Better Lives, Better Stocks
Virtus portfolio manager Rajiv Jain bucks the consensus by jumping into consumer stocks in emerging markets. Beer, cigarettes and diapers.
Perhaps Rajiv Jain feels comfortable investing in the consumer needs of individual emerging markets because he grew up in India, where the economy has grown eight-fold in the past 30 years.
The son of a textile executive, Jain, 43, has created a different kind of portfolio for the $1.8 billion Virtus Emerging Markets Opportunities Fund (ticker: HEMZX). Whereas most portfolio managers tend to favor export giants, tech companies and commodity plays like Petrobras (PBR), Gazprom (OGZPY) and Samsung (005930.Korea). Jain has been drawn to defensive consumer stocks like large-cap cigarette makers, brewers and diaper companies. Virtus has about 36% of its portfolio in these kinds of companies, versus just 8.4% for most other emerging funds, according to tallies by Morningstar. His energy and cyclical basic-material holdings amount to 7%, against 29% for his peers.
The strategy has two aims. Jain wants to insulate his portfolio from the ups and downs of commodity markets and other cyclical factors. "We're doing disservice to investors if we don't explain the cyclicality that's inherent to emerging-market indexes that are 40% industrials, basic materials and energy," he says. He also prefers to rest his portfolio's fortunes on internal emerging-market growth, rather than external demand from U.S. and European consumers. "The fact is, too, an investment in Samsung doesn't provide diversification -- it is the same as the average tech stock in the U.S., albeit a much lower quality holding."
Virtus manager Rajiv Jain (with Warhol print): Prefers resilience of emerging-market consumer stocks to global tech or energy companies.
Jain's distinctive approach has produced top-tier performance for Virtus Emerging Markets Opportunities. It posted a 12.28% average annual return in the five years ended July 29, topping its emerging-markets peers by 3.3 percentage points and its benchmark, the MSCI Emerging Markets index, by 3.8 percentage points, according to Morningstar and MSCI. Virtus ranks in the top 9% of its group in that span. Jain's absolute and relative performances are a little better than that over three years. And year-to-date, the fund's 6.27% total return is in the top 3% of the group.
Jain and a team of 11 analysts who work in the New York office of Swiss asset-manager Vontobel have been the Virtus fund's subadvisor since 2006. They oversee the fund's $422 million load and $1.4 billion no-load classes; the load is 5.75%. The expense ratio for retail customers comes to 1.66%. Another $1.2 billion in institutional assets are invested in the same portfolio. Overall, Jain supervises $13.7 billion in assets for Vontobel.
Virtus Emerging Markets includes 60 to 90 positions, mostly large-cap names. Jain & Co. start the bottom-up process by hunting for companies with at least a three- to five-year track record of earnings growth. They whittle the list down to candidates that have enough market sway to enjoy some pricing power. Two more criteria -- return on assets or equity and operating margins -- usually shrink the list to about 300 stocks. Virtus then calculates a forward-enterprise value for each company and looks to purchase shares at a 25% discount to that figure.
Jain will pay a premium for quality and predictability. As a result, the fund's 16 times price to forward earnings multiple is more than the roughly 11-times figure for the MSCI benchmark and his peer group as calculated by Morningstar.
While the Virtus fund doesn't make a point of placing country-specific bets, its portfolio is weighted toward India and Brazil. Jain's homeland�he lived in Delhi, Jaipur and several other cities as his father's career progressed -- accounted for 26% of the fund at the end of the second quarter and Brazil made up another 18%. The India stake has risen from just 5% four years ago. "We feel India offers a more diversified earnings stream," he explains, "with a number of companies that are driven by domestic demand which is fairly resilient to global issues."
Two of the Virtus fund's largest holdings are related Indian banks, parent Housing Development Finance (HDFC.India) and retail offspring HDFC Bank (HDFCB.India) with about 4% of the fund's assets each. The former is the subcontinental nation's largest mortgage lender and boasts a 25% average return on equity in the past decade. Its compound annual earnings growth rate is 23%. The latter has made considerable headway with India's burgeoning middle class, helping fuel annual earnings growth of about 26% a year over the last 13 years. Jain believes it can sustain that rate for another decade.
Virtus Investment Partners
Virtus Emerging Market Opportunities
800-243-4361
| Total Returns* | |||
| 1-Yr | 3-Yr | 5-Yr | |
| HEMZX Class A | 29.44% | 7.32% | 12.48% |
| HIEMX Class I | 29.85 | 7.60 | 12.74 |
| % Of | ||
| Top 10 Holdings | Ticker | Portfolio** |
| Housing Dev Fin | HDFC.India | 3.97% |
| HDFC Bank | HDFCB.India | 3.90 |
| Souza Cruz | CRUZ3.Brazil | 3.73 |
| AmBev | ABV | 3.70 |
| ITC | ITC.India | 3.20 |
| Baidu | BIDU | 3.04 |
| Brit Am Tobacco | BATS.U.K. | 2.68 |
| Itau Unibanco | ITUB4.Brazil | 2.41 |
| SABMiller | SAB.U.K. | 1.95 |
| Semen Gresik | SMGR.Indonesia | 1.94 |
| Total: | 30.52 | |
| *All returns are as of 6/30; three and five year returns are annualized. ** As of 6/30. Source: www.virtus.com | ||
ITC (ITC.India), a 3.2% holding, has held a near monopoly on India's cigarette market while diversifying its operations to include hotel and packaging businesses. Consumer loyalty to ITC is very high, helping it to fend off the likes of Philip Morris on its home turf without sacrificing profits. Over the past 10 years, average operating margins of 30.3% have produced a 28% annual return on equity and earnings growth of 17% a year. Earnings are expected to grow 21% this year and the stock trades at a multiple of 24.5 times Jain's forecast for profits.
Brazilian tobacco maker Souza Cruz (CRUZ3.Brazil) is another big holding, owing to its 60%-plus marketshare as well as high margins and return on capital. The brewer Companhia de Bebidas das Americas, or Ambev (ABV), is "one of the best beer companies in the world," says Jain. An offshoot of the Anheuser-Busch InBev (ABI.Belgium) empire, it gets over 80% of its sales from Latin America; it's maintained margins of 25.4% and an impressive 22.8% return on equity over the past decade.
Jain's approach has particular appeal if the developing world stumbles further. "We feel the opportunity is clear�2 billion people who want to eat, drink more, gamble, buy toothpaste, candy and enjoy life in general," he says. "What drives steel prices in one country affects the industry everywhere; on the other hand consumer staples offer up greater diversification." Worth bearing in mind as the U.S. and European economies try to curb spending.
JAMES A. ANDERSON is an English professor at Lehman College/City University of New York.
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