Emerging Markets Commentary
January 22, 2013
Our Redwood Emerging Markets Dividend Fund benefits from the exceptional management of Somerset Capital Management and its lead manager Edward Lam.
I believe the talent at that firm, and its structure, is truly remarkable. In addition, I think that the dividend approach that they have ‘pioneered’ for emerging markets is a smarter way for people to invest – a lower volatility solution to emerging markets investing.
I’m also often struck by Ed Lam’s monthly commentary and how truly thoughtful it is. I share his January 2013 commentary with you below:
“For in the same way as many plants only bear fruit when they do not shoot too high, so in the practical arts the theoretical […] flowers must not be made to sprout too far, but kept near to experience, which is their proper soul.”
von Clausewitz, On War
Unfortunately investors seem to be panicking again. It started in earnest last month with the covering of short positions in China and it has continued through to the beginning of January. Today I noticed one of the stocks in the fund, Anadolu Hayat as it rose. First it crept innocently, 2,3,4; then it lingered, 7; finally by the end of the day it had leapt 11.8%. True, the pensions and insurance sector in Turkey
was boosted by news that the government will match 25% of private pension contributions up to the minimum wage level. However it is the psychology of the moves in the wider market that is interesting. Investors are acting as if they “cannot afford not to” buy or as if there is “no going back”. Likewise there are many more stocks moving upwards in a headily similar manner, most of which are not in this fund. The whole MSCI EM index was up 1.8% yesterday(2nd January). Are you worried that you are not fully participating in this market? The tension is palpable.
Considering what we try to do, though a positive market is welcome, the paroxysmal is at best a nuisance. We have been building a position in Anadolu Hayat since July of 2012. In fact some may recall us mention that we bought more shares when the government cut the ceiling on pension fund fees (from 3.65% to 2.2% p.a.) and the stock dropped 10% over a couple of days in August. We have been adding since too, moving towards a 2.5% position (now 2.1%). The key is that we like the franchise, we have a view on where the business might be in 5 years time and the dividends and growth we might accumulate. We are less concerned about the short term news. Toying with the metaphor from Clausewitz, tall stocks bear small dividends. Indeed when a stock shoots too high, the yield becomes shrivelled small. We were buying Hayat when the dividend yield was expected to be just over 3.0% (maybe more given growth). Now is it 2.75%. Worse still the volatility in the stock excites traders to play with the daily gyrations, and the fundamental experience of ownership (the dividend; 3%) gives way to the theoretical shoots of expectation (the daily movements; 1‐12%) on which chancers can turn their hands.