Emerging markets' valuations "reasonable"

On the valuation of her universe, Perez-Coutts says that despite the MSCI Emerging Markets Index's stellar performance in 2009, it trades at a "reasonable" price/earnings multiple of 13 to 16 times 2010 estimates, versus earnings-per-share growth forecasts for the constituent companies in the index of 30% to 35% for 2010.

A bottom-up GARP (growth at a reasonable price) manager, Perez-Coutts does nevertheless pay considerable attention to the macroeconomic climate of the companies she invests in. With the assistance of a team of five analysts, she follows some 27 countries and screens more than 5,000 companies.

The fund currently has 77 names with a weighted average market capitalization of $20.7 billion. The investment discipline has a five-year time horizon and requires that target companies have business models that have generated a cash-flow return on investment of at least 10% over the previous three to five years.

AGF Emerging Markets has 53.2% of its holdings in the Pacific Rim Region, 26.6% in Latin America and 10.4% in the Middle East and Africa.

AGF fund performance versus the index
		2009	2008	2007	2006	2005	2004	2003
	AGF Emerging Markets	60.3	-35.2	12.4	40.4	35.3	16.6	29.2
	MSCI Emerging Markets Index	52.0	-41.4	18.5	32.1	31.2	16.8	27.8

Brazil is the biggest Latin American weighting at 17.6%. It is, Perez-Coutts says, a commodity-based economy that has iron ore, offshore oil, pulp and paper and "soft" commodities such as coffee and soya beans. The country is a net exporter and is "fiscally disciplined." Brazil experienced a currency crisis in the '90s and there were many naysayers, she says. "But I saw some positive trends and was an early entrant."

In Asia, China is undoubtedly the biggest driver of both the region and, increasingly, the global economy, says Perez-Coutts, and "its growth could surprise on the upside." China-based stocks constitute 22% of AGF Emerging Markets.

Perez-Coutts does not share concerns held by some about the possibility of a residential real-estate bubble in key cities in China. "Per capita incomes in the country have been rising more rapidly than property prices."

When it comes to sectors in AGF Emerging Markets, materials and energy companies constitute 28.2%, consumer-related stocks 27.4% and financial services, which includes real estate companies, 18.2%.

A big-cap Brazilian integrated energy-company, Petroleo Brasileiro S.A. (Petrobras), is the largest holding in the portfolio at 3%. The company, she says, is expected to generate annual production growth of 8% to 10% for the foreseeable future. "It is a low-cost producer and has the specialised technology necessary to undertake deep-sea drilling. A significant percentage of its proven reserves are in fields in the offshore Campos Basin."

Petrobras is a good cash-flow generator and "is disciplined in the management of its cash," says Perez-Coutts. (The stock trades on the New York Stock Exchange under the ticker PBR).

Patricia Perez-Coutts

Also in the top 10 holdings of the fund is Vale S.A., a major global metals and mining player based in Brazil. Formerly Companhia Vale do Rio Doce, Vale is one of the largest iron ore producers in the world, Perez-Coutts says. "Its iron ore is high-grade, in contrast to that of China, which is low-grade and thus more inefficient in the steel-making process."

China is a major customer for Vale's iron ore. But there is also, she says, strong demand from Brazil and Mexico for infrastructure spending and "the European economies are starting to come back to life." In addition to iron ore, the company produces nickel and copper. Vale acquired Canada's Inco Ltd. in the fall of 2006. Of the company's production outlook, Perez-Coutts says: "Vale is ramping up the use of its capacity as the global economy recovers."(The stock trades in New York under the ticker VALE.)

Consumer-related stocks that underscore Perez-Coutts' thesis about the growth of domestic consumption in key markets include Brazil's Lojas Renner S.A., which manufactures and sells apparel and shoes as well as accessories. It is a national player, says Perez-Coutts, and its target market is women between 20 and 40 years old. "It is a play on positive demographics and growing purchasing power in the country."

A consumer-related stock in Mexico that has similar drivers, she says, is Wal-Mart de Mexico S.A.B. de C.V. "It is one of the largest employers in the country and its operating profit is substantially higher than its U.S. counterpart." Some emerging market managers are unenthusiastic about Mexico because its economic growth rate is much slower than say that of China, she says, "but I am encouraged by its growing middle-class."

In keeping with her confidence in the Chinese real estate market, Perez-Coutts added to her long-standing holding in China Overseas Land & Investment Ltd., "after the global economic turmoil." The company is a developer of homes mostly for the middle class, she says. "It has a well known brand, with a national reach, and has an inventory of good land holdings."

On concerns that its proposed infrastructure projects in the Middle East could prove to be less profitable than management anticipates, Perez-Coutts sold her holding in Gamuda Berhad, an engineering and construction company based in Malaysia. "The company had a poor experience with its previous projects in the Middle East and this could be repeated."