PFS Somerset Global Emerging Markets Fund

Transcription

1 PHOENIX Fund Services PFS Somerset Global Emerging Markets Fund Short Report 30 September 2015

2 Directory Authorised Corporate Director (ACD) & Registrar Phoenix Fund Services (UK) Ltd Springfield Lodge, Colchester Road, Chelmsford, Essex CM2 5PW Telephone: Fax: Website: (Authorised and regulated by the Financial Conduct Authority) Customer Service Centre Phoenix Fund Services (UK) Ltd Springfield Lodge, Colchester Road, Chelmsford, Essex CM2 5PW Telephone: Fax: (Authorised and regulated by the Financial Conduct Authority) Directors of the Authorised Corporate Director P.J. Foley-Brickley S. Georgala (appointed 24 August 2015) D. Jones R.W. Leedham D.W. Munting D.C. Tibble (retired 24 July 2015) Investment Manager Somerset Capital Management LLP 110 Buckingham Palace Road, London SW1W 9SA (Authorised and regulated by the Financial Conduct Authority) Depositary National Westminster Bank Plc Trustee & Depositary Services Younger Building,1st Floor, 3 Redheughs Avenue, Edinburgh EH12 9RH (Authorised and regulated by the Financial Conduct Authority) Auditor KPMG LLP Chartered Accountants 15 Canada Square, Canary Wharf, London E14 5GL 1

3 Investment Objective and Policy The Fund seeks to achieve capital appreciation by mainly investing in an actively managed portfolio of emerging market securities. The portfolio will consist principally of quoted equity securities, issued by companies established or operating in emerging market countries, principally in Asia, Eastern Europe, the Middle East, Africa and Latin America. The Fund may also invest at the Investment Manager s discretion in other transferable securities, money market instruments, cash and near cash, depositary receipts, derivative instruments and forward transactions, deposits, and derivatives for the purpose of hedging or efficient portfolio management. The Fund may also invest in shares in other collective investment schemes subject to the limits set out in Appendix 2 of the Prospectus, however, investment by the Fund in other Schemes will be limited to a maximum of 10% of the scheme property of the Fund. Use may also be made of stocklending, borrowing, cash holdings, hedging and other investment techniques permitted under applicable FCA Rules. The Company permits the use of derivatives for investment purposes by the Fund, however, this policy is not currently applied and may not be applied without giving the required 60 day notice to Shareholders. If derivatives are used for the purpose of meeting the investment objective of the Fund it is not intended that the use of derivatives would significantly raise the risk profile but this cannot be guaranteed and the risk profile may increase as a result of a change in the investment policy for derivatives. The Fund is permitted to invest 5% or more of its scheme property in warrants. Such investments may increase the volatility of the Fund and therefore may adversely affect its risk profile. Investment Manager's Report for the year ended 30 September 2015 The Fund in capital terms during the 12 months to 30 September 2015 saw an underperformance of -0.52% against the MSCI EM Index. The Fund s accumulation class share price at NAV was down % in sterling terms whereas the market fell %. In terms of longer-term positioning, we continue to look for reasonably priced good quality companies. Q was characterised by a December sell off across emerging market equities and currencies triggered by a collapse in the oil price. Saudi Arabia made it clear they would keep pumping as much crude oil as possible. Their aim (it seems) was to restore their market share in the US. Their intention is to wipe out higher cost production (particularly shale oil). Countries like Turkey, India, Taiwan and the Philippines benefit. Russia, Venezuela and Nigeria do not. Because of their large reserves most of the Gulf States, and Saudi Arabia, can weather a period of low prices. This is a big development at a time of global economic challenges deflation in Europe, a slowing Chinese economy and a tentative US recovery. 2

4 Investment Manager's Report continued The final few months of 2014 saw the more cyclical and value stocks in the Fund dragging on performance. We sold MTS in Russia on a potential corporate governance issue and declined to add to our other Russian positions, despite cheap valuations. The value portion of the Fund did not work as a strategy in With similar economic conditions in GEMs this is unlikely to change soon. Emerging markets are cheap but a rising USD, higher interest rates and a China slowdown weigh on sentiment. There were bright spots during Q and our Indian and Turkish companies did well for us but these companies are now trading at fair value. We added ICICI Bank and sold out of Coal India where decent prospects are put at risk by lack of regulation and a greater possibility of government interference. The main highlight during Q was a fast, virtually unprecedented rise in the USD which always makes for a difficult time in emerging markets and the Fund. A rapid rise in the USD tends to run in parallel with liquidity leaving emerging markets and this tends to have a number of knock on effects particularly on vulnerable countries (and currencies) including Turkey, South Africa and Brazil. Our positions in Turkey were marked down heavily in dollar terms, particularly Sisecam. A recovery in Europe is slowly underway and that should help Turkish corporates that export to the Eurozone. Given the huge monetary easing that is being undertaken, it is hard not to see a gradual continuing recovery in Europe. Greece s problems remain in the foreground. OTP Bank was sold down on worries over Ukraine and Russia but that conflict has abated (for now) and OTP s domestic market of Hungary is doing well. The Hungarian government recently cut the tax burden on banks. In Latin America, the Petrobras corruption scandal spread to higher levels of government and the economy is hardly growing; this could be the year that the consumer capitulates. M Dias Branco was a detractor for Q but falling from the highs of last year. Mexico is thought to be improving, not only getting help from a recovering US but also the consumer, feeling more spritely after digesting the tax rises of a 15 months ago. We continue to like South Africa for its regional exposure but that will possibly take a pause for a while having done well up to Q115; likewise India, where we are overweight. China s economy remains tough and we question the lasting effects of any stimulus. Korea remains cheap and parts of Asean expensive. The main change we made to the Fund during Q was replacing Rosneft with Yandex in Russia (although our overall Russia exposure remains low). Both are cheap in their way but Rosneft has become politicised and carries a lot of debt. The outlook for the global economy looks better than it was at the beginning of the year but given Greece s position and the unknown consequences of unorthodox monetary policy from all the world s major democracies, risks remain. We were underweight China and the opening up of the Hong Kong Exchange to mainland fund managers affected relative performance. The valuations locals are willing to pay for stocks and businesses where fundamentals continue to deteriorate is debateable. The trend in China continued into Q as the stock market was aggressively promoted by its government and the willing, but naïve, public duly obliged. The problem was that it got very quickly out of control. Margin lending soared and a government put, with the attitude they won t let the market go down, meant the market climbed to risky levels. In the end it all came crashing down and government efforts to stem the damage (massive intervention in the market) must have had the MSCI benchmark team scratching their heads. China remains volatile and risky; the strategy here is to buy on dips but these dips may turn out to be quite big. 3

5 Investment Manager's Report continued China and Greece dominated headlines in Q with, in our view, China being the more relevant. Greece appeared to have done itself no favours in calling a referendum. Assuming a deal is completed, the extent of any debt restructuring will be the measure of Mr Tsipras s success (and that will come later). The situation had become very political for both sides, which means either outcome is possible; a Grexit could happen by mistake. Contagion, in the short-term, is likely to be limited. The data in nearly all other GEMs remains unimpressive. Brazil was particularly weak as it undergoes a deep recession. Our holdings in South Africa, particularly Nampak and Tiger Brands, also struggled. The domestic economy is only just growing but opportunities in Africa are compelling in the long-term. The prospect of a new government in Poland, pledging a bank tax and other interferences, has pulled down Bank Pekao and PZU. Some of this remains electioneering; the run up to elections in the autumn is likely to be noisy. The prospect of higher US interest rates and the extent of any China slowdown are the two worries which tempered the outlook for GEMs during the second half of The authorities in China had loosened aggressively over the first half of the year, probably realising they were way behind the curve but they still have a mammoth task in getting the re-balancing right. It is not surprising that the babysteps in opening up the stock market have been so up and down. During Q we added three positions: Sands China, Hero MotoCorp and China Mengniu. We sold BM&F Bovespa. Both Sands China and Hero MotoCorp are opportunistic buys as we took advantage of market falls to start building positions. The Macau gaming sector has been in decline for over 12 months and it is likely we are nearer the bottom as far as GGR (gross gaming revenue) is concerned. Hero MotoCorp was sold down over the first half of the year on weak volumes (from a subdued rural economy). BM&F we rolled into Bank Itau. We have funded these purchases from PLDT in the Philippines and PTTGC in Thailand. China Mengniu is well positioned to be a leader in the dairy sector and, through its partnership with Danone, move up the value chain. Q was one of those panic quarters when investor panic begets more panic. Emerging market equities and currencies were down heavily. Initially it was a mild Chinese currency devaluation which was the trigger. Was this devaluation necessary to allow the yuan to qualify for SDR (Special Drawing Rights) or was it the precursor to a bigger devaluation? The seeds of uncertainty were sown. It is likely there will be some weakness in the Chinese currency in 2016 (say c 3-5%). A one-off devaluation of a certain size would be very negative for both emerging and global markets. That is not what we expect but China will continue to need to adapt to a slower economy. Stock prices in China reached interesting levels during the panic and we added at the margin. The volatility in China s markets is likely to continue but the pricing-in of meltdown scenarios makes for interesting times. India remains a big overweight for the Fund and we are mindful of valuations being somewhat stretched but cyclically, interest rates are coming down and we should see that begin to work itself into the economy over the next 12 months. Many other Fund positions went down in sympathy with China and general emerging market sentiment. Brazil was particularly affected including our position in Bank Itau. At some point the politics will matter less but weak government in this environment has been especially toxic in Brazil. Mexico has, unsurprisingly, fared better. Reform helps and they announced successful auctions of oil blocks as part of the energy sector privatisation. Our South African positions, particularly Nampak and MTN, were weak. We added to MTN but it is affected by sentiment surrounding the oil price given that its 4

6 Investment Manager's Report continued largest market is Nigeria. Our Polish financial exposure, normally defensive, has been hit by electioneering pledges of bank taxes and other levies and whilst something will come in post the October elections, it is unlikely to be as bad as the media suggests. Emerging markets remain in a tricky place. The Federal Reserve not raising rates actually prolongs the inevitable; we welcome lift off as something just as likely to help sentiment as not. The two major worries of China and US interest rates remain and these are likely to cap any lasting bounce in EM equities. During these markets it is important not to get sucked into the selling and to chip away at stocks in the Fund we like for the longer term (where the valuations have become reasonable). Edward Robertson Lead Investment Manager 20 October

7 Comparative Tables Accounting and distribution dates Accounting Distribution Interim 31 March 31 May Final 30 September 30 November Change in net assets per share A Income GBP A Accumulation GBP p p p p p p Opening net asset value per share Return before operating charges^ Operating Charges Return after operating charges^ Distributions on income shares n/a n/a n/a Closing net asset value per share Retained distributions on accumulation shares n/a n/a n/a ^After direct transaction costs of Performance Return after charges -8.57% 5.74% -0.33% % 5.76% -0.33% Other Information Closing net asset value 128, , ,526 1,521,195 1,718,741 2,797,870 Closing number of shares 83, , , , ,885 1,587,073 Operating Charges 1.83% 2.03% 2.06% 1.83% 2.03% 2.06% Direct transaction costs -0.17% -0.07% 0.12% -0.17% -0.07% 0.12% Prices Highest share price Lowest share price B Income GBP B Accumulation GBP p p p p p p Opening net asset value per share Return before operating charges^ Operating Charges Return after operating charges^ Distributions on income shares n/a n/a n/a Closing net asset value per share Retained distributions on accumulation shares n/a n/a n/a ^After direct transaction costs of Performance Return after charges -7.83% 6.26% 0.16% % 6.29% 0.16% Other Information Closing net asset value 51,912,865 8,927,621 5,822,559 29,492,024 19,511,220 7,177,596 Closing number of shares 33,668,563 4,943,305 3,378,281 17,851,403 10,226,258 3,998,428 Operating Charges 1.08% 1.53% 1.56% 1.08% 1.53% 1.56% Direct transaction costs -0.17% -0.07% 0.12% -0.17% -0.07% 0.12% Prices Highest share price Lowest share price

8 Comparative Tables continued Change in net assets per share (continued) B Income USD B Accumulation USD $ $ $ $ $ $ ^^ Opening net asset value per share Return before operating charges^ Operating Charges Return after operating charges^ Distributions on income shares n/a n/a n/a Closing net asset value per share Retained distributions on accumulation shares n/a n/a n/a ^After direct transaction costs of Performance Return after charges % 6.39% 0.45% % 6.40% -3.02% Other Information Closing net asset value $91,259 $114,318 $108,964 $37,601,326 $10,403,209 $4,121,609 Closing number of shares 39,075 39,075 39,075 45,047,782 10,081,453 4,250,163 Operating Charges 1.08% 1.53% 1.56% 1.08% 1.53% 1.56% Direct transaction costs -0.17% -0.07% 0.12% -0.17% -0.07% 0.12% Prices Highest share price Lowest share price With effect from 1 October 2014, the Investment Manager's charge was reduced from 1.00% to 0.85%, then further reduced to 0.75% from 1 January ^^ B Accumulation USD shares were launched 30 April 2013 The foreign exchange rate used to calculate the net asset value and net distribution per share as at 30 September 2015 was US$

9 Comparative Tables continued Change in net assets per share (continued) B Accumulation EUR ^^ c Opening net asset value per share Return before operating charges^ Operating Charges Return after operating charges^ Closing net asset value per share Retained distributions on accumulation shares ^After direct transaction costs of 0.17 Performance Return after charges % Other Information Closing net asset value 1,970,837 Closing number of shares 2,193,400 Operating Charges 1.08% Direct transaction costs -0.17% Prices Highest share price Lowest share price With effect from 1 January 2015, the Investment Manager's charge was reduced from 0.85% to 0.75%. ^^ B Accumulation EUR shares were launched 31 October The foreign exchange rate used to calculate the net asset value and net distribution per share as at 30 September 2015 was

10 Comparative Tables continued Change in net assets per share (continued) B Accumulation DKK ^^ øre Opening net asset value per share 2, Return before operating charges^ Operating Charges Return after operating charges^ Closing net asset value per share 1, Retained distributions on accumulation shares ^After direct transaction costs of 3.51 Performance Return after charges -9.84% Other Information Closing net asset value kr. 976,882,442 Closing number of shares 54,172,962 Operating Charges 0.83% Direct transaction costs -0.17% Prices Highest share price 2, Lowest share price 1, ^^ B Accumulation DKK shares were launched 15 January The foreign exchange rate used to calculate the net asset value and net distribution per share as at 30 September 2015 was kr Operating charges include indirect costs incurred in the maintenance and running of the Fund, as disclosed (but not limited to) the detailed expenses within the Statement of Total Return. The figures used within this table have been calculated against the average Net Asset Value for the accounting period. The return after charges is calculated as the closing net asset value per share plus the distributions on income shares minus the Opening net asset value per share as a % of the Opening net asset value per share. Direct transaction costs include fees, commissions, transfer taxes and duties in the purchasing and selling of investments, which are offset (where applicable) against any dilution levies charged within the accounting period. The figures used within the table have been calculated against the average Net Asset Value for the accounting period. 9

11 Comparative Tables continued Risk and reward profile The Risk and Reward Indicator table demonstrates where the Fund ranks in terms of its potential risk and reward. The higher the rank the greater the potential reward but the greater the risk of losing money. It is based on past data, may change over time and may not be a reliable indication of the future risk profile of the Fund. The shaded area in the table below shows the Fund s ranking on the Risk and Reward Indicator. Typically lower rewards, lower risk Typically higher rewards, higher risk The Fund is ranked 6 because funds of this type have experienced high rises and falls in value in the past. Please note that even the lowest risk class can lose you money and that extreme market circumstances can mean you suffer severe losses in all cases. The indicator does not take into account the following risks of investing in this Fund: Investing overseas can bring additional returns and spread risk to different markets. There are risks, however, that changes in currency exchange rates may cause the value of your investment to decrease and increase. Emerging markets or less developed countries may face more political, economic or structural challenges than developed countries. This means your money is at greater risk. For further information please see the Prospectus. Risk Warning An investment in an Investment Company with Variable Capital should be regarded as a medium to long-term investment. Investors should be aware that the price of shares and the revenue from them can fall as well as rise and investors may not receive back the full amount invested. Past performance is not a guide to future performance. Investments denominated in currencies other than the base currency are subject to fluctuation in exchange rates, which can be favourable or unfavourable. 10

12 Sector spread of investments All sectors in percentage order are shown below Sector % of Fund as at Consumer Goods Financials Technology Telecommunications 8.16 Industrials 5.10 Oil & Gas 3.52 Utilities 1.83 Consumer Services 1.80 Basic Materials 0.93 Net other assets 7.41 Sector % of Fund as at Financials Consumer Goods Telecommunications 9.86 Technology 9.44 Industrials 7.98 Oil & Gas 7.05 Basic Materials 5.69 Consumer Services 2.87 Utilities 1.51 Net other assets

13 Major holdings The top ten holdings at the end of each period are shown below Holding % of Fund as at Maruti Suzuki India 5.20 China Mobile 4.69 Infosys 4.37 Fomento Economico Mexicano Sponsored ADR 3.93 SABMiller 3.84 Samsung Electronics 3.29 OTP Bank 3.08 ICICI Bank 2.92 MTN 2.91 Taiwan Semiconductor 2.73 Holding % of Fund as at Maruti Suzuki India 4.48 China Mobile 3.76 Fomento Economico Mexicano Sponsored ADR 3.19 Infosys 3.16 CTBC Financial 3.01 SK Hynix 2.99 SABMiller 2.98 Sanlam 2.85 Beijing Enterprises 2.78 Bank Pekao

14 General Information Authorised Status PFS Somerset Capital Management Investment Funds ICVC - PFS Somerset Global Emerging Markets Fund (the Company ) is structured as an Investment Company with Variable Capital (''ICVC''), under regulation 12 (Authorisation) of the OEIC Regulations (Open-Ended Investment Companies Regulations 2001 (SI 2001/1228)). The Company does not intend to have an interest in immovable property. The Company is authorised and regulated in the UK by the Financial Conduct Authority (''FCA'') as a UCITS Retail Scheme and ''Umbrella Company'' under the COLL Sourcebook. The Company was incorporated in England and Wales on 17 October 2008 under registration number IC The Shareholders are not liable for the debts of the Company. Buying and Selling Shares The ACD will accept orders for the purchase and sale of shares on normal business days between and Instructions to buy or sell shares may either be in writing to: Springfield Lodge, Colchester Road, Chelmsford, Essex CM2 5PW or by telephone on The ACD has the right to establish facilities for recording telephone calls made or received on this telephone line. A contract note will be issued by close of business on the next business day after the dealing date to confirm the transaction. Report and Accounts This document is a short report of PFS Somerset Capital Management Investment Funds ICVC - PFS Somerset Global Emerging Markets Fund for the year ended 30 September The full Report and Accounts for the Fund is available upon written request to Phoenix Fund Services (UK) Ltd, Springfield Lodge, Colchester Road, Chelmsford, Essex CM2 5PW. Other Information The information in this report is designed to enable you to make an informed judgement on the activities of the Fund during the period it covers and the results of those activities at the end of the period. Risk Warning An investment in an Investment Company with Variable Capital should be regarded as a medium to long-term investment. Investors should be aware that the price of shares and the revenue from them can fall as well as rise and investors may not receive back the full amount invested. Past performance is not a guide to future performance. Investments denominated in currencies other than the base currency are subject to fluctuation in exchange rates, which can be favourable or unfavourable. 13

15 Phoenix Fund Services (UK) Ltd. Registered in England No Authorised and regulated by the Financial Conduct Authority.