Are you interested in a mutual fund rated five star by
Morningstar that has outperformed the emerging markets ETF (
EEM
,
quote
) in all but one of the last four years?
[caption id="attachment_66082" align="alignright" width="300"
caption="One of British American Tobacco's premium brands lit up
around the world: Lucky Strike"]
[/caption]
According to its prospectus, the Virtus Emerging Markets
Opportunities A fund (
HEMZX
,
quote
) had an annualized return of -45.90% in 2008, 48.52% in 2009,
28.15% in 2010 and -2.92% in 2011. The fund outperformed EEM all
years except 2009. HEMZX's return since its inception in 2006 is
10.44% and it has an expense ratio of 135 basis points.
As of May 31, 2012 the size of the fund was $3.8 billion,
holding approximately 65 securities.
The top 10 holdings as of May 31, 2012 are the following:
1. British American Tobacco PLC (
BTI
,
quote
)
2. SABMiller PLC (
SBMRY
,
quote
)
3. ITC Ltd. (
ITC
,
quote
)
4. Housing Development Finance Corp. Ltd. (
HDFC
,
quote
)
5. Companhia de Bebidas das Americas ADR (
ABV
,
quote
)
6. Companhia Energetica de Minas Gerais (
CIG.C
,
quote
)
7. Baidu Inc. ADR (
BIDU
,
quote
)
8. Wal-Mart de Mexico S.A.B. de C.V. ADR (
WMMVY
,
quote
)
9. Fomento Economico Mexicano S.A.B. de C.V. ADR (
FMX
,
quote
)
10. Power Assets Holdings Ltd. (
HGKGY
,
quote
)
Senior portfolio advisor for HEMZX Peter Newell says
there's high inherent risk investing in emerging markets because
they are comprised of mostly energy, industrial, base materials and
telecommunications companies. These types of companies, argues
Newell, are not only cyclical in nature but also follow the global
cycle. When commodity prices collapse, so do emerging markets.
The fund stays away from the index and avoids the vast majority
of big names in emerging markets says Newell. Of the top 15
capitalized companies in emerging markets, HEMZX owns only one,
Columbian Ecopetrol (
EC
,
quote
).
45% of the fund's portfolio consists of consumer staples, mostly
in India, Brazil, Indonesia, Mexico, China and Malaysia. Newell
says large tobacco, beer, and consumer staple distributors in these
countries are examples of good picks.
Thanks to the euro zone crisis and weak growth in the U.S., many
emerging markets exports are under threat. Because of this HEMZX
stays away from exporting companies and instead looks for companies
that can earn consistently in all environments.
Most emerging market fund managers -- especially ETFs, give you
a little bit of everything, which Newell argues is not
very wise. HEMZX invests only in companies with high return on
equity, assets, and invested capital. A company also needs to have
low debt, dominant market share, high barriers to entry, five years
of sustainable earnings, durable demand -- and it needs to be at a
good price.
Newell says they are very careful when picking countries for the
fund to invest in. HEMZX has never owned any Venezuelan or
Argentinian companies. He adds they also do not own any Russian
stocks because the country lacks rule of law, private property
rights and equitable taxation. Not to mention that the Russian
government can take over companies at any time, as it did with
Yukos.
HEMZX reduces risk by owning non-correlated businesses, as most
downturns don't happen at the same time. A tobacco company's
downturn in Brazil for example, should not affect a tobacco company
in India, explains Newell.
HEMZX is completely bottom up. As part of their screening
process, they visit companies and their competitors. Newell says
that assessing companies in emerging markets is much more difficult
because many times they are not in business to reward
shareholders.
HEMZX is not forced to own big companies like some indexes and
fund managers are. Newell says they are compelled only to own
what helps their clients achieve their investment objectives.
