Board sticking by Genesis – Genesis Emerging Markets Fund Limited has announced results for the year ended 30 June 2017. The MSCI Emerging Markets returned 27.8% to UK investors. The discount to NAV narrowed marginally from 13.1% at the beginning of the period to 12.9% at the end. The NAV increased from 621.4p to 749.6p. The share price rose by 20.8%. The chairman says that the relative underperformance over the past year has partly been a consequence of the fund’s underweight to Chinese internet stocks in particular; a position that she says reflects the stretched nature of the current valuations of companies such as Tencent and Alibaba rather than the manager’s assessment of their corporate quality.
The chairman says that the board is “very conscious that, over the medium term, the Fund’s relative performance has not been at the level that shareholders have come to expect. As a Board we are encouraged by the Manager’s response to this challenging period, in terms of enhancing its investment process – through the use of more precise definitions of corporate quality when assessing companies, and increased formalisation and consistency of the investment theses across the portfolio – in order to address the reasons behind the disappointing results. Nonetheless, shareholders should be assured that my colleagues and I continue to review the Fund’s performance very carefully at our meetings and frequent discussions with the Manager.”
The board has also reviewed the fund’s allocation of expenses and has concluded that – starting from the beginning of the current financial year on 1 July 2017 – 80% of the annual management fee should be allocated to the capital account, rather than to the revenue account, reflecting their long-term assessment of the balance of returns between capital and revenue. For shareholders, this will result in a higher level of income available for distribution as a dividend. This year, revenue earnings per share were 5.5 cents. However, they are recommending a dividend of 14.0 cents.
The manager reiterates that significant value was lost in the IT sector, predominantly by being underweight in Chinese internet companies. Tencent and Alibaba were large detractors despite the portfolio being invested in both (Tencent through a position in Naspers). The managers believe that these businesses are great franchises with scale, network effects and capable management teams. However, there remains a wide range of outcomes and they believe current valuations, particularly that of Tencent, are skewed toward the upside. Conversely, the portfolio benefitted from its positions in technology hardware giants TSMC (up 45%, Taiwan) and Samsung Electronics (up 73%, South Korea).
Elsewhere, value was lost in the health care sector, particularly through positions in Indian generic drugs manufacturers Sun Pharmaceutical (down 22%) and Lupin (down 26%). Again, they think that these companies have strong franchises with talented management teams. However, despite adding value to the Fund over the long term, recent challenges such as enhanced FDA regulatory scrutiny and a slowdown in the new drug pipeline has affected earnings and their estimates of intrinsic value. These businesses are proactively addressing the regulatory issues and continue to implement a strategy of building out a longer-term pipeline of products. Some companies disappointed for more stock specific reasons, most notably the LatAm/Caribbean telecom operator, LiLAC, and Universal Robina, the dominant producer of branded snacks in the Philippines. On the positive side, value was added in the consumer discretionary sector, where Chinese white goods company Midea and luxury brand owner Richemont – both absent from the benchmark – rose 88% and 50% respectively.
From a country perspective, the largest detractor was India chiefly due to the positions in the pharmaceutical companies noted above. Further value was lost in Thailand, where Bangkok Dusit retreated by 13% and Thai Beverage rose by only 3%, and in Turkey through a combination of stock performance and the overweight position, while the underweight position in Taiwan also hurt the portfolio. These losses were partially offset by gains in South Africa and Mexico through stock selection, and the underweight position in Malaysia.
GSS : Board sticking by Genesis