Paris Forum vets emerging markets, absolute return funds

Emerging markets and the diverse uses of absolute return strategies were the focus of presentations to fund selectors at the InvestmentEurope forum in Paris.

Uncertainty continues across European markets but fund selectors remain interested in emerging markets and absolute return funds. The typical themes associated with emerging markets – commodities, infrastructure and non-correlated growth — have evolved into more sophisticated strategies focused on regions, styles or sectors.

Renaissance Capital’s Ottoman fund, UBS’ Asia Consumption fund and F&C Thames River’s emerging equity focus presented delegates with new insights into the asset class. Each has adopted themes and strategies which the managers say will deliver outperformance.

Aziz Unan, portfolio manager of the €42m Ottoman fund, is a stock picker targeting the Turkey, the 6th largest economy in Europe and the 16th largest in the world.

He points out that Turkey’s economic profile offers everything investors want from emerging markets: strong GDP growth, favourable long term demographics, robust foreign investment interest, improving domestic corporate governance and liquidity. His own strategy results in a low correlation with developed markets.

He describes Turkey as an “over-brokered but under-researched” market. It hosts more than 100 brokers, but most only cover a limited number of stocks.
“There are many quality companies not covered by the brokers, and valuations at the moment are extremely compelling. The stock market is liquid and diversified, trading $1.2bn to 41.5bn a day. The country is entrepreneurial and dynamic.

Turkey’s demographics are supportive of long term growth. The average age of the population is 29, against 44 for the rest of Europe. There are 19 million students (primary to university level) – one third of the population is studying. In Greece, 68% of the workforce is employed by the state; and in the UK it is 54%. In Turkey it is just 20%.

“We only need (political) stability in Turkey for the market to flourish,” said Unan.
Domestic investors show a preference for real estate and gold (Turkey is the second largest consumer of gold worldwide, after the US), but both are now fully priced, so equities are looking a more attractive alternative.

On the downside, Turkey is a net importer of energy and there are no local energy subsidies so fuel price fluctuations feed straight through to the consumer. “If you are concerned about inflation Turkey is a very good lead indicator,” said Unan.

His €42m fund holds some 70 stocks, selected from the 330 on the Istanbul stock exchange and other regional markets. Non-Turkish stocks include Saudi Mobile Y and Russia’s Sperbank. The correlation of the fund to the Europe index is minus 4, so it outperforms its index with less than half the volatility.

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