Sunshine through the rain
This year, emerging markets are under strong pressure due to trade wars, currency crises and tighter monetary policies of central banks. This has also affected the performance of the TCM Global Frontier High Dividend fund.
The heat map with historical monthly yields shows that the fund price declined seven consecutive months (excluding dividend). This is the longest losing streak since inception. In this period ranging from April 30 to November 15, 2018, the fund fell 8.50%, but held better than the Frontier Markets index, which lost more than 10%. Meanwhile, Frontier Markets trade at a price/earnings (P/E) ratio of 13.4x which is a discount of 25% compared to developed markets. TCM Global is even cheaper and trades currently on an average of ten times earnings.
We think a dialing-back of global trade tensions could spark a rebound in frontier/emerging markets next year. By then, the Trump administration will have maxed out tariffs on more than $500 billion in Chinese goods and retaliatory measures by Beijing could start to hurt the U.S. economy and stocks. Neither country wants that, so they could be pressured to make a deal. Trump will also be gearing up for his 2020 re-election race and the prospect of a deal that could be branded as a win for the U.S. In addition, US growth slows from 2.9% in 2018 to 2.5% in 2019, according to the median forecast of 60 economists consulted by Bloomberg. If so, less monetary tightening than expected and in combination with a bigger growth differential and weaker dollar and oil prices, this should be good news for developing markets.
A recovery in Frontier Markets would fit perfectly into the seasonal pattern of the fund. In the top row of the heat map can be seen that on average the first five months of the year typically yield positive returns. In the first two months of the year in particular, the fund is historically strong with an average of + 1.87% in January and + 1.67% in February. June on the other hand turns out to be the worst month for the fund with an average monthly return of -2.60%. Until now, June was negative every year. In addition, there are a number of red blocks in the columns of the months of May and November. However, it should be noted that the fund pays dividends in these months and the figures in the heat map only reflect price return (excluding dividend) instead of total return. The difference is about 2.5% for each of the months May and November. Therefore, in total return terms May has actually been positive every year.
The worst quarter in the history of the fund was in Q3 2015. The fund then fell 9.59%, but still outperformed the Frontier Markets 100 ETF that lost 14.33% This shows the defensive nature of the fund's dividend strategy in relation to the market average. The fund is more resistant in downtrends but this characteristic is not at the expense of the upward potential. In the strongest quarter in the history of the fund (Q3 2014), the fund increased by 16.12%, while the ETF rose 13.72% (total return).
In November 2018 the fund celebrates its sixth anniversary. Since inception, the fund returned 63.78%, equivalent to an annual return of 8.57%, and outperformed the Frontier Markets 100 ETF, which rose by 45.82% in the same period (measured in euro based on total return).
Over these years, the fund strategy was nominated three times for an Award, of which two were actually won. In 2015, the fund won the "Investors Choice Award" in the category "Emerging EM Fund of 2014". In 2017 TCM Investment Funds was the winner in the "Boutique Management Group of the Year Single Strategies" category organized by Investment Week. Subsequently, the fund was nominated this year for the VWD Cash Fund Award 2018 in the “Equity Emerging Markets” category. The Awards are a confirmation that our focus on High Dividend Strategies in Frontier Markets is a successful approach.
