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Four key Baillie Gifford emerging market calls
by Annabelle Williams on Dec 11, 2012 at 07:29
From rice machines to micro-lending, the emering world offers a breadth of opportunities. Baillie Gifford's emerging markets team give a rundown of the best stocks and bonds in their top-performing funds.
Asia’s populations are growing rapidly and becoming wealthier, but one thing not likely to change in the near future is the demand for rice as a staple food.
The way rice is produced, however, is set to change to more closely mirror European and American grain production – meaning huge reliance on machinery and much less need for human hands in harvesting.
Japanese company Kubota is a leader in agricultural machinery used to harvest rice and its technology is so sophisticated that the number two in the market has even admitted it cannot copy the machines.
‘The mechanisation of agriculture is at quite early stages,’ Citywire AAA-rated manager Matthew Brett explained.
‘Kubota specialise in rice and they have spent decades expertly perfecting pieces of key kit. The Chinese number two said they know how to take it apart but they can’t put it back together so they can’t make one. I think that’s likely to stay the case for some time.’
Brett’s Bailie Gifford Japanese fund is ranked 5th out of 61 in the Japan sector over three years. The fund has returned 19.35% over the last three years compared to 2.64% in the Topix TR benchmark.
Colombian local currency bonds
Sally Greig has had exposure to Colombian local currency bonds for the last four years in the top-ranking Baillie Gifford Emerging Markets Bond fund she co-manages alongside Steven Hay.
Greig argues the market is overly focused on Colombia’s high crime rates, and is missing the positive side of the fiscal reforms that have taken place since the end of the civil war.
‘Colombia we have liked to quite a few years now. They have been pursuing sensible fiscal policies but the market has been overly focused on crime rates and put too much of a discount on Colombian assets because of its history,’ she said.
‘But if you had invested in Colombian bonds over the last four years you would have doubled your money.’
The fund is ranked first out of 17 in the Emerging Markets Global Local Currency sector over three years and made a return of 42.3% over the period, compared to 32.27% in the Barclays EM Local Currency Government -10% Country Cap TR GBP benchmark.
Indonesia is a very underpenetrated market for banking, where most people do not have a bank account and loans to GDP are less than 30%.
So not only does local micro-lender Bank Rakyat have a lot of scope for growing its market share, but it also benefits from an established position in the market, having been set up in the 1970s.
Roderick Snell, co-manager of the Baillie Gifford Pacific fund says he is looking for Asia’s next Unilever or Coca-Cola and has been a long-standing holder of Bank Rakyat, in part because he describes its management as ‘one of the best teams in Asia’.
‘They have a strong competitive advantage with 30 years of credit history, so what they can loan is actually cheaper than the competition,’ Snell explained. ‘They are very well capitalised and have very good management… and finally there is the valuation.’
The fund has returned 39.52% over three years compared to 27.86% in the FTSE AW Asia Pacific ex-Japan.
Energy represents a huge opportunity in China as the growth in private wealth and industry sees the country consume more and more resources.
Mike Gush, manager of the Baillie Gifford Greater China fund, rates gas distributor Kunlun Energy for its growth prospects and argues investors are failing to recognise the stock’s value.
‘China’s gas distribution is tiny compared to the opportunities,’ he said. ‘This is a company that doesn’t really worry about price. They have a very strong state-owned part and have been buying assets at pretty favourable prices.’
‘A lot of the acquisitions are growing extremely quickly – and people are valuing them on last year’s earnings rather than what they what they could be earning,’ he argued. ‘We think the prospects for this company are very good.’
Mike Gush’s Greater China fund is ranked eighth out of 14 in the Greater China sector, but has struggled to perform against benchmark, providing a return of 3.06% over the last three years compared to 15.1% in the MSCI Golden Dragon TR index.