SOMERSET EMERGING MARKETS: World-traveling manager finds gems

The investment house Somerset Capital Management is a boutique asset manager specializing in emerging markets. Co-founded 16 years ago by Conservative MP Sir Jacob Rees-Mogg, the company now has assets of £3.3 billion and has offices in Shanghai and Singapore, as well as the UK.

Its investment managers – who manage a mix of global emerging market mandates, Asia-specific and China-only funds – spend a lot of time meeting with companies to identify successful companies and review existing ones.

Among the most frequent travelers is Kumar Pandit, co-manager of the firm’s Emerging Markets Dividend Growth fund. Last year he visited China, India, Indonesia, South Korea, Taiwan and Vietnam to look for opportunities for the fund.

“Yes, much of the financial analysis of investable companies can be carried out in the UK office,” he says, “but face-to-face meetings with companies are crucial to our work, whether in their home country or at conferences” in the UK. “We need to understand what management thinks.”

The fund, which he manages with Mark Williams, is unusual for an emerging market vehicle. Although the focus is on generating total returns for investors, it is income focused. “We want to hold companies that make a lot of money and pass some of it on to shareholders in the form of dividends,” adds Pandit.

It’s an approach that hasn’t been without its challenges – most notably the impact of Covid-induced extended lockdowns on businesses. But Pandit says the long-term trend for many emerging market companies in countries like Brazil, South Korea and Taiwan is to pay shareholders a dividend for their support.

Last year dividends paid to fund investors totaled around 1.8p per unit, compared to 3.3p the year before. But encouragingly, this year’s interim payment was an improvement on 2022.

Unlike some other emerging markets funds like Mobius, which are wary of investing in China for geopolitical reasons, Pandit is more relaxed. He describes the prospect of China invading Taiwan as “a high-risk, low-probability event,” adding that it would be disastrous for China in terms of its role in the global supply chain. He believes a more likely outcome is unification through the formation of a government in Taiwan, which is more receptive to the idea.

One of the fund’s most important holdings in China is the electric car manufacturer BYD (Build Your Dreams). “It is the world’s largest manufacturer of electric cars,” says Pandit. “Having honed its craft in its home market, BYD now sells cars across Asia – in countries like Indonesia and Thailand. “I’ve even seen its cars advertised at London Underground stations.”

What Pandit likes about the company is that it is “vertically integrated” — meaning it makes the lithium batteries that power its cars and doesn’t rely on any one supplier. It also pays a dividend.

The fund’s performance metrics aren’t great, although Pandit and Williams have improved its relative performance since they were appointed joint managers in November 2020. Under her management, the fund has generated a return of 10 percent, compared to a return of zero for average emerging markets funds.

Pandit believes many emerging markets are now in a better position than developed markets to offer investors attractive returns – a result of stronger economies, lower inflation and falling interest rates. The fund’s annual fees are just over one percent. Williams is also co-manager of Somerset Capital’s Asia Income Fund.