The Fund Manager: A man emerging into a very grown-up market

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The Independent Online
FUND MANAGEMENT is in Henry Thornton's blood. "My father was in fund management. I joined his firm aftergraduating from Bristol University". His father, Richard Thornton, founded two fund management companies, the second (now part of Dresdner Kleinwort Benson), baring the family name.

"When I joined Thornton, I went straight out to Hong Kong, specialising in the Asean equity markets - Singapore, Malaysia, Thailand, Indonesia, etc - and I have been covering emerging markets more or less ever since. No one has ever asked me to cover a more `grown up' market."

This makes him one of the more experienced managers in the emerging markets sector, as his remit has grown to cover other of the world's burgeoning economies. "There wasn't an asset class called `emerging markets' when I started. I was simply covering South-East Asia and the concept hasdeveloped since then."

Mr Thornton joined Colonial First State, the asset management arm of a major Australian insurer and fund management house, earlier this year to head its emerging markets team, after its acquisition of the international business of Mr Thornton's previous firm, Nicholas Applegate.

"All of Colonial First State's international investment is now run out of London, with all of our overseas funds run by specialist teams. We have put together a team of global sector analysts who know an awful lot about individual companies, even if we individual fund managers don't.

"While other houses may have 50 people working on emerging markets, we have just two, so that we can make decisions without having to go through endless committees. Yet we can still leverage off our in-house global analysts and the group resources in our local offices around the world."

He describes his style of management as `bottom up' stockpicking, because his investment decisions have to be related to individual companies rather than sectors or markets.

"We concentrate very much on the quality of companies and the quality of the growth that they generate. We try to have a bias towards companies where earnings growth is increasing. We are looking for sensibly priced companies, and we are always aware of what we are paying for growth."

This means frequent visits to these markets. "We are trying to work out why a company is growing and the best way to do that is to see it. We are not relying on any one factor to deliver growth. If we get one wrong, there are two or three others that can bail us out."

They look for companies that are benefiting from a cyclical upturn, or a sector recovery, or part of a dominant global trend, or developing new products, preferably with a rising market share, that have a strong franchise, established brand, or genuine pricing power.

Mr Thornton cites an example of this stock selection process in one of the fund's largest holdings. "Take Taiwan Semiconductor, which is one of the world's major chip manufacturing companies. The global trend which applies here is outsourcing, and this company will produce chips that perform certain specific functions for the so-called `fabless' design houses, which have no manufacturing capacity and will outsource their whole manufacturing process, including part of the design work.

"As a result, Taiwan Semiconductor has been growing very fast in recent years, despite its costs of production falling at 20 per cent per year. It also has a strong brand, with its chips commanding a premium within the sector, its technological developments give it pricing power and the information technology industry is in a cyclical upturn."

Another key element in running an emerging markets fund is the management of risk. "We pay particular attention to the risk profile of our funds by country and by sector. We only get to an overweight or underweight position by investing in companies that meet our growth criteria. We have been running this approach for some of our institutional funds for five years and it really does work."

The result is a broadly spread fund that typically has between 40 and 50 individual holdings. The major regional exposure is to Asia (just under 50 per cent of the portfolio), followed by the emerging economies of Europe (24 per cent ) and Latin America (16 per cent).

"Our focus has been on larger, more liquid companies with well defined business strategies, good growth prospects and realistic and achievable profitability targets."

Mr Thornton highlights six current themes that make investment in emerging markets attractive - the recent boom in commodity prices, the economic recovery that is following last year's Far East financial crisis, improved returns from corporate restructuring, the prevalence of companies with strong earnings growth and cheap valuations, the current underweighting of emerging markets assets in most investors' portfolios and their attraction as a diversification away from the more developed markets.

"Emerging market equities have been slammed because return on equity has collapsed, but the reverse will happen over the next three years. Patience has been one of the most important disciplines for an emerging market fund manager, especially over the past few years, but the outlook for emerging markets is more positive now than it has been for a decade."

Fundamental Facts

Fund Manager: Henry Thornton

Age: 36

Fund: Colonial First State Emerging Markets Fund

Size of Fund: pounds 7.2m

Fund Launched: July 1999

Manager of Fund: Since Launch

Current Yield: n/a

Initial Charge: 4.0 per cent

(Investors may be able to buy at lower cost via a discount broker)

Annual Charge: 1.4 per cent

Current Bid/Offer Spread: n/a (Open Ended Investment Company)

Minimum Investment: pounds 1,000

Minimum Monthly Savings: pounds 50

Standard & Poors' Micropal Rating (maximum KKKKK): n/a (less than 3-year track record)

Fund performance to 8 November 1999 (offer-to-bid, with net income reinvested):

Since Launch - 4.2 per cent

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