Even though emerging-markets stocks are attracting significant inflows from foreign and domestic investors, Austin Forey maintains that shares are still reasonably priced.
"Valuations are not a source of concern, in aggregate," says Forey, manager of the $315- million Mackenzie Universal Emerging Markets Class and London, England-based managing director, global emerging markets at JPMorgan Asset Management. "If we look at price-to-book multiples, or price-to-earnings, they are not very far from the long-term averages. They look pretty normal, and not over-cooked at this stage."
Yet capital inflows are making a difference. "It's important for two reasons. First, it's often intrinsically inflationary," observes Forey, who shares duties with co-manager Ashraf El Ansary. "Second, if the flows continue as they have in the last 12 months, they will pose some interesting policy changes. Brazil, for instance, imposed a small tax on inflows in the bond market."
From a corporate perspective, Forey notes that the low cost of money is posing challenges, especially for companies that borrow in foreign currencies. "When that foreign-exchange relationship goes the other way, as happened in 1998, balance sheets could get into real trouble. We're very interested in corporate balance sheets."
The fund's largest weightings by country include China, Brazil and India, with 18.5%, 16.6% and 12.8% respectively. But Russia, also one of the so-called BRIC countries, makes up only about 3.7 %.
The lack of Russian content is partly attributable to that market's large oil and gas component and its lack of diversification by industry. "Domestically oriented stories that we have bought around the world are few and far between in Russia," says Forey, who as a bottom-up investor pays little heed to the country weightings of the MSCI Emerging Markets Index.
Backed by a team of 30 specialist investors based in New York and Hong Kong, Forey looks for companies that have a strong return on capital and solid long-term growth prospects.
One representative holding is India's Housing Development Finance Corp. "The bank is very profitable and serving a very underdeveloped market," says Forey, adding that the bank boasts a return on equity in the neighbourhood of 25% to 30%. "A lot of value is being created by the company. It's doing something well that its competitors find hard to match."
A native of St. Andrews, Scotland, Forey is a 22-year industry veteran who discovered his niche purely by accident. In 1987, he planned to pursue an academic career after he had completed a PhD thesis on the work of Giovanni Boccaccio, the 14th century Italian author of The Decameron. Earlier, Forey earned a bachelor of arts in modern languages at Cambridge University in 1984.
Frustrated by the lack of jobs in his areas of study, Forey found a viable alternative in the financial world. "I thought it was different, and interesting, and I liked the people."
At the same time, Forey learned that his academic background was useful in stock-picking. "Any exercise in literary criticism is an exercise in argument. To some extent, any exercise in forecasting the future is also about having a good argument," he says. "It's all about the quality of the thought process."
In 1988, Forey began working as an analyst of UK financial-service stocks at Robert Fleming. He became head of UK research and eventually had portfolio responsibilities. Six years later, he seized an opportunity to work on an embryonic emerging-markets investment trust.
Ever since then, he's enjoyed working in the same area, although assets under management have grown significantly to about US$12 billion. In 2000, the firm was acquired by Chase Manhattan, which later merged with JPMorgan.
Forey, who assumed the Morningstar 4-star rated fund in September 2005, tends to own about 60 names and limits single holdings to about 4% of fund assets. He is a long-term investor, as evidenced by his low portfolio turnover of 19% for the 12 months ended March 31.
Forey notes that rising living standards in the emerging markets mean more opportunities for financial-services companies, a sector that could outpace GDP growth. To capitalize on that trend, he owns firms such as Ping An Insurance Group Co. of China Ltd.
He had watched the Hong Kong-listed Ping An peak at HK$100 and then slump in late 2008 to HK$25. "We had a significant sell-off, with not much changing in the underlying business. That had to be of interest to us."
While the shares have more than tripled since then, that does not mean it's time to sell. "The business was far too cheap when we bought it," says Forey. "It's a business that has a long opportunity in front of it. The retail financial-services industry is still very immature in China."
