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Geography lessons

There has been a lot of change at Gartmore this year, most importantly, the management buyout by the senior staff with the assistance of H&F, a private equity firm. Most changes of this type inevitably result in several departures and, for Gartmore, some of the big losses included Philip Ehrmann and Peter Dalgliesh on the emerging markets team, which put into question Gartmore’s capabilities in this field.

There is, in fact, a team of six in global emerging markets, headed by Chris Palmer. Gartmore has also recently announced two further individuals joining the team. There is therefore no shortage of experience and I believe there should be little doubt over Gartmore’s resources in emerging markets.

Palmer took over the Gartmore emerging market opportunities fund in June and has been managing emerging market equities for Gartmore since 1996. He ran this very same fund between 2001 and 2003, so it is not an unfamiliar mandate for him.

In terms of the fund’s investment approach, the team continue to apply the same rigorous research process but there has been a small enhancement since Palmer took over, which he feels will make a meaningful contribution to overall performance.

A new model has been designed to take into account country selection, something I feel can be crucial in emerging markets.

Being in the right country is an important driver of returns in respect to emerging markets and, in my view, cannot be ignored. The model has been back-tested over the last 10 years and the results are startling.

The model basically looks at all the emerging markets based on various factors such as valuations, earnings growth and macroeconomic data and generates a score on each relative to its peers. The countries are then ranked into quintiles. There is also a unique feature that looks at currencies but in the sense of penalising countries with weakening currencies.

The score will, however, not be flattered by appreciating currencies. If currencies strengthen, this will serve as an added bonus. The back-testing shows that the countries scoring in the top quintile have consistently outperformed those in the bottom quintile and this is expected to help generate outperformance for the fund, together with bottom-up fundamental analysis.

Other than that, the process has remained the same. Essentially, the ideas come from a number of sources ranging from fundamental research, macro research, brokers and quantitative models.

Ultimately, the team are looking to identify unexpected earnings’ growth in companies through a combination of industry, franchise, valuation and cashflow analysis. The ideas are filtered through a screen taking into account factors such as liquidity, risk and catalysts for improvement. Subsequently, the right stocks are picked for the portfolio.

The fund typically has a tilt towards long-term growth but Palmer will look for attractive valuations within growth companies. He is also aiming to lower the turnover on the fund by extending the holding period for the stocks. The idea is to run with the winners for longer. Since Palmer has been at the helm, the exposure to bigger companies has increased based on liquidity grounds, which should prove beneficial.

Emerging markets have had a phenomenal run over the last five years and valuations for most markets still remain attractive relative to developed markets. Many countries are in a strong export position with favourable trade balances. Inflation rates have been converging, job security has improved and corporate profitability is higher in the current environment. The conditions for growth remain firmly in place.

The key is to pick an investment team that can capture the growth in emerging markets and I think it would only be fair to give Palmer and his team a chance to prove they can reward long-term investors.

Meera Patel is senior analyst at Hargreaves Lansdown

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