Aberdeen’s Kaloo Tops Emerging Markets: Riskless Return
Devan Kaloo led Aberdeen Emerging Markets Fund to top risk-adjusted returns by picking the best stocks in the most volatile industries, beating peers from Fidelity Investments to Franklin Resources Inc.’s Mark Mobius.
The $7.5 billion fund rose 1.7 percent the past five years after adjusting for price swings, the top gain among 27 rivals with more than $1 billion, according to the BLOOMBERG RISKLESS RETURN RANKING. Kaloo’s preference for companies with lower debt and higher profitability than the benchmark index helped the fund post smaller price swings than 77 percent of peers in a period when emerging-market volatility reached a record high.
Kaloo, 40, won with businesses that accelerated profit growth despite a global slowdown and a 4.5 percent decline in the MSCI Emerging Markets Index in the past year, including reinvested dividends. While competitors got hurt by bets on bank and energy stocks, which tend to drop most in falling markets, the Aberdeen manager’s picks in those industries rallied. They include Mexican lender Grupo Financiero Banorte SAB (GFNORTEO) and Tenaris SA (TEN), a maker of seamless pipes that has benefited from oil exploration in Mexico and Brazil, according to data compiled by Bloomberg.
“We’re always looking for returns per unit of risk, and theirs are impressive,” said Sam Katzman, the chief investment officer for New York-based Constellation Wealth Advisors, which has about $50 million invested in the Aberdeen Emerging Markets fund. Stock selection spurred the outperformance, said Katzman, whose firm manages about $4.5 billion in total.
The risk-adjusted return, which isn’t annualized, is calculated by dividing total return by volatility, or the degree of daily price variation, giving a measure of income per unit of risk. A higher volatility means the price of an asset can swing dramatically in a short period, increasing the potential for unexpected losses.
The Aberdeen fund had a total return of 49 percent in the five years through Aug. 31, the biggest gain among those in the Bloomberg ranking, with below-average volatility.
The $5.1 billion Virtus Emerging Markets Opportunities Fund, run by Rajiv Jain, returned 33 percent since August 2007 for the second-best performance after Kaloo’s fund, while Justin Leverenz’s $26 billion Oppenheimer Developing Markets Fund (ODMAX) came in third with a 23 percent advance. The funds also had the No. 2 and No. 3 rankings after adjusting for price swings.
The $2.8 billion Fidelity Emerging Markets Fund (FEMKX), run by Robert von Rekowsky, ranked last for total return over five years after declining 21 percent and had the 10th-highest volatility. The Templeton Developing Markets Trust, overseen byMobius, declined 8.3 percent to rank 20th in the group of 27 funds, with the eighth-lowest volatility.
“Volatility and market factors have been difficult but we remain focused on bottom-up stock selection and evaluating companies based on fundamental analysis,” Sophie Launay, a spokeswoman for Boston-based Fidelity, said in an e-mailed statement.
Matthew Walsh, a spokesman for San Mateo, California-based Franklin, the manager of the Franklin and Templeton mutual funds, declined to comment.
The Aberdeen fund’s results stand out after the MSCI Emerging Markets gauge declined 1.2 percent including dividends during the past five years. The index tumbled 66 percent from its October 2007 peak through its bear-market nadir in October 2008, then more than doubled the following two years.
The gauge’s 100-day historical volatility has averaged 24 percent during the past five years, compared with a historical mean of 17 percent, according to data compiled by Bloomberg. It rose to a record above 60 percent during the height of the global financial crisis in January 2009.
“Aberdeen is an example of a fund that has historically taken on less risk than the benchmark while proving to generate excess return,” said Todd Rosenbluth, a mutual-fund analyst at S&P Capital IQ, a New York-based research firm.
Kaloo’s returns have fueled a more than 60-fold surge in assets at the U.S.-domiciled fund in the past five years, according to data compiled by Bloomberg. Emerging-market stock funds tracked by Cambridge, Massachusetts-based research firm EPFR Global increased assets by 27 percent in the same period.
Growth in the Aberdeen fund’s assets may curb returns by forcing the fund managers to buy more stocks than they want to, according to S&P’s Rosenbluth. It’s more difficult for larger funds to purchase and sell thinly-traded stocks without affecting the market price.
“When a fund is investing in more illiquid markets like emerging markets, you don’t want to lose your ability to be nimble,” Rosenbluth said.
Flows of investor cash have been so big that Aberdeen stopped marketing the fund to potential clients, according to James Thorneley, a spokesman for the firm. Kaloo wasn’t available to comment, Thorneley said.
Kaloo, the head of global emerging markets equities at Aberdeen Asset Management Plc (ADN), leads a team of 12 investment managers and analysts in London while also working with the firm’s staff in Asia and Latin America to pick stocks for the fund, according to Aberdeen’s website. The University of St Andrews graduate joined Aberdeen in February 2000 after working for Martin Currie, an Edinburgh-based money manager.
Aberdeen’s stock-fund managers place a greater emphasis on business models, the quality of company executives and corporate governance than on economic trends or index weightings. Kaloo’s fund held 64 stocks at the end of July, or 92 percent fewer than the MSCI Emerging Markets index.
The Aberdeen fund’s holdings in the banking industry, which account for about 25 percent of the portfolio, returned 5.2 percent during the past year while its energy shares, with a 16 percent weighting, gained 3.1 percent. The stock picks contributed more to the fund’s outperformance compared with the MSCI index than for any of its peers, a Bloomberg analysis of publicly disclosed holdings through July shows.
Stock selections in the two industries have an outsized impact on relative performance because they have the biggest weightings in the MSCI index, making up more than 30 percent of the $7 trillion gauge’s market value. They also have the highest value-at-risk, or VaR, among 24 industry groups, data compiled by Bloomberg show.
Bank stocks in the MSCI index have lost 6.3 percent as a group during the past year after economic growth in China and India slowed to the weakest pace since 2009 and consumer defaults in Brazil hit a 30-month high. Oil’s slide from this year’s peak in February and growing supplies of natural gas have helped drag down energy stocks by 12 percent.
About 68 percent of the biggest emerging-market funds had declines in their bank holdings during the past year and 86 percent posted losses from investments in energy companies, according to data compiled by Bloomberg.
Banorte, the Monterrey, Mexico-based bank, has surged 45 percent during the past year. The bank reported earnings growth of at least 20 percent for five straight quarters as the bank boosted business, credit card and payroll lending. The lender’s second-quarter earnings gain of 29 percent compares with a 10 percent combined increase for banks in the MSCI Emerging Markets Index (MXEF), data compiled by Bloomberg show.
The Aberdeen fund boosted holdings of Banorte during the past year to 2.9 percent of the fund, and the firm is the biggest publicly-disclosed holder of the Mexico-listed shares, according to data compiled by Bloomberg.
Kaloo’s fund has also benefited from holdings in Istanbul- based Akbank TAS (AKBNK) and Manila-based Bank of the Philippine Islands (BPI), which both returned more than 10 percent in the past 12 months, the data show.
Tenaris, the world’s largest maker of seamless pipes, has jumped 31 percent in the past year. While the Luxembourg-based company isn’t a member of the MSCI Emerging Markets index, it has benefited from increased oil exploration and production in emerging markets.
Second-quarter earnings rose 61 percent on growing demand for pipes from energy producers, Tenaris said in an Aug. 1 statement. The company has a current ratio, or short-term assets divided by liabilities, of 2.3, compared with an industry ratio of 1.4, data compiled by Bloomberg show. A higher ratio signals Tenaris has a greater ability to repay liabilities coming due in the next year.
Aberdeen was the biggest holder of Tenaris’s U.S.-listed shares as of June, with an 11 percent stake, according to data compiled by Bloomberg. The emerging-markets fund held about 0.7 percent of the securities, the data show.
Ultrapar Participacoes SA (UGPA3), a Brazilian holding company that owns the Ipiranga gas station chain, has also been a winning pick in the energy industry for the Aberdeen fund. The stock, which accounts for about 2.9 percent of the portfolio, surged 59 percent during the past year for the top gain among companies in the MSCI Emerging Markets Energy Index.
“It only took a couple of names in the portfolio to really prime the pump,” said Jeff Tjornehoj, the head of Lipper Americas research in Denver. “This fund is managed with a lot of conviction.”
The fund’s turnover ratio, a gauge of how much its positions change in a year, is lower than all 23 peers tracked by Bloomberg that provide the data. Constellation Wealth’s Katzman started investing in the fund during the second half of 2009 in part because the investment team makes about 1,500 company visits a year, he said.
The profit margin for the portfolio’s companies is about 12 percent, two percentage points higher than the benchmark index, according to data compiled by Bloomberg.
The companies’ debt amounted to 71 percent of common equity, versus 104 percent for the MSCI gauge, the data show. The fund’s value-at-risk, as measured by its potential loss during one trading day, is about 1.7 percent, according to data compiled by Bloomberg. That compares with 1.8 percent for the MSCI emerging-market index.
“As bottom-up stock pickers, our global allocation strategy is a function of where we can find good quality companies which are attractively valued,” the fund managers wrote in their second-quarter report. “This style may lead to significant deviations from the index.”
The Aberdeen fund’s outperformance has also made its holdings increasingly expensive versus the benchmark index. The portfolio is valued at about 13 times earnings, or 15 percent higher than the MSCI gauge, according to data compiled by Bloomberg. A year ago, the ratios were about equal. The Aberdeen fund also has a higher price-to-book ratio and a lower dividend yield than the index, according to Bloomberg’s analysis of disclosed holdings as of July.
The fund’s managers say they’re still finding stocks at attractive prices, and analysts tracked by Bloomberg are predicting gains for some the fund’s top holdings. Banorte may rally 13 percent in the next 12 months, according to the average of 15 analyst projections. Tenaris will probably gain 14 percent, based on the mean of 12 forecasts.
“Valuations in the asset class have come off in the wake of previous sell-offs,” the Aberdeen investment team wrote in its second-quarter report. “This should provide opportunities to pick up favored stocks at reasonable prices.”
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