Presenter: BNY Mellon Global Emerging Markets Equity Value Fund is a Dublin-domiciled vehicle that's now available to UK investors with a sterling share class. It's run by The Boston Company Asset Management and I'm joined now by Senior Portfolio Manager on the fund, Carolyn Kedersha. Carolyn, could you start by telling us a bit about The Boston Company?
Carolyn: Certainly. The Boston Company is one of BNY Mellon's 18 investment boutiques and we're all run independently. The Boston Company Asset Management manages about $US42 billion (as at 30/06/2011) of equities only in an active style, and within The Boston Company there are seven investment teams of which the Emerging Market team is one, and I represent that particular team.
Presenter: And what's the objective and the benchmark of this Fund?
Carolyn: The objective of the Fund is to outperform the MSCI Emerging Markets Index over a full market cycle and we do that through active stock selection using a value discipline.
Presenter: And what are the investment parameters on this portfolio?
Carolyn: Well as I was saying, Mark, the key thing is that we want to buy stocks from the bottom up, meaning we want to use active stock selection to determine our clients' alpha, and so we're using a value-based investment discipline, and let me give you an example of that. We want to pick stocks that meet three criteria, sort of like the inner section of three circles, and to do that the first circle is value. And what do I mean by value in emerging markets? I'm looking at the old tried and true standby, so value price to book, price to earnings, but I want to buy those stocks in the bottom two quintiles relative to those metrics, country or sector. So for example in Mexico, I'm going to buy the bottom two quintiles in terms of P/E or price to book. Then when I move to the second circle which is the fundamental circle, I'm looking for how good is the company's business model and how strong is the balance sheet, and it's not just saying okay, fine, how much debt does the company have. The real question I'm looking at is do management have the tools to accomplish what they're trying to do.
So let me give you an example. The first example is, say a company's going to launch a new business product, you'd better be prepared to see a balance sheet that's going to see accounts receivable go up, inventory go up, and then when I'm looking at debt, is it long-term versus short-term, hard currency versus soft currency, fixed versus variable? Again, does management have the right business model and do they have the tools and the balance sheet to actually support what they're doing? And the last thing that we look for in choosing a stock is a catalyst because it's so easy in emerging markets to ride a stock all the way up just to ride it all the way down. So to avoid that we're looking for a catalyst, something that management is going to try and do to recognise that value. Again, maybe launch a new business product but maybe they're just going to sell off some non-core business, you know, and get out of it and put their money into something that they know what to do with. So again, it's something that management's doing and it's not something macro-fundamental. So, again, we want to see individual stock selection create the alpha for your clients.
Presenter: Is there any asset allocation by country in this portfolio?
Carolyn: No. What we want to do is we want individual stock selection to produce the alpha so to that end, when we come to the construction of the portfolio, whether by country or by sector, it's the number of really compelling names that we can find which determines the country weight or the sector weight. So if there's a lot of names that have that compelling value we'll be overweight, but if we can't find a lot of compelling names we'll be happy to be underweight. The idea is to let the stock selection come through and not try and do any benchmark-hugging.
Presenter: So, for example, you'd be perfectly happy if you had, say, no exposure to Mexico?
Carolyn: Yes and no, because what you have to understand is one of the key attributes of this particular product is that we are very much risk-aware and capital preservation is key in this type of asset class, and to that end we do have some risk controls. So for example, at the country level we'll be in at least 15 of the countries but usually north of 20 countries just for the diversification. Similarly for the sector, we can go overweight as much as 10 percentage points above the index weight by sector but we can go down to zero. However, if it's a very large sector, for example, like financials which is about 25% of the index, we wouldn't go down to zero or maybe halfway at the most. And then finally, because we don't want any single country decision, sector decision or individual stock selection decision to adversely impact your clients' portfolios, no more than 5% of the Fund can be in any one particular name. And then the last thing to finish up the risk controls, of course, is cash is for use for cash. We don't try to trade around the portfolio. It's typically less than 5%. And then finally the portfolio is unhedged, and that's something that your clients need to be aware of.
Presenter: So you see currency as a risk rather than reward then?
Carolyn: It can be both. We're not going to sit there and select stocks because of the currency and we're not going to select currency as an asset within the portfolio but that being said, as currency affects the income statement, it feeds through to the stock performance so it is a factor in there but we're not trying to seek it as a separate asset class.
Presenter: And as a value-based fund, does that give you any particular sector biases?
Carolyn: No. As I said, we want to go anywhere we can to find the active alpha for your clients. Again we're going to go back to those three circles, the value, business fundamentals and catalyst to find those names, and if it leads us to a particular sector exposure that's fine, if it doesn't that's okay as well. We want to have good solid value names, high quality, that's going to help your portfolio.
Presenter: Is there any market cap bias on this?
Carolyn: Yes. It is an all cap fund. By that, I mean we can buy stocks in the Fund with market caps of $US500 million and above and what that gives us is the ability to do is take advantage of the small cap bias occasionally versus the large cap. Many of the other funds who we compete against have by default become just simply large cap funds and we think this gives our clients exposure to the full range of alpha out there.
Presenter: But doesn't that create an illiquidity risk? I mean it's easy to get into small caps, it's getting out that's the problem.
Carolyn: Well, you know, we would think that that's sort of a thought. However, in the global financial crisis that we unfortunately all experienced we had no issues in getting out of our smaller cap positions. I mean part of that is the care that we take on the entry of the position in terms of looking at and assessing its liquidity risk in case something does go wrong.
Presenter: What has recent performance been like? What have been the main contributors?
Carolyn: Well, the major contributors to the performance have been, first of all going in to the global financial crisis we were well positioned and we had a lot of small cap stocks in the portfolio and as we came out of that, because we had paid attention to balance sheet strength and high quality, the Fund outperformed quite dramatically*. Then in the subsequent recovery year the Fund did quite well as well*. It was a very strong up-year and we did extremely well. Now, after that recovery year, things have started to get normalised and we're finding more rotation in the market and so, for example, going into the crisis we had very little, for example, in Chinese banks or Chinese financial stocks because they were very, very over-valued we felt, and then they corrected quite sharply in the global financial crisis and have continued to lag, and so for the first time in probably three years we now have several positions in Chinese financials. The other thing on the flip side of that, for example, has been the Indian financials where we have accumulated a nice overweight, and they have done quite well for us in the fourth quarter of last year and into the first quarter of this year and so we've trimmed that exposure and, as I said, put it into the Chinese financials.
Presenter: How do you see emerging markets developing over the next few months and how are you positioning the portfolio in response?
Carolyn: Well, one of the things that we've done that we've never done, or we hadn't done in the last three years going into the global financial crisis, was we were not in Chinese financials and now, since they've come down so sharply as a result of the GFC but also because of concerns of the Chinese raising interest rates, they've become very, very inexpensive and so for the first time we've actually established quite a nice position in them. Now the flipside of that was we had an overweight in the Indian financials and they ran up quite nicely and we trimmed back that position in the fourth quarter going into the first quarter of this year, and so we've almost done a complete flip between China and Indian financials.
Presenter: Why should investors consider the emerging markets today?
Carolyn: Well, the emerging markets are in quite a different place today than they were even 10 years ago. From a global macroeconomic standpoint, the countries are positioned quite well in terms of their own finances and what we're seeing is actually a very strong rise of the early or entry middle class, particularly in China, somewhat in India but definitely in countries like Indonesia and Malaysia, etc. And that particular class is of people just out of sort of subsistence living but into just the beginning part of the middle class does a couple of different things. One is they change their patterns of consumption. The most common example is they start eating more animal proteins, for example, but even in terms of healthcare spending, they didn't try and usually access healthcare spending before, now they are. They're also accessing education in a way that they've never been able to before. So there's all sorts of consumption patterns that change.
In addition, for the first time they're having access to financial products, basic financial products, true, but it's still savings products, basic savings products, you know, checking accounts, insurance, things like that, and so that's a tremendous growth driver above and beyond just simply population growth, you know, general macroeconomic growth. So that's the reason to be really bullish about emerging markets. The question always is valuations.
Presenter: There's a lot of competition in running emerging market money these days, what are the USPs of this Fund?
Carolyn: The key attributes of this particular Fund is our investment discipline and while a number of portfolio managers have good buy disciplines, and certainly we do as well, it's the constant application of the sell discipline that is so unique and it's led to the repeatability of this particular performance. And by that I mean when a stock reaches the upper two quintiles on that price to book or price to earnings, we will sell the stock and redeploy that money into names with more compelling value. So it's the application consistently that's led to the repeatability of our performance.
Presenter: Carolyn Kedersha, thank you very much.
Carolyn: Thank you.
*The Fund returned 60.46% in 2009, 19.75% in 2010 (to end December). 5 year annualised total return to 31 may 2011: 12.67%. Source for all performance: Lipper as at 31 May 2011. Total return including income net of UK tax and annual charges, but excluding initial charge. All figures are in sterling terms. Performance data covering periods prior to the B GBP share class launch include returns that have been calculated from the daily NAV of the BNY Mellon Global Emerging Markets Eq Value A USD share class, converted to GBP using the daily WM Reuters USD to GBP exchange rate and adjusted to reflect an annual management charge of 1.5% per annum. This data assumes that all other charges are consistent. Simulated performance results such as this have limitations. Simulated results do not represent actual investment returns nor costs and are not a reliable indicator of future performance. Performance data covering the period since share class launch is a record of actual returns achieved. Past performance is not a guide to future performance. The value of investments and the income from them is not guaranteed and can fall as well as rise due to stock market and currency movements. When you sell your investment you may get back less than you originally invested. The impact of the initial charge, which may be up to 5%, can be material on the performance of your investment. Performance figures including the initial charge are available upon request.
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All information relating to The Boston Company Asset Management, LLC (The Boston Company) and the BNY Mellon Global Emerging Markets Equity Value Fund has been prepared by The Boston Company for presentation by BNY Mellon Asset Management International Limited (BNYMAMI). Any views and opinions contained in this document are those of The Boston Company at the time of going to print and are not intended to be construed as investment advice. BNYMAMI and its affiliates are not responsible for any subsequent investment advice given based on the information supplied.
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BNY Mellon Global Emerging Markets Equity Value fund is a sub-fund of BNY Mellon Global Funds, plc is an open-ended umbrella type investment company with variable capital (ICVC) and segregated liability between sub-funds, incorporated with limited liability under the laws of Ireland. It qualifies and is authorised in Ireland by the Central Bank of Ireland as an undertaking for collective investment in transferable securities pursuant to the European Communities (Undertakings for Collective Investment in Transferable Securities) Regulations, 2003 (S.I. No 211 of 2003), as amended. The Manager of BNY Mellon Global Funds, plc is BNY Mellon Global Management Limited. BNY Mellon Global Management Limited, 33 Sir John Rogerson's Quay, Dublin 2, Ireland. The Manager is approved as a management company and regulated by the Central Bank of Ireland under the European Communities (Undertakings for Collective Investment in Transferable Securities) Regulations, 2003 (SI No 211 of 2003), as amended. The Global (ex. US) Distributor of BNY Mellon Global Funds, plc is BNY Mellon Asset Management International Limited.
ICVC investments should not be regarded as short-term and should normally be held for at least five years.
Changes in rates of exchange may affect the value of investments. The Fund can invest in overseas securities which may also generate profits overseas and pay dividends in foreign currencies, which means the fund is exposed to changes in currency rates. Fund may invest in emerging markets. It should be noted that these markets have additional risks associated with local custody and registration practices that may be less developed than more mature markets. The Fund takes its charges from the income of Fund. The impact of Fund charges may be material on the value of any income you receive from your investment. There is potential for future capital erosion if insufficient income is generated by the Fund to cover these charges. The Fund may use derivatives for efficient portfolio management (EPM) purposes. EPM restricts the use of derivatives for the reduction of risk, the reduction of cost and the generation of additional capital or income with no or an acceptable low level of risk. EPM transactions must be economically appropriate and the exposure fully covered. All of these factors may affect the performance of the Fund.
This document is issued in the UK by BNY Mellon Asset Management International Limited. BNY Mellon Asset Management International Limited, 160 Queen Victoria Street, London EC4V 4LA. Registered in England No. 1118580. Authorised and regulated by the Financial Services Authority.
BNY Mellon Asset Management International Limited, BNY Mellon Global Management Limited (BNY MGM), The Boston Company and any other BNY Mellon entity mentioned are all ultimately owned by The Bank of New York Mellon Corporation.
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