London and Singapore-based Somerset Capital Management has unveiled an emerging markets future leaders Ucits fund.
It will invest primarily in medium-sized businesses that derive the majority of their earnings from EMs, with a market cap range of between $750m and $13bn (€11bn).
Co-managers Edward Robertson and Anthony Linehan will target firms that can grow earnings, book value and cash flow per share sustainable over a market cycle; and which they believe have the potential to grow into industry-leaders.
The fund will be a concentrated portfolio of 40-50 companies with a typical holding period of three to five years.
It will be a daily dealing Ucits Icav domiciled in Dublin and will be available in GBP, USD and other currencies on request.
Launched on 1 September, it will be seeded with circa £350 from the Swedish National Pension Fund, Första AP-fonden (AP1).
Pursue positive change
All companies in the portfolio will be assessed for suitability according to Somerset’s independent criteria around environmental, social and governance (ESG) issues.
The company will use its position as a long-term active manager to engage with portfolio holdings on material issues where it believes it can influence positive change.
The fund will not invest in stocks in the tobacco industry nor relating to fossil fuels to accommodate the evolving preferences of pension funds and other long-term institutional investors around the world.
End of an era
Anthony Linehan, partner and co-manager of the Somerset EM Future Leaders Fund, said: “Emerging markets have been heavily out of favour for some time but we believe the recent volatility has given investors an opportune moment to buy into high quality smaller and medium-sized companies at very attractive valuations.
“The companies we invest in don’t typically feature in the list of usual suspects you find in funds elsewhere nor in the passive vehicles.
“Our long experience of investing in these markets has allowed us to develop a framework for identifying the characteristics that we believe are critical for any company wishing to be a future industry leader.
“These include evidence of a strong competitive position, the financial muscle to get through the next down cycle and the ability to navigate regulatory and consumer preference changes relating to ESG.
Linehan added: “The era of badly run, corrupt companies making big profits is coming to an end. Being able to distinguish between those that take corporate governance and sustainability issues seriously and those that don’t will be absolutely crucial in identifying future winners and losers.”