Bulls Are Running In 2 Emerging Markets

Apr. 03, 2012 12:16 PM ET
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Long-Term Horizon, Long Only

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Kate Stalter is the founder of Better Money Decisions, an asset-management firm with offices in Albuquerque and Santa Fe, New Mexico and Scottsdale, Arizona. She is an expert investment columnist for numerous media outlets including Forbes, US News & World Report, Benzinga, TheStreet.com and Morningstar, and is a frequent on podcasts and radio shows, discussing investment topics. Better Money Decisions implements stock-and-bond portfolios using an asset-allocation strategy with funds from Dimensional Fund Advisors. Kate is a Series 65-licensed investment advisor representative, and has a Master's in Business Administration from Northwestern University's Kellogg School of Management. 

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Emerging-market fund manager Allan Conway tells MoneyShow.com why he remains bullish on China and Russia. In part one of Kate Stalter's interview with him, Conway also says the fund is not overweighted in Latin America at the moment.

Kate Stalter: I'm speaking today with Allan Conway, manager of the Schroder Emerging Market Equity Fund (SEMVX), which has a four-star rating from Morningstar. Alan, let's start out today by hearing a little bit about your fund's objectives.

Allan Conway: Sure, we aim to provide investors with a strong degree of outperformance relative to the emerging-market benchmark. Of course, all managers seek to outperform, but a couple of key differences with us is we aim to achieve the performance with the lowest risk possible.

We make an assumption that most of our investors-hopefully all of our investors-are very rational, and they'd like any given level of performance with less risk rather than more. That's why we don't aim just to outperform and add value, but do that with the lowest risk possible. So we have a very proactive approach to risk control.

The other big difference, I think, is the way we seek to add value not just through stock selection. We of course, have a lot of analysts out there in the field, around the world looking at individual stocks, but we also seek to add value through country selection.

In fact, if you look at emerging markets, historically anything from 50% to 70% of the return that you've received from investing in emerging has come from being in the right country. As a result, we have a very strong methodology to both choose countries and then take the best stocks. So it is a function of looking at all the sources of adding value for investors and doing it in a very risk-controlled way.

Kate Stalter: Can you say a little bit about some of the countries where you might be heavily weighted at the moment?

Allan Conway: In the countries that we currently like in Asia, we're very overweight. In China, we certainly believe a lot of the concerns that you've been reading about lately in China are overdone and exaggerated.

China looks extremely attractive. It's on about a 10% discount to other emerging countries. It's on a P/E of about nine. Even though there's some modest slowdown in growth-no country can just keep growing at 10% forever-certainly we don't believe in a China hard landing. The stocks are attractive; the economy is one of the strongest in the world.

We're also overweight in Korea; again valuations are extremely supportive. The underlying economic fundaments are very good.

We are currently not overweight in any Latin country. We're neutral Brazil and underweight Mexico.

The other big overweight we have is in the EMEA [Europe, Middle East, and Asia] region-Russia. And we're very overweight Russia. This is one of the cheapest markets in the world, on a prospective P/E of about 5.5.

We, of course, accept that there are some political concerns and corporate governance concerns. That's why the market is half the level of emerging generally, in terms of rating. It's just over five times, whereas emerging generally is on ten times. So we think a lot of those issues are discounted in the price.

So we're running on an overweight Russia, and of course Russia is particularly supported by a strong oil price, and we think the oil price generally looks pretty secure at least at these sorts of levels.

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