Forget Wall Street. Invest in emerging markets.
That advice would have left you well out of pocket if you’d followed it at the start of 2013.
But with 2014 dawning, one of the world’s most successful fund managers, Kristoffer Stensrud, thinks now is the right time to swap the US and developed markets for more exotic climes once more.
I confess I had never heard of Mr Stensrud until last week, but he has a very impressive track record. And if he’s right, then the car industry and South Korea could be particularly fruitful areas for investment.
The most successful fund manager you’ve never heard of
I came across Kristoffer Stensrud in an interview on Bloomberg last week.
I learned that he manages the Skagen Kon-tiki fund. This fund is one of the very best – over the last ten years, it’s the fifth-best performing fund out of more than 1,100 tracked by Bloomberg.
The Kon-tiki fund focuses on emerging markets. Around half of the fund is invested in emerging market stocks, while the other half is in developed world companies that have strong emerging markets businesses.
The fund is managed by a Norwegian fund management business called Skagen, which was co-founded by Stensrud in 1993. As well as the Kon-tiki fund, Skagen runs two other equity funds. All three funds have a strong contrarian bent.
The funds also take big bets. Although each fund normally invests in around 90 to 100 companies – roughly par for the course – the top ten holdings in each fund normally comprise 40%- 50% of the fund’s value. That’s higher, and a lot more focused, than you’d normally expect.
It reveals a manager who’s willing to do exactly what you pay an active investor to do: work hard to find the best opportunities in a market, then bet big when he finds them. This isn’t a closet tracker fund.
So what is Stensrud bullish on at the moment? Clearly, he backs emerging markets versus the US. Big deal, you might think – that’s what you’d expect from an emerging markets specialist! But he does make some interesting arguments to back the case.
Firstly, he thinks that political change could trigger some strong market gains this year. I think he’s right on this, especially in India. If Narendra Modi’s BJP party is able to take power, we could see some new pro-market reforms and a boost to India’s growth rate. It’s a similar story in Indonesia, where a new president could kickstart some much needed pro-market reforms.
Stensrud’s second argument is that the economic and stock market cycles in emerging markets are becoming less dependent on what is going on in the developed world. Emerging markets are no longer all about commodities and cheap labour. They’re developing their own service economies, which should make these markets less cyclical.
The most obvious example of this change is in China, where we’re seeing a switch away from exports in an attempt to boost consumption. This isn’t without risk, but I suspect that, after some squalls, China will reach its objective in the end.
South Korea’s drive to become a car manufacturing superpower
Stensrud is also bullish on the car business. Until recently, I’ve kept away from the car industry on the basis that profit margins are low and there’s just too much capacity worldwide. But my antipathy began to soften last year when I wrote a positive piece about BMW and its i3 electric car.
And Stensrud has made me wonder if there might be some good investment opportunities in emerging market carmakers. He’s especially keen on Hyundai: “Hyundai has clearly set their goal to be the world’s next Toyota, master of the universe, best manufacturing, highest quality, best design and affordability, highest level productivity… I think they will succeed. “
Hyundai is also a play on Skagen’s other big theme – South Korea (which is classed as an emerging market even although it’s arguably a lot more developed than most of its peers). Another Skagen manager said recently: “There is hardly any country in the world with so many undervalued shares.”
In fairness, share prices could stay low for some time. The problem with South Korea is that many of the best companies are still family businesses, with the family retaining large holdings. On top of that, these companies often own big chunks of each other. The families don’t necessarily want big rises in share prices, as they’re worried about inheritance taxes. And with such powerful vested interests holding so many shares, minority shareholders – particularly foreign ones – are hardly high on management’s priority list.
However, Skagen thinks that a new generation of US and UK-educated managers is emerging. These are more open to the idea that creating shareholder value should be a priority for Korean companies. So in time, this could convince markets to re-rate South Korean stocks higher.
How can you invest in South Korea?
I’ve said before that I think prospects for emerging markets look good the moment. I’ve recommended big generalist investment trusts such as the Templeton Emerging Markets investment trust (LSE: TEM) and the JP Morgan Emerging Markets trust (LSE: JMG). I own shares in both trusts.
However, if you’re convinced that South Korea is a good investment opportunity, you might be put off by the fact that only 4.4% of the Templeton trust is invested in that country. If you’re keen to get some concentrated exposure, you could go for the iShares MSCI Korea Fund (LSE: IKOR). This exchange-traded fund is focused purely on South Korea.
Another option is the Pacific Horizon investment trust (LSE: PHI), managed by Baillie Gifford. Although it invests across a range of different markets in the Far East, 24% of the fund is invested in South Korea with 7% invested in Samsung and 3% invested in Hyundai.
Personally, I’m happy to stick with the Templeton and JP Morgan trusts for now, but I’ll be keeping a close eye on the progress of both South Korea and Hyundai.
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