumulative performance (GBP, %)|
|Y class (OCF: 0.99%)||Year-to-date||1 year||3 years||5 years||From launch (23/12/2016)|
|Annualised performance (GBP, %)|
|X class (OCF: 1.24%)||1 year||3 years||5 years||10 years||From launch (23/12/2016)|
|Calendar year performance (GBP, %)|
|X class (OCF: 1.24%)||2013||2014||2015||2016||2017|
|Discrete year performance to date (GBP, %)|
|X class (OCF: 1.24%)||Aug-14||Aug-15||Aug-16||Aug-17||Aug-18|
Latest Guinness Emerging Markets Equity Income Fund Report
The Guinness Emerging Markets equities team take a deeper look at Emerging Markets, both in comparison to Developed Markets and as a region with considerable variety.
|Investment team (start date)||Edmund Harriss (23/12/2016) Mark Hammonds (23/12/2016)|
|Benchmark||MSCI Emerging Markets Index|
|IA sector||IA Global Emerging Markets|
|Redemption fee||2% within 30 days of purchase|
|Underlying currency||US Dollar|
|Valuation||2300 Dublin time|
|Deal cut off time||1500 Dublin time|
|Administrator||Link Fund Administrators (Ireland) Ltd|
|Custodian||JP Morgan Bank (Ireland) plc|
|UK Reporting Fund status||Yes|
|0.99% OCF||0.74% OCF For early investors (1)||1.99% OCF|
|Currency||GBP / USD / EUR||GBP||USD|
|OCF* (Total ongoing charges p.a.)||1.24%||0.74%||1.99%|
|Accumulation or Distribution||Accumulation||Distribution||Distribution||Accumulation|
|Share class name||Y Acc||Y Dist||Z||C Acc|
|ISIN codes||GBP: IE00BYV24Q63 USD: IE00BYV24V17 EUR: IE00BYV24S87||GBP: IE00BYV24R70 USD: IE00BYV24W24 EUR: IE00BYV24T94||GBP: IE00BYV24X31||USD: IE00BYV24P56|
|Bloomberg tickers||GBP: GUEIXGA ID USD: GUEMXUA ID EUR: GUEMXEA ID||GBP: GUEMXGD ID USD: GUEMXUD ID EUR: GUEMXED ID||GBP: GUEMZGD ID||USD: GUEMCUA ID|
- United Kingdom
- Singapore (professional only)