e-fundresearch: Which benchmark do you adhere to?
Godfrey & Vaight: The benchmark of the fund is the MSCI Emerging Markets Index, but we do not adhere to the benchmark in the management of the fund.
e-fundresearch: Are you also responsible for other funds at the moment?
Godfrey & Vaight: M&G Asian Fund, since March 2008.
e-fundresearch: What is the total volume that you manage in all your funds?
Godfrey & Vaight: € 1,061.5 billion across M&G Global Emerging Markets Fund (€ 468.4m) and M&G Asian Fund (€5 93.1m) as at 31 October 2010.
e-fundresearch: Regarding the performance: which performance did you achieve since the beginning of the year and in the year 2009? Absolutely and relatively to the relevant benchmark?
Godfrey & Vaight: The fund was launched in February 2009, the performance year to date is 18.2%, whereas the MSCI Emerging Markets index had a performance of 17.9% as at 31 October 2010.
e-fundresearch: How content are you with your own performance in the last years and this year?
Godfrey & Vaight: We are very pleased with the long-term performance which remains strong. The fund is first quartile since launch, having returned 53.6%pa compared with 44.8%pa for the sector average (Morningstar Equity Global Emerging Markets Sector) and 45.9%pa for the benchmark (as at 31 October 2010).
We are also pleased because the outperformance has been delivered in the way it was intended. Stock selection, our key area of expertise, has been the key driver of performance and we have added value across a broad range of countries and industries.
e-fundresearch: How are you able to deliver added value for your investors with your performance?
Godfrey & Vaight: We focus on value creation, not economic growth, because history tells us that value creation, namely a company’s return in excess of the cost of capital, drives share price over the long term. Economic growth is an interesting talking point for many investors but has been a poor indicator of future stockmarket returns. We believe there are two good reasons for this: firstly, growth doesn’t always create value for shareholders and secondly, investors have a habit of overpaying for growth.
By contrast, value creation has excellent explanatory power, so corporate governance is extremely important for investors. Corporate governance really matters in emerging markets because better corporate governance leads to better operating performance, which is turn leads to better share price performance.
We also take a deliberately long-term view in our investment approach. There is a fundamental mismatch between the time horizon of companies (long term) and that of many investors in emerging markets (short term). Emerging markets are strongly influenced by short-term momentum – a situation which often results in share prices becoming detached from company fundamentals. These anomalies provide excellent opportunities for stockpickers like ourselves. Good company fundamentals will be recognised by investors over time and we believe that market inefficiencies are best exploited by a disciplined bottom-up approach. Understanding company fundamentals and valuations is therefore crucial – this is where we add value.
e-fundresearch: How long have you been a fund manager already?
Godfrey & Vaight: Michael Godfrey has been a fund manager since March 2008 and Matthew Vaight since May 2007.
e-fundresearch: What were your biggest successes and your biggest disappointments in your career as fund managers?
Godfrey & Vaight: The biggest success has been to deliver excellent returns for our investors at the fund level and we have been able to do that across different market conditions by backing our conviction in our disciplined process. Noble Group, a Hong Kong-based commodities supplier, and Banco do Brasil, Latin America’s largest bank, have been among the most rewarding investments on a stock specific basis, but we believe the good performance at the fund level is the outcome of a sound investment approach.
In terms of disappointments, our investment in Citic Pacific, a Hong Kong-based conglomerate, stands out. The shares, held in the M&G Asian Fund, collapsed in late 2008 after the company predicted a $2 billion loss due to unauthorised currency transactions. Given that the hedging activities went undetected by the company, it would have been difficult, if not impossible, for an outsider to spot these errant practices.
It is important to note, however, that rogue traders are not unique to Asia and we will never be able to eliminate the risk of financial mishaps completely. Having said that, a broad range of companies in the region, and the rest of emerging markets, are committed to becoming better businesses and we believe that improving standards of corporate governance will have a positive influence on equity market returns. That said, we aim to minimise the risk of company specific problems by ensuring that the portfolios are sufficiently diversified.
e-fundresearch: What kind of capital market situation do we have at the moment? How do you act in this environment?
Godfrey & Vaight: Despite the volatility in stockmarkets this year, the valuations remain attractive in emerging markets. We believe that the potential for a structural improvement in corporate returns and the long-term potential for profitable growth is not fully reflected in share prices. We are continuing to find plenty of attractively valued companies with sound business models and disciplined management teams right across Asia, Latin America and EMEA. We firmly believe that bottom-up stock selection is the optimal way to make the most of market inefficiencies and we are confident that patient investors will reap the rewards of this strategy in the long run.
e-fundresearch: What are the special challenges in this environment?
Godfrey & Vaight: Given the uncertainties in the global economy, it is possible that we return to a sentiment-driven market where valuations are ignored. This type of environment provides a headwind for the fund’s approach which is committed to the analysis of company fundamentals and valuations. We believe our tried and tested investment process will stand the fund’s investors in good stead over time.
e-fundresearch: What objectives do you have till the end of the year and in the mid term for the upcoming 3 to 5 years?
Godfrey & Vaight: We have a long-term investment process which we stick with consistently. We are long-term investors and we remain optimistic that the changes taking place in corporate culture in emerging market companies will lead to high profitability and more value creation for shareholders. Improving corporate governance is a multi-decade theme, in our view, which is not going to be derailed by short-term market movements or the vagaries of economic cycles.
e-fundresearch: What motivates you in your job?
Godfrey & Vaight: The motivation for our job is finding the next good stock. We are excited about the changes taking place in emerging markets ate the corporate level and we are in the privileged position of being able to meet the best management teams in Asia, Latin America and EMEA. We take our responsibility as shareholders seriously and remain focused on our ultimate goal of generating excellent returns for our investors.
e-fundresearch: Thank you for the interview!