Lessons from Lutetia following previous booms and busts
Not many emerging market fund managers can remember market cycles going back to 1994, but Lutetia Capital’s Claude Tiramani can. He believes most investors have failed to take heed of those tumultuous times in their current strategies.
With more than $10bn assets under management, Claude Tiramani has been managing emerging markets funds for many years, but he talks with the enthusiasm of someone who has just discovered something new and exciting. He describes himself as a country-based stock picker and value investor.
The wider context for his emerging market focus is consensual: global economic growth prospects are best in emerging markets, capital is moving from the West to the East, and the biggest long-term emerging market story is China.
Based in Paris, Tiramani launched his latest fund last November, but feels even relatively sophisticated investors have learned little from previous boom and bust cycles in the sector. Many remain bound by a herd mentality, which means “they all want to buy when the sky is blue”.
A one-time manager of a variety of outperforming China, Russia and BRIC funds for Parvest, he has clocked up 20 years of beating emerging market benchmarks, but retains a healthy respect for the unexpected.
Tiramani sees parallels between the current global downturn and the recession of 1994, which followed four boom years. Then, as now, the US was burdened with high debt, low savings levels and tepid economic growth.
But the much-debated ‘de-linking’ of emerging markets has never quite occurred. Emerging markets tend to benefit from strong inflows until the US starts to recover, at which point investors returned to bigger and more liquid markets.
“It is intensely frustrating to see otherwise very solid emerging markets go down because of what might be happening in the US,” Tiramani says.
What is different in 2011 is the more robust economies and financial infrastructure in key emerging markets. Where emerging markets equities were at a 50% premium to developed markets at one point pre-1994, they are now at a 15% discount, or in line with them. Profitability among major emerging market companies has improved dramatically.
“Emerging economies are clearly more resilient – they are already at pre- crisis levels,” Tiramani notes. “Emerging markets used to be a way to leverage the global economic cycle, but this is now broken. They are far more a play on the growth of the domestic middle-class growth, or internal demand.”
Through the France-domiciled Lutetia Capital Emerging Opportunities Ucits III fund, Tiramani runs a network of local partners, including the Cisneros Group, Financiere Otto and M Square in Latin America, as well as Maoming Investments. In Eastern Europe and the Middle East, he works with Dayim Holdings (for MENA) and the Millennium Group (Russia).
The fund, with daily liquidity, has share classes for both institutional and retail clients. Fees include a 15% performance participation fee and a front load fee of up to 3%, but there is no exit fee. A hurdle rate is linked to the Dow Jones Emerging Markets Consumer Titans 30 index.
The portfolio has at least 60% of its assets in stocks, in 50-80 positions. The largest holdings by country are China (35.5%), Brazil (16.5%), South Korea (15.6%), with other significant holdings in Russia, Thailand and Indonesia.
By sector, the largest holdings are financials, consumer discretionary stocks, consumer staples, industrials, materials and healthcare. Tiramani observes that traditionally, institutional investors are more likely to access emerging markets through bonds, which is why the asset class has seen such a run-up in recent years.
But retail investors and intermediaries prefer equities, often with quite aggressive positions, which partly accounts for the boom and bust cycles.
He sees institutional investors now turning to emerging equities as the bond “super boom”, fuelled by quantitative easing programmes in mature markets, comes to an end.