Rami Sidani is running the best-performing stock fund in emerging and frontier markets by picking undervalued companies from Georgia to Qatar.
The $343 million Schroders International Selection Fund, which he oversees from Dubai, returned 3.6 percent in 2013 after adjusting for price swings, beating 157 peers in a BLOOMBERG RISKLESS RETURN RANKING of emerging market and frontier funds. His fund produced the highest total return while keeping volatility below average.
Sidani looked beyond the MSCI Frontier Markets Index for mispriced securities, picking companies that aren’t part of the gauge such as Bank of Georgia Holdings Plc and Gulf International Services QSC, both of which more than doubled last year. The 33-year-old money manager plans to sell some Nigerian securities because they’ve gotten too expensive and pick up more stocks in Georgia, Kazakhstan and Romania.
“Investing in the frontier today is like investing in tomorrow’s emerging markets,” Sidani said in an interview at the Schroders Plc’s office in London on Jan. 9. “You won’t get everything right, but if you have the right discipline and the right risk measures, when things go wrong, the damage will be contained.”
Equity indexes in less-developed nations were among eight of the world’s 10 top performers last year, showing greater resilience than emerging markets in the face of Federal Reserve stimulus cuts. The MSCI frontier gauge rallied during a year of losses in the emerging index for the first time on record, climbing 21 percent in 2013 versus a retreat of 5 percent for the MSCI Emerging Markets Index. It’s up 3.4 percent this year.
Risk-adjusted returns, which aren’t annualized, are calculated by dividing the total return by volatility. The bigger the daily swings in an asset’s price, the greater the potential for unexpected losses. Emerging and frontier markets accounted for all but two of the 10 most-volatile stock exchanges in the world yesterday, according to data compiled by Bloomberg on 72 benchmarks.
Schroders’ frontier fund returned 40 percent last year before adjusting for price swings. It had a volatility of 11, eighth-lowest in the ranking, which compared funds with at least $250 million in assets.
Sidani beat frontier-market funds managed by Harding Loevner LP and Wasatch Advisers Inc., which came in second and third. Wasatch’s emerging-market fund had finished on top in the four years through 2012 among peers with at least $1 billion in assets.
Sidani’s fund, which was set up in December 2010, has returned an average annual 12 percent in the past three years, before adjusting for price swings, beating 99 percent of peers, data compiled by Bloomberg show.
Money managers who travel to the regions they invest in and are “a little more brave, looking for new ideas off-index, may continue to outperform,” Ali Khalpey, head of equities at Exotix Ltd. in London, said by phone on Jan. 16. “As people get flows, they need to be a bit more creative.”
Schroders became the biggest non-Qatari investor with a 1.7 percent stake in Gulf International, in which state-run Qatar Petroleum owns 30 percent, according to data compiled by Bloomberg. The Qatari company, which provides services to the oil and gas industry such as drilling and transportation, surged four times more than the benchmark QE Index in 2013. Qatar made up 17 percent of Sidani’s fund mix by the end of December, the biggest component after the United Arab Emirates at 20 percent.
“We pay close attention to the environment that these companies operate in, so the top-down story in each of these markets is very important,” said Sidani, who joined Schroders in 2008 from Dubai-based investment bank Shuaa Capital PJSC.
Qatar is planning about $200 billion of infrastructure spending before hosting the 2022 soccer World Cup. Along with the U.A.E., the country won emerging-market status at MSCI Inc. last year, and the change effective from May 2014 is likely to spur another $2 billion of inflows to these markets, he said.
“People that are already positioned will benefit as these markets come on the radar screen of international investors,” said Sidani, who is keeping an overweight stance on both.
While benefiting from the doubling of Dubai’s DFM General Index last year, Schroders missed out on the 89 percent rally in Argentinian stocks. Argentina’s political and economic situation was “messy,” he said, as reserves hover at a seven-year low, inflation climbs and the currency plunges.
“We continue to be out of Argentina and we expect the situation to get worse as international reserves continue to dwindle.”
Sidani was drawn to Georgia, a Black Sea nation that isn’t represented in the MSCI Frontier Market Index. Economic growth in the country is set to double to 5 percent this year, International Monetary Fund estimates show. Bank of Georgia offered “the best way to play economic growth and the expansion in the middle class,” he said.
Schroders has begun to exit some investments in Nigeria, the fund’s biggest market outside the Middle East, according to Sidani, who cited valuations. Nestle Nigeria Plc trades at 31 times projected 12-month earnings, 1.6 times the ratio for its Zurich-listed parent, data compiled by Bloomberg show.
Sidani wants to buy more in Kazakhstan after shares of phone provider Kcell JSC advanced 64 percent in London since an initial public offering in December 2012.
He is also bullish on Saudi Arabia, a country of more than 28 million people that’s expected to gradually welcome greater foreign presence in its $480 billion Tadawul All Share Index, which investors from abroad can access via equity swaps and exchange-traded funds. Nine percent of the fund’s capital was invested in the country by the end of December.
Frontier markets suffer from “inefficiencies” due to the dominant presence of retail investors, Sidani said. “As long as there is mispricing in the market, this is when we will step in” to identify potential gems, he said.