The Nordea Emerging Starts Fund has managed to achieve a year-to-date return of more than 12% this year. This contrasts strongly with the -5% return of the MSCI Emerging Markets Net Return Index (USD), the fund’s reference index. The fund’s manager Juliana Hansveden explains how the fund managed to achieve this remarkable performance.
Though fund’s return this year suggests otherwise, it wasn’t easy to navigate the Covid crisis, says Hansveden. ‘The basis is that you continuously have to consider the actual impact of the crisis on a company. Is the end of the crisis already in sight or does it look like it will take longer?’
Latin America
It is an assessment that is not always easy to make and sometimes involves gut feeling. In the specific cases of the Latin American airline Azul and an online travel agency Despegar, that certainly worked out well.
‘Quite early on in the crisis, we foresaw that the virus would also find its way into the Latin American continent and that business travel would be greatly affected. In addition, even before the crisis, there were issues of leverage, structural economic problems in Argentina and insufficient liquidity. This combination of factors led us to take a more negative view of long-term growth for these companies and we decided to sell,’ she says.
Doubts also exist, for example in relation to healthcare companies, one of the sectors showing most solid performance during the crisis. Hansveden still sees healthcare as a growth sector, but its prospects are more mixed. ‘We see big differences across this sector. Whereas some companies have hardly been affected, others have been hit very hard by the crisis.’
As an example, she mentions a manufacturer of stents. These metal or plastic tubes for medical applications are used, for example, in cardiac surgery. Although there will continue to be demand for these products in the long term, cardiac surgery was often postponed during the crisis.
Valuations
The crisis has not prevented Hansveden and her team from adding new positions to the portfolio. ‘There were companies that we’ve been following for a longer period of time and we saw that they kept their course well throughout the crisis. In addition to stock-specific growth factors, valuations also play a role. After all, in some cases these had also come down considerably.’
On average, however, valuations have now risen way above their pre-crisis levels in emerging markets too. ‘We can indeed see that some stocks have risen sharply. In the case of Chinese A-shares, valuations are more speculative. This is because this market is not fully efficient because of the presene of a relatively large proportion of retail investors.’ The price/earnings ratio of emerging market equities has risen somewhat from 15 at the end of last year to 19 at the end of July. Nevertheless, Hansveden believes there are still more than enough shares with good fundamentals, trading at a discount.
In line with its focus on structural growth, the fund continues to overweight Information Technology (+ 6%), Financials (+ 5%), Consumer Durables (+ 3%) and Consumer Staples (+ 1%). The opposite applies to Basic Materials and Energy: the combination of ESG risks and less future-proof business models is a reason to underweight these sectors. The regional positioning is close to neutral with respect to the benchmark. India and Brazil have a slight overweight while China is slightly underweight.