The newly launched Mobius Investment Trust (MMIT) could benefit from continued corporate governance improvements, according to Premier Asset Management’s Simon Evan-Cook.
Speaking to Morningstar.co.uk, Evan-Cook says the Premier Multi-Asset Global Growth fund took a small stake in Mobius’s new venture at its flotation at the start of October.
The trust aims to build a high-conviction portfolio of small to mid-cap stocks in the emerging market universe, aiming to engage with company management to improve shareholder returns.
Evan-Cook, who also has oversight for the Morningstar Bronze Rated Premier Multi-Asset Growth & Income fund, says this is the main attraction for him and his team, allied with Mobius’s strong team.
That team includes two former colleagues from Templeton Emerging Markets (TEM), Carlos Hardenberg and Greg Konieczny, and the former manager of the Neptune India fund, Kunal Desai.
As a general point, Evan-Cook says the emerging world is “the most exciting area” for his team. “Obviously, it’s got its risks, but in terms of valuation, it really has been the asset class that has been left behind,” he notes.
Don't Double Up on Asia
But he is aware of the growing influence of Asia, and China more specifically, on the emerging universe. While 15 years ago "emerging markets" meant developed markets versus everything else, that is no longer the case.
“In the last 15 years, you’ve seen another bloc emerge, and it’s very clear now that the world is three major blocs, Europe, North America and Asia, so to include Asia in emerging markets is becoming a bit of a misnomer,” he explains.
As a result, the funds are trying not to “double up” on its China exposure and looking more for offering that are “emerging in spirit, rather than following the benchmark, which is already dominated by China and Asia and is only going to become more so as China opens up more”.
“There’s no point in buying an emerging market manager to double up on Asia if you think your Asia manager is actually better at running that.”
That led them to take a stake in Mobius’s trust “because we got the impression that was a fund that was prepared to do that” and not put too much, if any, emphasis on whether it was over, or under, weight to China relative to its benchmark.
Another key reason for taking the plunge on the Mobius offering, Evan-Cook continues, is the focus on governance. They are starting from a good place in looking for undervalued companies, “and if they only did that it would have been interesting enough”.
But “there is a lot of money out there that is paying a lot more attention to ESG and so that gives them more of a market to play into”. As a result, “when a company goes from being poorly governed to being well governed, you get the re-rating because you should pay more for a company that is being governed well”.
New Japan Trust Offers Similar Characteristics
But MMIT is not the only recently launched product playing into this area that Evan-Cook likes. Japan is at the forefront of corporate governance improvements in the non-Western world, and another investment trust playing on this theme his team has bought is AVI Japan Opportunity (AJOT).
The fund, run by Joe Bauernfreund, who also manages British Empire Trust (BTEM), is targeting companies where corporate governance is improving.
“That gives them an edge, in the case of both AVI and Mobius, where you’re already getting cheaply valued companies, but there’s potentially that catalyst to help that re-rating happen.”
Again, Japan is an area of interest for Evan-Cook. “Earnings seem to be growing quite well and I don’t think you’re paying much for that on a long-term basis,” he notes.
“The sentiment around Japan has been so dire for so long that people have kind of lost interest and just play it as a cycle, but there seems to be good things happening there.”
This includes companies becoming more shareholder friendly, which is something we have reported previously. “The AVI trust is all about the corporate governance changes that are happening there and we’re seeing that in a lot of the other funds we hold. They are able to benefit from that.”
Both positions are small, around 1%, “so it’s not going to make or break us, but adds to all the other positions where we’ve got interesting fund managers”.
Positive on UK Small Caps
A final area Evan-Cook likes is the UK, despite uncertainties around Brexit. One particular area of interest is the UK small-cap market, where valuation anomalies have already attracted other fund managers.
“The fact that everyone hates the UK because of Brexit we think is an opportunity,” says Evan-Cook.
“If you’re a global equity manager sitting in the US at the moment with a bank of US clients, you’re probably thinking ‘why on earth would I bother with the UK?’ Particularly why would I bother searching around in the UK small-cap market, so I think there’s a lot of missing capital there.”
A bad Brexit is “probably already in the price”, the manager continues, and a good Brexit could be a trigger for a lot of that missing capital to flood back into the market.
“UK small caps have always been a very good hunting ground for us. They’re inefficient and over very long periods of time, small-cap investing tends to pay you more, particularly if you have a good manager there.
“The only time people really get excited about small caps and everybody rushes in is really the worst time to buy … 2015 was the last time that happened and we did pull back. But the time you should be buying it, which seems to be 90% of the time, is when there’s a reason not to, so Brexit currently – we think there’s enough [fear] there to go and buy it.”
While there a number of more mainstream funds that Evan-Cook likes – including long-term holdings the Morningstar Bronze Rated Fidelity UK Smaller Companies, Montanaro Smaller Companies (MTU) and Downing Monthly Income – he also has more recently added a lesser-known offering, VT Teviot UK Smaller Companies.
Launched in August 2017, the £49 million fund is run by Teviot Partners, a boutique asset manager set up by Andy Bamford, formerly a partner at Aberforth, which specialises in UK smaller company investing.
“For me it’s almost the perfect example of where you should be allocating a decent amount of money. It’s big enough for us, but still small enough that it can outperform; it’s got the ability to go into and out of stocks quickly; and it’s got an experienced manager in charge of it,” Evan-Cook says.
The fund badges itself as having a value investment style and has a high-conviction portfolio of 69 investments, around 60 of which are in the FTSE Small-Cap index and Alternative Investment Market.
Its joint top holding is retailer Mothercare (MTC), which perfectly illustrates the contrarian approach taken – the stock is down 78% in the past year and 90% over the past three years.
However, the fund has made a good start, returning over 16% from inception to 12 November, compared twith just 2.3% from the AIM 100 index.
