These three fund managers give you plenty of exposure to emerging markets.
The decoupling theory that emerging markets can grow faster and even independently of Western ones is more off-and-on than Pete and Jordan.
Unlike that romance, decoupling is currently back on, with emerging markets racing away in 2009 and many commentators expecting more, unsaddled as these regions are by public and private debt and ageing populations.
Investing in emerging markets hasn't become trouble-free overnight. They're still volatile (emerging markets fell further and faster during the flight to safety last year), and political and governance risks abound.
Many emerging markets aren't exactly lowly-rated, either, compared to the valuation of UK shares, although cheerleaders would obviously say a higher rating was justified by their better growth prospects.
If you're in the decoupling camp -- or you expect all markets to perform well but emerging markets to do better -- you can easily get exposure via exchange-traded funds, unit trusts, or the likes of the Templeton Emerging Markets Investment Trust (LSE: TEM).
And if you doubt the decoupling theory, you can simply not invest.
Invest in the investors
But what if you're in a third camp like me -- you're undecided as to whether emerging markets will outperform, but you can see people buying the theory?
One neat option might be to back the story as well as the markets, by buying companies that manage money invested there.
My thinking is as follows. Fund managers derive their fees in proportion to their funds under management (FUM), through a fixed tithe on such assets as well as performance fees.
By investing in a fund manager specialising in emerging markets, you thus have two chances to bite the exotic cherry:
- if Western investors pile into emerging markets seeking superior growth, mangers' profits will grow as FUM balloon; and
- if emerging markets deliver good returns, FUM will grow organically, again boosting profits.
The converse is obviously true, too -- if emerging markets fall out of favour because of poor performance, these managers will be hit hard.
Indeed, that's just what happened to several London-listed firms over 2007 and 2008. And it's what makes them potentially attractive buys, now that the worst is hopefully behind us.
Here are three to consider.
City of London Investment Group (LSE: CLIG) -- Price: 276p
City of London Investment Group is a boutique fund manager with a great record of profitably running emerging market funds for institutions.
That's not to say the past year wasn't hard. Profit before tax fell 50% in the year to 31 May and earnings per share almost as much to 16.1p. But the firm maintained its dividend record with a 15p payout for the year.
After steep declines, FUM are now growing again, rising 13% since the end of the financial year to $4.0 billion. Barring fresh setbacks -- or unexpected dollar strength -- earnings should recover strongly from here, and better cover the juicy 5.5% dividend yield.
Ashmore Group (LSE: ASHM) -- Price: 231p
Ashmore has put in a creditable performance in difficult conditions since arriving on the stock market in 2006 at 200p.
Accordingly, the giant emerging market fund manager -- valued at £1.6 billion -- is placing nearly 16 million shares at a very modest discount of 226p per share with institutional investors, as employees of the company come out of their post-IPO lock-in period.
The founders and other staff still control 61% of the company's shares, which in my opinion bodes well the company. More importantly, on Tuesday it announced a fourth month of investment inflows, modestly beginning to undo the damage wrought by FUM dropping by a third to $24.9 billion in the past financial year.
Despite that drop, pre-tax profit fell by just 19% to £159.8 million – better than expected -- after performance fees rose thanks to dollar strength boosting FUM in sterling terms. (Currency risk is partially offset by hedging, though this proved expensive in the extreme conditions of the past 12 months).
Earnings per share fell to 17.1p, covering a dividend held at 12p per share for a yield of 5% -- a decent payout that's not only a handy side effect of Ashmore's strong insider ownership, but also its £288 million cash balance.
Analysts are looking for around 12p in earnings per share next year, which puts the company on a P/E ratio of 19 -- expensive, but at least there's that dividend to keep you satisfied while you wait for growth to return.
Charlemagne Capital (LSE: CCAP) -- Price: 18.5p
As a hedge fund manager as well as an emerging markets specialist -- and AIM-listed to boot -- Charlemagne Capital was poorly placed for the bear market. Floated at 100p in early 2006, it's been an almost one-way trip to the bottom, with the shares approaching 7p in March as earnings per share collapsed.
Nevertheless, analysts at UBS recently upgraded Charlemagne to a 'buy' and set a price target of 17p, which promptly caused the £52 million microcap's share price leap by 50%. Assets under management have grown 11% since June, and the outflow of funds has been arrested.
UBS also flagged up the strong balance sheet and -- a theme with these fund managers -- the decent dividend yield of 5%.
Charlemagne is the riskiest of these three companies, but needless to say if earnings per share recover to anything approaching the 10p-plus pre-crash levels, the share price will go through the roof.
Current analysts' estimates are few and varied, but the company is on a heady forecast P/E of at least 20, making this an investment best-suited to those who think emerging markets will continue to gain in popularity with investors AND deliver strong returns over the next few years.
Note: Owain owns shares in the Templeton Emerging Markets Investment Trust and City of London Investment Group. City of London and Ashmore are previous recommendations made by our Champion Shares stock picking-service. You can take out a free 30-day trial today.
