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Investing against the grain to harvest the best emerging market returns

2023 has been another challenging year for emerging markets relative to developed ones. As we enter the final month of the year, the MSCI EM index lags the MSCI World equivalent by 12% as geopolitical tensions, disappointing earnings growth and a sluggish Chinese economic have weighed on sentiment, while stellar returns from a handful of US technology companies have lifted broader DM equities[1].

Against these headwinds, SKAGEN Kon-Tiki continues to perform strongly, delivering solid absolute returns and leading the EM benchmark by over 3% year-to-date[2]. This outperformance is particularly impressive given the portfolio is underweight in the strongest performing markets of Taiwan (+17.0%) and India (+8.2%) and has around a quarter of assets invested in the relative weakling of China (-12.9%)[3].

“Stock selection has continued to drive fund performance this year,” Portfolio Manager Cathrine Gether explains, “Chinese and Korean companies dominate the list of our best contributors this year, despite lacklustre market performance. This shows the advantage of active stock picking and also long-term thinking – companies like Hyundai Motor, LG Electronics and Samsung Electronics which are among our top performers have generated strong portfolio returns over many years.” The fund’s largest contributor this year is CNOOC, with gains from the Chinese energy company single-handedly offsetting the combined losses from the five weakest holdings.

Higher quality at lower prices

Companies are chosen using a contrarian investment approach – the portfolio’s Active Share which measures how far it differs from the market averages nearly 90%[4] – and price discipline. The fund is currently around 50% cheaper than the EM index using earnings and book value multiples, with estimated upside of around 70% over a two-to-three-year investment horizon[5].

The fund’s expected returns are based on a bottom-up assessment of the holdings’ mispricing, as Portfolio Manager Espen Klette outlines: “Rather than assessing the outlook for countries, sectors or trends, what matters most is the price we pay for companies versus our calculation of their intrinsic value. We want to make sure we get better quality companies than what we pay for them. This explains why we are overweight small and mid-caps versus index – these companies tend to be mis-priced more frequently as they receive less attention from investors and analysts.”

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Sell discipline is another important driver of Kon-Tiki’s strong performance this year. Ten companies have left the portfolio in 2023, with several sold after achieving their target prices, including Foxconn, Hisense and Gedeon Richter. Others have departed for breaching their investment thesis, for example Russian holdings Magnit and X5 Retail Group.

The third group of disposals are those sold to fund investments in companies offering better risk-reward, such as Tres Tentos and Vina Concha, and with the team having a long list of potential opportunities, the bar for portfolio inclusion remains high. The disposals have been replaced by nine strong but undervalued companies, including Simpar, Grupo Exito, Genomma Lab, KB Financial and Phinia. You can read about these exciting new investments in the fund’s monthly reports.     

Focus on risk

Following these changes, Kon-Tiki now holds 46 companies in a concentrated portfolio – the 12 largest positions represent around 50% of assets – spread across 19 countries and 9 sectors. “We invest bottom-up but also manage risk top-down to ensure that the fund is carefully hedged for a range of inflation and economic growth scenarios”, Klette explains, “We aim to strike a balance for clients so that the portfolio is sufficiently diversified across sectors that outperform at different stages of the economic cycle and inflationary environments, but concentrated enough that we don’t dilute our best ideas.”

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The current sector positioning is such that the fund is likely to perform strongest in a high inflation, low growth environment, although the valuation and quality of its holdings should see it outperform the broader EM index in most macro scenarios. While this top-down analysis is important for portfolio risk monitoring, buying the right companies at the right prices remains key to fund performance.

“The greatest risk comes from overpaying for an asset – we mitigate this by only paying prices that offer a high margin of safety,” explains Gether, “Picking the right risks is also important. Our best investments are often made when sentiment is negative and risk is perceived to be high – valuation provides both a safety net and springboard for the best risk-adjusted returns.”

The fund’s positive performance in 2023 means that Kon-Tiki also leads its benchmark over one-, three- and five-year periods. With EM valuations generally close to record lows and a more economic environment on the horizon, the chances for continued strong relative and absolute returns ahead look good.


[1] Source: MSCI. MSCI World Index +15.4%, MSCI EM Index 3.4%, in EUR as at 30/11/2023.
[2] Source: SKAGEN. In EUR, net of fees as at 30/11/2023.
[3] Source: MSCI. MSCI Country index returns in EUR as at 30/11/2023.
[4] Average 2016-2023. Calculated at the issuer level.
[5] Weighted top 12 upside: 72%, weighted top 35 upside: 69% as at 31/10/2023.

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Historical returns are no guarantee for future returns. Future returns will depend, inter alia, on market developments, the fund manager’s skills, the fund’s risk profile and management fees. The return may become negative as a result of negative price developments. There is risk associated with investing in funds due to market movements, currency developments, interest rate levels, economic, sector and company-specific conditions. The funds are denominated in NOK. Returns may increase or decrease as a result of currency fluctuations. Prior to making a subscription, we encourage you to read the fund's prospectus and key investor information document which contain further details about the fund's characteristics and costs. The information can be found on www.skagenfunds.com. Storebrand Asset Management administers the SKAGEN funds which are by agreement managed by SKAGEN's portfolio managers.

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