Exploiting the growth in emerging markets

e-fundresearch.com: Mr. Matthew Vaight, you manage the M&G Global Emerging Markets Fund. When did you take over the responsibility of managing this fund?

Matthew Vaight: I have been responsible for the fund since its inception in February 2009.

e-fundresearch.com: What is the current size of the fund?

Matthew Vaight: €1bn Euros (as per 31 Dec 2012)

e-fundresearch.com: Do you also manage other funds or mandates?

Matthew Vaight: Yes, I also manage the M&G Asian Fund (and I co-manage the Vanguard Precious Metals & Mining Fund).

e-fundresearch.com: What is the total amount of assets you manage currently?

Matthew Vaight: 1.6bn Euros

e-fundresearch.com: How long have you been in the business as a fund manager?

Matthew Vaight: I have been managing funds for five years. In 1996, I joined M&G as a graduate working on the UK equity desk and then became a member of the global equity team. I graduated from Oxford University with an honours degree in mathematics. I’m also a member of the UK Society of Investment Professionals (UKSIP).

e-fundresearch.com: What are the main steps in your investment process and in which area is your competitive edge to add value to investors?

Matthew Vaight: The M&G Global Emerging Markets Fund invests in companies across all countries, industries and market capitalisation ranges in global emerging markets. We also have the flexibility to invest in firms that are based in developed markets but conduct most of their business in the developing world. As a bottom-up stockpicker I am interested in companies rather than macroeconomics. My focus is on finding attractively priced firms that understand the importance of good corporate governance and using capital efficiently to create value for shareholders.

To achieve this, I follow a disciplined investment approach based on return on capital, corporate governance and valuation. My strategy is to identify well-managed companies that can increase or sustain their return on capital in the future. Importantly, I look for firms whose long-term potential is not fully appreciated by the market. Focusing on valuations ensures that I can identify good investments, not just good companies. In my view, this approach set us apart from other emerging market investors who tend to focus on macroeconomic issues, in particular economic growth. Our strict valuation discipline is another distinctive element, as unlike many investors we are not prepared to overpay for growth. We focus on finding firms whose long-term prospects are, in our opinion, being undervalued.
My approach involves the following:

• I look for value-creating companies with a shareholder focus. Value creation, not economic growth, drives long-term equity returns.
• I take a long-term view and align our interests with company management.

In our opinion, strong GDP growth does not always result in high stockmarket returns. Over time I believe that value creation, not economic growth, determines share prices. I therefore focus on companies that can exploit the growth in emerging markets profitably and create value for their shareholders over the long term.

We select four distinct types of companies that have different characteristics and catalysts which influence their return on capital: ‘external change’ companies with unique assets where returns should benefit from structural trends; ‘internal change’ companies which are restructuring to improve returns; ‘asset growth’ companies which invest in R&D and innovation to drive future returns and ‘quality’ companies with high and sustainable returns. These distinct categories tend to display different risk/reward characteristics which help to build a diversified portfolio capable of performing in different market conditions.
 
This balanced approach to portfolio construction has underpinned the fund’s performance in the extremely changeable conditions of the past three years. For example, the defensive attributes of the ‘quality’ companies added value during a turbulent 2011. Conversely, in 2009 when markets rallied sharply, a number of the more cyclical companies in the ‘external change’ category bolstered performance.

In our view, searching for ‘internal change’ companies that are restructuring their business is another distinctive aspect of our process. These ‘improving’ companies, which are often shrinking or re-focusing on their core strategies following a period of excessive growth, are frequently overlooked by emerging market investors. However, they can be very rewarding for those investors who have the patience to uncover these turnaround companies. We believe that over time there will be an increasing number of ‘recovery’ candidates in emerging markets and as long-term investors we should be able to benefit from their transformation and improvement in returns.

e-fundresearch.com: Which benchmark is most relevant and how should investors compare the fund vs. benchmarks or peer groups?

Matthew Vaight: As active, unconstrained investors the portfolio is constructed without reference to the benchmark, MSCI Emerging Markets Index. The exposures in the portfolio are a consequence of the individual company opportunities we identify, rather than views on particular sectors, industries or geographic regions.

e-fundresearch.com: Which performance did you achieve for the fund YTD and over the past five calendar years in absolute terms and relative to relevant benchmark or other reference indices?

Matthew Vaight: The fund achieved a positive return of 10% last year (compared to 4% for the benchmark). Since Launch, 22.6% (compared to 19.3% for the benchmark)1.¹

e-fundresearch.com: What motivates you in your job?

Matthew Vaight: One of the most exciting aspects of my job is being able to observe and profit from the evolution taking place in emerging markets. Companies are improving all the time, both at a corporate governance level and in terms of their operational performance. There is a great deal of satisfaction that comes from discovering underappreciated companies, sticking with them for the long term as they improve and reaping the rewards as they become more successful, particularly as it means that I am creating wealth for my investors. e-fundresearch.com: Many Thanks!

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¹ (source: Morningstar, Inc., as at 31 January 2013, euro class A shares, net income reinvested, bid to bid basis).