In June the fund returned +1.25%. We launched this fund with a relatively unorthodox objective for an emerging market equity strategy. Rather than looking to beat the typical EM benchmarks we looked to beat inflation, to generate a real income for investors on a sustainable basis.
Of course this is a remit more typical of fixed income funds or conservative equity strategies in developed economies. But given the protracted environment of negative real interest rates and high inflation, it’s become increasingly difficult to achieve this basic target with traditional allocations. Our belief was, and still is, that an EM equity strategy with the right approach would prove to be a useful tool in the toolbox for income-seeking investors.
Last month we passed the significant milestone of our first anniversary, an appropriate point to see how we’re doing.
As a distributing income fund, let’s start with dividends. Since launch in early June 2022 our companies have returned to our investors a total of £1.0726. Our first distribution covered the initial 3 weeks so having now paid the second quarter dividend of £0.3668 we have the more relevant full 12-month cycle of quarterly payments totalling £1.01417, a yield of 10.5%.
The total shareholder return over the same period was 7.9% in GBP (12.9% in USD) which is exactly the same as the June UK CPI print. We’re therefore in-line with inflation over 12 months (short since inception), whilst the income we’ve generated is clearly ahead by a good margin.
Comparisons will inevitably also be made with peer group funds and established emerging market benchmarks. We’ve been very clear that we do not reference these benchmarks in the allocation process, so we’d caution about drawing too many conclusions from this analysis. Nevertheless, the fund has outperformed the MSCI Emerging Market index by 9.2% since inception and 10.4% over 12 months.
More relevant from our perspective is how the fund has performed compared to alternative yielding asset classes. One of the cornerstones of our investment thesis has been that corporate and sovereign stewardship in the emerging world has improved significantly, whilst the opposite is true for the developed world. There’s now a broad universe of companies with disciplined capital allocation, clear dividend policies with good alignment of interests that are well suited to long term income-orientated investors. As a result, we believed the asset class deserved re-appraisal.
For example, looking at an equity alternative such as the Morningstar Global Equity Income index, since inception the fund has outperformed this benchmark by 100bp and with slightly lower volatility. Against a fixed income alternative such as the Vanguard Global Bond Index, a blend of sovereign and corporate debt, the spread was higher at 12.5% outperformance. This is less surprising considering the recent path of interest rates, but it also illustrates our earlier point concerning relative creditworthiness in that EM fixed income actually outperformed developed markets. Nevertheless, the fund still performed better than both the iShares JPMorgan USD EM bond ETF and the JPMorgan EM High Yield bond EFT by 6.3% and 3.2% respectively.
As we have a tilt towards absolute return investing it’s also appropriate to assess the risk we’ve taken by looking at the return relative to the annualised volatility. On a risk-adjusted basis the fund was in-line with the EM High Yield ETF and better than all the other alternatives mentioned.
It’s still early days but so far we feel confident that we’ve been able to show that it is possible to construct an emerging market equity portfolio of attractively valued, good quality, high yielding companies that have the earnings power to pay out dividend yields that exceed inflation (and their cost of capital) and with a risk/reward ratio appropriate for income investors. If you’d like to know more about the fund or any of the other topics covered in this commentary, please get in touch with our representatives by clicking this link.
