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Somerset uses dividends for emerging market cushion

Somerset Capital Management – PFS Somerset Capital Global Emerging Markets Dividend Fund

Somerset Capital Management – PFS Somerset Capital Global Emerging Markets Dividend Fund

Type: Oeic

Aim: Income and growth by investing in dividend-paying global emerging market securities

Minimum investment: Lump sum £2,000

Investment split: 18.4% South Africa, 13.2% Taiwan, 10.5% China,10.5% Brazil, 5.3% Korea, 5.3% Indonesia, 5.3% Chile, 5.3% Turkey, 5.3% Polan, 5.3% Egypt, 15.6% other

Isa link: Yes

Charges: Initial 5%, annual 1%

Special offer: Initial charge waived

Offer period: Until December 31, 2010

Commission: Initial up to 5%, renewal up to 0.5%

Tel: 0845 026 4282

Global emerging markets specialist Somerset Capital Management, founded in 2007, has established an Oeic that provides income and growth by investing in global emerging market companies that pay dividends. It will focus on firms with a market cap in excess of $800m and is likely to have around 40 holdings that are drawn from a universe of around 14,500 stocks. The final portfolio will be constructed through a combination of top-down and bottom-up stockpicking.

Discussing how this fund could be useful to IFAs and their clients, Hargreaves Lansdown senior analyst Meera Patel says: “This is the first emerging market income fund of its kind that is available to private investors in the UK. It may attract investors who like equity income and are prepared to take the risk for the prospects of higher growth. “

Patel points out that the fund is managed by Edward Robertson, one of the founding partners of the firm, and its head of research Edward Lam.

“What I like about the fund is that it invests in companies with stability of income and prospects for that income to grow over time. The managers will also look for companies that have scope to deliver capital growth, but ultimately, dividends form a fundamental component of a share’s overall return and this will be the main focus,” says Patel.

She adds that the managers will look to invest in companies that yield more than the market average. “In the early days of launch fund is expected to yield around 4.6 per cent. This compares favourably to the MSCI Global Emerging Markets index, which currently has a yield of 2.1 per cent.”

Patel notes that there is an emphasis on discovering opportunities at the individual company level, but the managers also appreciate the merits of wider economic analysis. “They believe this research can help avoid major pitfalls like currency devaluation or a country defaulting on its debt. If they dislike a country, they will simply not invest in it. I like this flexibility and it shows that they are not benchmark constrained,” says Patel.

Assessing the charges, Patel regards the annual charge as very low at 1 per cent and says this is unusual for a specialist fund such as this. “There is also no performance fee attached which make it attractive from a fee point of view,” she says.

In Patel’s view, equity income has its attractions in terms of the total returns it can offer, in other words the returns in the form of income and capital growth. She feels that the effect of compounding that income is rather powerful, so the fund can have its merits for many investors.

Considering the potential drawbacks of the fund, Patel says: “I believe this is an interesting proposition, but my main concern is that the managers have a limited track record managing money with an income objective. With time, we will be able to see if they are successful at managing an equity income fund specialising in emerging markets.”

She also highlights issues with the dividends payable by emerging market companies. “Emerging market companies have been known to pay dividends intermittently, and the dividend growth is not always sustainable. Only time will tell if companies are committed to paying and growing dividends over the longer term,” she says.

Switching her attention to possible competitors, Patel says: “This is the first emerging market income fund that I am aware of so there is no like for like competition. There are, however, Asian income funds available like Newton Asian income. But this is not a true likeness and therefore not really comparable.”

Suitability to market: Good
Investment strategy: Good
Charges: Good
Adviser remuneration: Average
Overall 8/10


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