Emma Wall: Hello, and welcome to the Morningstar series, Why should I Invest With You. I'm Emma Wall and here with me today is Mark Gordon James, Senior Investment Manager for the Aberdeen Emerging Markets fund.
Hello.
Mark Gordon James: Hello. Good morning.
Wall: So, I thought we'd start by talking about the biggest change that has happened to the fund over the last couple of years, which is the soft close. There has been an implementation of a 2% initial fee to sort of discourage people from putting money in. Why is that?
James: Well, we're pleased this worked, because we aren’t having many inflows at the moment into the open-ended funds, thanks to the fee. And the intention was to slow flows. We were seeing huge flows into the funds at the beginning of last year. And we don't want to compromise on our investment process, because we’ve become too large. So it's to protect our unit holders.
Wall: I mean, the fund is Gold rated by Morningstar analysts, so it is a great fund, and you are right to protect the money that’s already there. You've been involved with the fund for a decade now. I just wanted to ask you the changes that you've seen over that period and how different it is now than it was 10 years ago?
James: Well, the asset class is seen as a mainstream asset class now, so much smaller than I think it should be and it deserves to be, but it's deeper than it was. It's more heavily traded than it was and the choice of stocks in the index is far, far wider. I mean, Brazil alone saw, I guess, around a doubling of new names in the mid part of the last decade.
Also, corporate governance standards have improved so much; again, much better access to management and financial transparency, et cetera, et cetera. There's always improvements to be made, but it's a serious maturing asset class these days.
Wall: I think the concern that investors have to that point is, although it's matured, it's deeper as you say, when I first joined the industry, it seemed like emerging markets was a one-way bet, shove as much you can in your portfolio and you'll make double-digit returns. That’s not necessarily the case anymore, is it? So looking now about where you're going to get those opportunities from, a bit more volatility, a bit more sideways movement, is that fair to say?
James: That's probably correct. This has been a fantastic sort of period of reasonably steady growth. Of course, so you had the financial crisis, where there was a wobble. But if you remember back to the Asian crisis, I mean we've had regular wobbles over long periods of time in emerging markets, and that's because many economies still remain dependent on external capital to drive investment domestically. And the Fragile Five would be the five key examples in emerging markets. It doesn't necessarily make it a worse place to invest. We can find great opportunities in those countries, but it does create some volatility on the way.
Wall: Looking then forward about where you can find those opportunities, I know that you are a bottom-up stock picker, but regionally are there any places that perhaps look more attractive now than they did a couple of years ago? On the flipside, China, are you avoiding that?
James: Well, we've always avoided China because we have issues on the corporate governance and transparency front, and there is a preponderance of state-owned companies in China that really don't look after minorities interest in terms of profitability, et cetera.
We are finding the better opportunities today in the markets that have sold-off significantly and have seen currency weakness. So going back to the Fragile Five nations, you can find plenty of fantastic opportunities there. There is not a deficit of high-quality businesses located in those markets. So we have overweight countries such as Brazil, India, Indonesia, South Africa, and Turkey.
Wall: So, perhaps, it's a case of investors not being too scared off by the headlines?
James: We use volatility to optimise portfolio and to take advantage of the opportunities to buy great companies cheaper than they are intrinsically worth. So we've been forthright in topping up our best positions in countries such as Turkey and Brazil and India in recent months.
Wall: Thank you very much. This is Emma Wall for Morningstar. Thank you for watching.
