RBC Emerging Markets focuses on value and dividends

The RBC Emerging Markets Value Equity [LON:BRWM] is an open-ended investment company that aims to provide long-term capital growth by investing in a portfolio of emerging markets equity securities with a focus on relative value and dividends.

Dollar-denominated, US-domiciled and benchmarked against the MSCI Emerging Markets Equity Index the fund launched in July 2013, and had USD1.3bn (GBP1bn) assets under management as at end-June.

Managed by Philippe Langham and Laurence Bensafi, the fund has outperformed its benchmark consistently over all time periods to a decade. Over the last quarter to the end of June, the fund  returned 3.01%, outperforming the MSCI Emerging Markets Equity Index by 2.11 percentage points. Over the year, the RBC Emerging Markets Value Equity returned 7.71% against a benchmark return of 4.89%.

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Over one year the fund’s composite return was 8.65%, outperforming the benchmark return of 1.75% by 6.9 percentage points. Over longer periods emerging markets have had a tough time. The 2008/9 Global Financial Crisis hit emerging and developing economies extremely hard. Output, exports, remittance flows, aid and capital inflows were all significantly affected. However, the rebound was equally strong in Emerging Markets (which may have encouraged the launch of this fund and many peers post-GFC).

Consistent outperformance

Over 10 years the RBC Emerging Markets Value Equity returned 4.84% against 2.95% for the benchmark index and 3.81% over five years, outperforming the index by 2.88 percentage points.

Langham is head of the RBC Emerging Markets team and has been with RBC since November 2009 after working in Europe with Société Générale Asset Management in London, Credit Suisse in Zurich, and the Kuwait Investment Office. Bensafi has been with RBC since 2013 after previous stints as head of Emerging Markets at Aviva and also with Société Générale.

The fund combines proprietary screening with rigorous company-level research in order to identify value stocks with attractive fundamentals and a catalyst for re-rating. A top-down thematic overlay focuses the portfolio in areas of long-term secular growth.

Langham and Bensafi pick stocks with good fundamentals which they say should outperform over time. The team also look for dividend-paying companies that “possess desirable quality characteristics”. The investment strategy places emphasis on value with factor adjustment, free cash flow generation, balance sheet strength and minority shareholder-friendly management.

Diverse economies

The emerging markets are a diverse range of economies stretching from Asia and Eastern Europe to South Africa and Latin America. Some are rich in commodities and natural resources, some rely on exporting goods to Western economies, and others have a vibrant consumer-driven society. They’re all at different stages of economic development.

Demographically they should have great long-term prospects, however, they’re more volatile and higher-risk than more developed ones. Commenting on the start of the year, the fund managers said that emerging markets equities underperformed developed markets over the quarter, with the MSCI Emerging Markets Equity Index returning 0.9% compared with 6.8% for the MSCI World.

The US powered developed market performance as shares in the mega-cap tech stocks surged on the artificial intelligence enthusiasm, while returns for the rest of the market were muted. Conversely the power behind emerging markets, China, stalled as its post-Covid economic recovery dampened investor sentiment and equity market returns.

The fund’s managers said that within emerging markets, Hungary (24.8%), Poland (24.5%), and Greece (23.8%) were the top performers during the first quarter, while Turkey (-10.7%), China (-9.7%) and Malaysia (-8.4%) were the worst. They wrote Central European markets strengthened on expectations of rate cuts as inflation eased. Turkey underperformed after president Erdogan won another five years in power following a tightly contested election, causing the Turkish lira to depreciate. China, which accounts for over 30% of the MSCI EM Index, weighed on the performance of the overall asset class as economic data continued to disappoint with ongoing vulnerability in China’s property market and declining export numbers.

Regardless of China’s performance, the country is too big to ignore in Emerging Market terms, with the fund allocating 27.5% of the portfolio to China and Hong Kong. Other significant allocations were Taiwan at 15.2%, South Korea at 14.1%, India at 10.1% and Brazil at 8.1%.

However, the markets that the RBC team saw as a positive bet were, South Africa, where the fund was overweight the benchmark by 3.8%, Brazil, where the managers were running an overweight position of 2.5%, Chile (so important in the lithium story) where the find was overweight 1.8%, the same overweight margin as South Korea.

Conversely the fund was 4.5% underweight India and 2% underweight China and Hong Kong.

RBC Global Asset Management Top Five Holdings (as at end of June 2023)

Source: RBC Global Asset Management

The fund is available on several platforms. The fund (Class O – Accumulation (GBP)) charges 1.3% as an ongoing charge, although discounts may be available from different platform providers.