Somerset Capital targets ‘future leaders’ with new ESG-focused emerging markets fund

Emerging markets flags

Somerset Capital Management, a global emerging markets specialist investment manager, has launched a new strategy which aims to capitalise on the growth potential among small and medium-sized ESG-friendly companies in emerging market countries.

The Somerset Emerging Markets Future Leaders Fund, which is co-run by portfolio managers Edward Robertson and Anthony Linehan, will invest in firms whose market cap ranges between USD750 million and USD13 billion, with target positions selected using Somerset’s own ESG (environmental, social and governance) investment criteria.

The UCITS compliant strategy launches with some USD350 million in seed capital from Första AP-fonden (AP1), Sweden’s national pension fund, which also seeded Somerset’s USD60 million Frontier Markets Fund in 2018.

The fund forms part of the Somerset Emerging Markets Mid Cap Strategy, which launched in July 2012. Co-managed by Robertson and Linehan, the strategy has returned 33.75 per cent since launch.

Partner and co-manager Anthony Linehan said the recent financial volatility offers investors an “opportune moment” to buy into high-quality smaller and medium-sized companies in emerging markets at “very attractive valuations”.

The portfolio will be built around 40-50 companies which can demonstrate growth in earnings, book value and cash flow per share sustainably over a market cycle, with the potential to grow into industry-leading businesses.

“The companies we invest in don’t typically feature in the list of usual suspects you find in funds elsewhere nor in the passive vehicles,” Linehan said.

“Our long experience of investing in these markets has allowed us to develop a framework for identifying the characteristics that we believe are critical for any company wishing to be a future industry leader. These include evidence of a strong competitive position, the financial muscle to get through the next down cycle and the ability to navigate regulatory and consumer preference changes relating to ESG.”

The strategy does not trade tobacco stocks or companies involved in fossil fuels, and will seek to engage with portfolio holdings on material issues in order to influence positive change.

“The era of badly run, corrupt companies making big profits is coming to an end,” Linehan said of the strategy. “Being able to distinguish between those that take corporate governance and sustainability issues seriously and those that don’t will be absolutely crucial in identifying future winners and losers.”

Established in 2007 with high-profile UK Conservative politician Jacob Rees-Mogg among its co-founders, Somerset Capital has offices in London and Singapore, with USD5.4 billion in assets under management. Rees-Mogg left the firm last year.