You may not, until now, have heard of Brilliance China Automotive Holdings, but Templeton Emerging Markets Investment Trust has. The oddly named manufacturer, which is a Chinese joint venture partner of BMW and Renault, was the trust’s star performer in the first half.
It took some profit in Brilliance “based on the strong performance over the period” and it remains one of the trust’s largest holdings, according to its most recent update.
The holding provides an illuminating starting point for weighing up the merits of the trust against other paths into risky but rapidly growing markets. There are two initial questions to ask. The first: should you be investing in more emerging markets? The second: is an actively managed investment trust the best way of doing so?
On the first question, aspects in the rear view mirror look satisfactory. The MSCI emerging markets index, the main benchmark, is up 32 per cent over the past year, having rallied strongly from early 2016 on. The last big wobble came when China devalued the yuan in August 2015, which came alongside the appreciation of the dollar.
That emerging markets have been on a strong run for the best part of two years is itself reason to pause for thought. Paul Manduca, chairman, acknowledged as much last week when the trust released its half-year figures: “Having experienced a continuing strong run in markets, we are mindful of the current level of valuations but . . . there are strong grounds to believe that there remains the potential for further growth from your company’s investments.”
Yet the wheels are not falling off the Chinese economy and the combination of economic growth and modern technology should open up opportunities that cannot be matched in more mature markets.
The second point, on whether active managers are the best source of emerging market exposure, is an interesting one. The lacklustre performance of highly paid stock-pickers against passive index trackers has been much commented on. But this appears not to be the case for emerging market funds.
One argument is that there are more state-controlled enterprises in emerging markets, which fare badly, because of historical legacies or doing the government’s bidding rather than that of their shareholders. While the index fund swallows these up like an unwary tourist in an Asian street market, the fund manager can deftly sidestep the less appetising prospects and justify his fees. This is where Templeton comes into its own. It punches beneath its weight on Chinese equities, with good reason. It steers clear of banking and telecoms stocks where government is the majority-shareholder.
“The Chinese market has had a good run and we remain more selective,” was how Carlos Hardenberg, managing director, put it. So while China and Hong Kong are 23 per cent of holdings, they represent 29.5 per cent of the MSCI Emerging Markets Index.
It uses this discretion to punch above its weight in certain sectors (notably consumer discretionary goods) and countries (Russia, Brazil, and Thailand). A quick scan shows that this is not a list of “hit-and-hope” investments. It includes a chunk of Massmart, a subsidiary of Walmart, the world’s largest grocer, and Unilever, one of the biggest companies in the FTSE 100.
Both find a place thanks to their exposure to the buying power of emerging consumers in growing economies. This is an approach that makes more sense than the scatter-gun approach of passive investing.
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Why Investing in emerging economies rewards discernment and Templeton Emerging Markets has a track record
McColl’s
It is no exaggeration to say that it is all go in the world of wholesaling and convenience store retailing. Palmer & Harvey collapsed into administration last week, causing significant job losses and disruption; Tesco is in the thick of a £3.7 billion takeover of Booker that could transform the industry; and the Co-op is tying up with Nisa Retail, a rival convenience stores retailer.
In a sector so beset by structural change and intense competion, it can be hard to back the right horse, but McColl’s is worth a look. It has an estate of 1,279 McColl’s convenience stores, 332 newsagents branded Martin’s and in Scotland operates under its RS McColl heritage brand. It is also the largest operator of post offices in the UK, with 588 in-store counters and branches.
The retailer has just come to a year in which sales have topped £1 billion for the first time, with a near-29 per cent leap in the final three months to November 26 after its acquisition of 298 stores from the Co-op. Full-year like-for-like sales are up 0.1 per cent.
So far, so good, but the real potential in McColl’s lies in the future. Its scale is increasing, most recently through the acquisition of the Co-op stores portfolio but also through individual store purchases. Its “Project Refresh” refurbishment programme has been so successful that it plans to do up another 100 existing stores next year.
McColl’s is also selling profitable fresh food and food-on-the-go products and fewer lower-margin cigarettes, magazines and newspapers. Its range of fresh food will improve further come January when a wholesale supply partnership with Wm Morrison to provide a full range of “supermarket-quality” Safeway-branded products begins.
McColl’s is in a tough sector and faces some short-term cost increases as it handles the disruption caused by the collapse of Palmer & Harvey, which used to supply 700 McColl’s stores. Nevertheless, it is taking the right self-help measures, is on track to have a dividend that is twice covered by earnings within the next six to nine months and has a yield of just a touch under 4 per cent.
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Why Self-help measures are paying off and McColl’s might yet become a target
