“It’s surprising to many advisors that companies from emerging markets pay dividends at all,” said Andrew Miller, portfolio manager of the Laudus Mondrian Emerging Markets Fund (LEMNX) following a presentation to a room of said surprised advisors at the Schwab Impact 2010 conference in Boston in October.
However, said Miller, who runs a total of about $9 billion in mutual funds and separate accounts from London, the emerging markets-companies he invests in have a yield of 2.2%, and “have similar metrics to the U.S. market, but with greater prospects for growth.”
EM investing, Miller says, has given investors a 10% return over the past 10 years, which he says raises the question “Is it reasonable to expect a 6% to 7% return from emerging market-equities?”
He answers in the affirmative, and says such returns moving forward are much more likely than in developed markets.
The Laudus Mondrian approach to picking companies is a value-based dividend discount model (DDM), he explains, in which Laudus Mondrian analysts look for companies expected to grow dividends — after inflation — sustainably over the long term.
That approach has been followed for all Laudus Mondrian’s portfolios for 20 years, he reports, and says the same approach has been applied to emerging markets since 1996, which he modestly points out have yielded “good results, outperforming its benchmark [the MSCI EAFE].”
The fund itself will have its three-year anniversary on Nov. 5, 2010. With Miller as manager; year to date as of Nov. 4, it was up 21.4%.
Miller says that “ultimately, we’re driven by valuation” of individual stocks, not countries, though he effortlessly displayed his knowledge of many countries in the interview.
Miller and his team rack up the frequent-flier miles, since they always meet with management in person before investing in the company. He also noted that individual countries have their own “culture, though maybe the right word is ‘trend,’” when it comes to whether companies in those nations pay dividends.
South Korea, India and Russia tend not to pay dividends, he says, while those in China, Brazil and South Africa do.
"Some Chinese companies pay back 60% of earnings to shareholders,” he says, while most “Indian companies hold onto their earnings.”
Time for Turkey?
As of Oct. 27, LEMNX was overweight in Turkey, he said, accounting for about 7% of the portfolio compared to the MSCI EAFE benchmark’s 2% weighting there.
“Turkey is a mini-China for Europe in manufacturing,” which is important since the customer base for those manufactures “must have confidence in the supply chain.”
He says the country has been “well managed” for the past 10 years, and that he’s not worried about hyperinflation or even the political risk from Islamic fundamentalists in Turkey’s traditionally secular society.
He is particularly keen on Turkey’s banking sector, partly because of the country’s strong domestic consumer growth.
Addressing about how to assess a country's political risks, Miller said “we do a best case-worst case scenario, and look to invest where the range” between best and worst cases is “narrow.”
While in Turkey “we don’t see major risks politically, one has to be more cautious in Russia,” he added.
Concluding, Miller says it’s not just advisors who need to learn more about how emerging markets behave: “Investors in the developed world are only in the early changes of changing their mindsets on international investing.”
He argues that the “riskiness of emerging markets is overblown.” While he admits “that doesn’t mean there won’t be blips along the way,” in referring to the emerging-markets companies he invests in, he asks “Can you get a 3% dividend yield with growth of 4% to 5%? It’s achievable.”