Arjun Divecha
GMO Emerging Markets Funds
by Marla Brill
MFI Publisher
Part II
Click here for Part I
Location, location, location
When it comes to emerging markets, the
real estate market mantra “location, location, location” applies in spades. In
US markets, some stocks or sectors can do well when others do poorly. Not so in
emerging markets, says Divecha, where stocks tend to move in sync with the
country’s overall market.
“Individual stock selection in emerging
markets adds much less value than it does in the US,” he says. “In 1997, if you
picked the ten best stocks in Malaysia, they might have dropped 70 percent
instead of 90 percent for the overall market. There’s not much comfort in that.”
He believes that 80 percent of the added
value of active management comes from country selection, while only 20 percent
comes from stock selection. Country selection is critical because, unlike
developed nations that depend heavily on the health of their respective
economies to support each other, the more insular emerging market countries can
be completely out of step in their economic cycles. The portfolio is broadly
diversified with some 300 names, reflecting the relative importance of country
rather than individual stock representation.
Divecha looks for countries whose
markets are just beginning to turn up, or are on the verge of doing so.
“Countries that have done well recently will continue to do well,” he says. “And
those that have done badly in the last three to five years tend to do well over
the next one to two years.”
Right now, the fund’s largest overweight
position is in the TIP (Thailand, Indonesia, and the Philippines) markets. All
of these markets are in a recovery phase, he says, with the worst of their
economic turmoil behind them. One TIP holding, Land and House, is one of only
four or five real estate developers in Thailand that remain standing after the
Asian economic crisis in the late 1990s. At $1 a share, it sells at 14 times
trailing 12-month earnings—a bit more expensive that the portfolio’s typical
value stocks, but a price Divecha is willing to pay for the company’s strong
growth prospects.
Russia also looks attractive because of
a stabilizing political system, continued major financial and economic reforms,
increasing attention to shareholder rights, and cheap valuations. Rising oil
prices, which have sent doubled from $10 a barrel to $20 a barrel in the last
two years, have been a driving force behind the country’s improved fortunes. The
one impediment to Russia’s improving outlook, he says, would be a drop in oil
prices to less than $15 a barrel. For the time being, though, companies like
portfolio holding Yukos Oil are enjoying rising stock prices and rising
earnings. The stock is selling at five times its year-ago level, but still
trades at just four times trailing 12-month earnings.
Countries that Divecha finds less
attractive include Mexico, whose market is overvalued and whose economy depends
too heavily on exports. Hefty valuations of stocks in China and Israel also look
unappealing.
GMO Emerging Markets Fund At-A-Glance
Manager: Arjun Divecha; since 1993
Assets: $1.5 billion
Top five holdings: Samsung Electronics,
Taiwan Semiconductor Manufacturing Corp., Yukos Oil, Telkom Indonesia.
Telephone: 617-330-7500
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