GEM Small Cap manager attributes performance to strength of investment platform
Smaller companies funds have led the charge of the outperforming IMA Global Emerging Markets sector over the past 12 months, with J.P. Morgan’s Emerging Markets Small Cap fund topping the peer group over this time period.
The £136m fund, which has been run by Greg Mattiko since its 2007 launch, is up 57.3% over one year to 1 June, according to Morningstar.
Mattiko describes his investment style as “a bottom-up long-term fundamental approach,” with the portfolio consisting of 70 to 80 names from a universe of around 4,000 companies.
“The portfolio invests in higher-quality growth companies,” he says. “These are the type of companies that performed well in the rebound, which lasted until May.”
The manager attributes the fund’s performance to the strength of JPM’s investment platform.
“J.P. Morgan has a huge presence in all these different emerging markets,” he says.
“As the portfolio manager, I am spoilt for choice with regards to the quality of information on a small-cap basis relative to my competitors.
“There may be 40 to 50 portfolio managers/analysts who are local investors in each of these markets I deal with.
“Whereas the sell-side coverage of a lot of the small-cap stocks is very limited, the J.P. Morgan coverage goes a lot deeper because we have investments in all of these markets as a local player.”
At a stock level, the biggest contributors to performance have been a number of China consumer-related stocks, including Wumart and Trinity.
The manager says: “These stocks have done very well, partly because when we had the correction in 2008 a lot of these small-cap stocks – particularly the ones listed in Hong Kong – traded at very low valuations.
“So we added to a lot of the high quality names which we thought were unjustifiably sold off.”
One of the largest portfolio holdings is Brazilian software company Totvs, which has also been one of the best performers over the last 12 months.
“It competes with the likes of Oracle and SAP, but because it is a local player with local languages and local accounting standards, it is able to gain quite a substantial market share,” Mattiko says
There are no emerging markets which Mattiko considers off limits because of their macro environment.
He explains: “Nigeria, for example, is a place where there are serious questions with regards to corporate governance and the political situation, but even here we can find interesting companies to invest in.”
He points out the fund has a holding in Nigerian Breweries, a subsidiary of the Heineken Group.
The portfolio currently has an overweight in consumer staples and consumer discretionaries, and a relatively large overweight in China related stocks.
In recent months the manager has sold some of the winning stocks and put money into stocks which have lagged the markets.
He says for the first time in eighteen months small-cap stocks have started to underperform larger-cap stocks.
“This is starting to manifest in some of the higher quality names in the asset class,” Mattiko says.
“I am waiting for the appropriate time to add to the high quality names which were prohibitive from a valuation perspective in the past, but, as the markets correct, are getting more interesting by the moment.
“So I will be adding to high-quality businesses that have been too overvalued in the recent past.”
The manager believes the MSCI Emerging Markets Small Cap index has a much higher representation of consumer related businesses than the larger-cap MSCI Emerging Markets index.
He says: “The large-cap index is full of the likes of Gazprom, PetroChina and Petrobras and firms like Samsung Electronics which are geared towards the global technology cycle.”
By contrast, he says, the small-cap index offers a more attractive proposition for investors.
“A local Chinese food chain or a Brazilian software manufacturer, for example, are the types of businesses levered into the domestic consumption growth story in emerging markets,” Mattiko says.
“So if we go into a period of continued risk aversion and if we have another big credit problem, which is not impossible, small caps will underperform.
“But aside from this scenario, because of the domestic consumption and valuation angles it is still a place investors need to look at.”
