Emerging markets have made huge strides in the past few years and become far less risky, says Robert von Rekowsky, manager ofFidelity Emerging Markets.
"In 2001-02, emerging markets were trading at a huge discount to their developed-markets peers -- and that made sense," says von Rekowsky, 41, a portfolio manager at Boston-based Fidelity Investments. "It was after 9/11, the U.S. was coming out of a recession and there were huge political risks in big countries such as Brazil, where President Lula came in and people didn't know what his track record would be." Then China triggered a surge in commodity prices, and "we had a global synchronized boom that caught everyone by surprise," says von Rekowsky, adding that many companies de-leveraged their balance sheets, and stock markets took notice.
"Yes, we've had some tail winds for the past few years, but we also had four significant corrections of 15% or more," observes von Rekowsky. "The media used to say [every time], 'That's it, it's over. We're heading into a recession.' It wasn't the case. Still, if you weren't positioned properly, and the market rolled over, you could put everything at risk."
While von Rekowsky took over the portfolio in January 2004, he had several years of emerging markets experience beforehand. He joined Fidelity in 1989 and began working in an administrative capacity on the bond-trading desk. Among other tasks, he helped put together databases for the research team that studied developed and emerging markets bonds.
A 1988 graduate from State University of New York at Albany, von Rekowsky drew on his academic training in Soviet studies and international relations that was part of his BA in political science and journalism.
By 1995, he became a sovereign bond analyst and soon gained first-hand experience in Bulgaria and Poland when he met central bank officials who were restructuring their countries' debt.
The following year, von Rekowsky was transferred to Fidelity's London office and assisted managers on the equity desk. In mid-1998, he seized an opportunity to become an equity analyst and joined the emerging markets team, which covered stocks in Russia, South Africa and the Czech Republic.
It turned out to be a baptism by fire when markets plunged during the Russian debt default in August 1998. Von Rekowsky had to advise his colleagues on how foreign exchange considerations could help or hurt a Russian company's balance sheet.
In 2002, von Rekowsky was promoted to sub-portfolio manager of Fidelity Emerging Markets. As part of a three-person team he oversaw European, Middle Eastern and South African stocks. But in 2004, the team approach was abandoned, and he became sole manager.
Von Rekowsky revamped the fund considerably and turnover hit 110% in 2004, and 104% in 2005. It dropped to 57% in 2006, a level that he intends to maintain.
A team of five sector analysts in Boston generates ideas for the fund. They, in turn, rely on recommendations from more than 30 Fidelity analysts around the world.
In assembling the portfolio, von Rekowsky uses the benchmark MSCI Emerging Markets Index as a risk measure and also gets a reading on macroeconomic conditions by consulting with the emerging markets debt team. "We want to risk-manage country factors, political risk factors, and make sure we constrain the sector bets," he says. "But we don't let the benchmark drive our stock choices."
This approach has certainly helped the fund generate strong performance numbers. The 5-star rated fund returned 28.2% for the 12 months ended Nov. 30, compared with 24% for the median fund in the Emerging Markets Equity category. Over two and three years, it averaged 30.6% and 33.2% respectively, versus 26.1% and 28.9% for the median.
Although the fund has about 360 names, the top 25 holdings account for about 40% of the fund by weight. There are also scores of small positions of around 0.10%, which are used to test their worthiness.
Von Rekowsky splits the fund roughly between 55% "active" money that comprises larger bets, and the remainder in "passive" investments that are close to the benchmark. "The closer you get to 60% in active money -- in names that you have strong confidence in -- the more likely it will be a good predictor of outperforming the benchmark."
Names that carry greater conviction include CVRD, OAO Gazprom and China Mobile (Hong Kong) Ltd. The maximum position is about 4% of fund assets.
Looking ahead, von Rekowsky is bullish because many governments are making heavy infrastructure commitments. "They are de-bottlenecking ports and railway systems. It's happening in Russia and India and South Africa, all over."
At the same time, rising personal disposable incomes and rising expectations about the future, will lead to "a positive dynamic," says von Rekowsky. "I see that happening for the next few years. All we have to worry about is which stocks will benefit from those trends, and are we valuing them better than the market."
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