Citywire printed articles sponsored by:
View the article online at http://citywire.co.uk/wealth-manager/article/a711730
Is a ‘revitalised’ Rafi Emerging index due a turnaround in performance?
by Robert St George on Oct 29, 2013 at 08:15
Meanwhile, Rafi is underweight China, India, consumer goods and technology in comparison.
To put a more positive spin on it, Rafi is light on investments that appear frothily expensive and poised to profit as cheap assets rerate. Rafi’s greatest active allocation, for example, is to energy businesses. These trade on an aggregate price-to-earnings ratio of 5.4x, with prices to book and sales of 0.6x and 0.5x respectively, and a 4% yield.
It is least exposed to consumer names, which are priced at 16.7x earnings and 2.3x book value, and 2% yield.
All together, the Rafi portfolio has an earnings multiple of 8.7x and a 3.9% yield, compared with equivalent figures of 11.5x and 3.2% from the FTSE Emerging All Cap index.
So, based on these attributes, would it be wise to back Rafi to dispel its disappointing run at long last?
‘What has been noticeable over the past three years is that the Rafi emerging markets strategy has underperformed its market capitalisation father,’ acknowledges Charles Aram, chief executive of Henderson Rowe.
‘Does this mean that the strategy is no longer valid or is it a function of the structural change in the emerging markets as they mature?’
Aram has come to the latter conclusion, and is buoyed by the fact the Rafi index has become revitalised in recent months. Although still behind its mainstream equivalent year-to-date, it enjoyed a strong third quarter. Over the three months to the end of September, Rafi returned 7.2% while the FTSE Emerging All Cap index posted 4.4%. For Aram, this was ‘a reversion to the mean’, driven by surges in both Russian and oil equities.
The three largest positions in Rafi are currently Petrobras, Gazprom and Lukoil.
During the quarter shares in the three energy giants surged by 16%, 32% and 10%, respectively. The FTSE Emerging All Cap index’s foremost constituent, Taiwan Semiconductor, plunged by 7% over the same period.
‘It remains to be seen whether the deep value discount that the Rafi Emerging Markets index displays will revert more over the next 12 months, but right now I think any value-oriented investor would prefer the Rafi portfolio,’ Aram added.
News sponsored by: