Alternative Investments: Somerset Capital’s New Fund To Pick ESG Winners in EM

September 3, 2020 | Alternative Investments, News
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Somerset Capital Management was founded in 2007 as a specialist Global Emerging Markets investment management firm.

The Somerset Emerging Markets Future Leaders UCITS Fund, a new fund from Somerset Capital Management, seeks to generate returns from the growth potential in small and medium-sized ESG-friendly companies in emerging markets across the globe.  Swedish national pension fund Första AP-fonden (AP1) has already provided seed capital of about $ 350 million to the fund. (Investment Week)

Note that in March AP1 became the first pension fund in Sweden to announce it was divesting all fossil fuel companies. The rationale for its decision: these investments were risky considering the international transition in favor of a low carbon global economy.

The Somerset Emerging Markets Future Leaders UCITS fund

The new fund from Somerset Capital will target emerging market businesses. These should have a market capitalization in the range of $ 750 million-$ 13 billion.

Somerset will evaluate these investments using its proprietary ESG investment criteria. On its website, the firm describes its investment philosophy as active stock-picking with high conviction and for the long term.

In line with this strategy, the new fund will invest in a portfolio of 40 to 50 companies. Typically, the holding period would be around 3 to 5 years. These would be companies that can grow earnings, book value, and cash flow per share sustainably over a market cycle. Further, they should have the potential to grow into industry-leading businesses.

The fund will be co-run by portfolio managers Edward Robertson and Antony Linehan.

Somerset Capital investments not the “usual suspects”

“Emerging markets have been heavily out of favor for some time but we believe the recent volatility has given investors an opportune moment to buy into high quality smaller and medium-sized companies at very attractive valuations,” says Linehan. “The companies we invest in do not typically feature in the list of usual suspects you find in funds elsewhere nor the passive vehicles.”

Profits at Somerset Capital drop by 20%

For the second year in a row, Somerset Capital Management reported shrinking revenues.

For the year ended 31 March 2020, the firm’s operating profit declined to £ 20.8 million. It was down about 20% from the £ 26.2 million it earned in 2019. Year-on-year turnover slumped 12.3% from £ 38.8 million in 2019 to £ 34.0 million in 2020, according to Portfolio Advisor.

The indifferent results are due to the coronavirus pandemic.

However, in March, Somerset EM Discovery Fund manager Mark Asquith said emerging markets presented a “once in a generation opportunity for supernormal returns.”

He further said that emerging markets as an investment class would bounce back similarly as they did after the global financial crisis.

Related Story:   The Case for Emerging Market ETFs, by Andrew Hallam

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