Knut Harald Nilsson, senior portfolio manager on the SKAGEN Kon-Tiki fund, discusses the approach which has secured its enviable – and consistent – performance over the past decade.

Knut Harald Nilsson, senior portfolio manager on the SKAGEN Kon-Tiki fund, discusses the approach which has secured its enviable – and consistent – performance over the past decade.

Emerging markets equity funds are hot once again, but it might be the case that investors are overlooking a gem of a vehicle in this space: the Kon-Tiki fund from Norway’s SKAGEN.

The latest figures from the Investment Management Association show a marked increase in flows towards emerging markets equity funds recently – such vehicles were the third highest-selling IMA sector in September (having been tenth in August), racking up £139 million ($222 million) in net retail sales, well above its monthly average of £77 million. For the first time in a year equities were favoured by investors over fixed income, and they are clearly looking beyond developed markets in their hunt for superior returns.

Those looking for market-beating returns might consider the SKAGEN Kon-Tiki fund, which since its April 2002 inception has managed to generate a 20 per cent return on an annualised basis, beating the MSCI Emerging Market’s 12 per cent by quite a margin.

Catching up recently with Knut Harald Nilsson, senior Kon-Tiki portfolio manager, WealthBriefing asked what the secret of his fund’s success is and his answer was simple: taking a “very pure” bottom-up, long-term approach to stock selection and carrying out all research in-house.

In for the long haul

Among Nilsson’s first points was that SKAGEN believes it is imperative that the end investor is able to understand exactly what they are buying so that they feel able to commit for the long-haul. In fact, being in for the long haul also underpins the investment process for the Kon-Tiki fund and Nilsson believes that a buy-and-hold strategy is key to its success. Currently, the fund’s portfolio has a turnover rate of around 22 per cent and this has hovered at around 30 per cent since inception. Advocates of such an approach argue that not only does constant “churn” increase costs to the end investor but that it can also be a distraction from long-term investment strategy.

Just as the fund is focused on long-term holdings, SKAGEN also seems to be big on consistency when it comes to the fund’s management. Since its launch the Kon-Tiki Fund has retained the same team and investment philosophy. “Things have of course been fine-tuned here and there, but the same investment philosophy remains the same and the team is stable,” explained Nilsson. A stable team no doubt helps with getting “under the bonnet” of the firms the fund buys and visits to their main factories are a regular part of the management team’s routine. This way, “you get a better feeling for the company and meet more senior management,” said Nilsson.

What the Kon-Tiki team are looking for (among other things it also looks at undervalued reverse to mean and restructuring cases) are companies which are set to grow more than the market, are competitive and which have significant shareholders, said Nilsson. What’s more, these “significant shareholders” are preferably not third generation and thus removed from the roots of the company, he added (the tendency towards mismanagement here is of course well noted).

Nilsson describes his fund as “highly concentrated”, so what are the emerging markets names which have made it into Kon-Tiki’s portfolio? As might be expected, as it is liked by so many fund managers in the emerging markets space, Samsung is a long-term hold, said Nilsson (the firm joins several others in lauding the Korean technology manufacturer’s credentials as the only real competitor against Apple in the smartphone market and indeed the S3 is now the world’s best-selling smartphone). But there are also some lesser-known companies which have passed muster with SKAGEN’s five-strong emerging markets team (overall the firm has 15 people covering equities).

Car manufacturers gearing up to expand

The Kon-Tiki fund must be at least 50 per cent invested in companies listed in emerging markets, but when assessing which stocks to buy SKAGEN looks closely at companies which are poised to grow non-domestically. The fund is holding several car manufacturers: Korea’s Hyundai (a 5 per cent holding) and India’s Mahindra (2 per cent).. “It’s not that we’re bullish on car sales globally but in particular Hyundai has the potential to expand outside its own country, particularly in Europe where the market share is currently low,” said Nilsson. Another car-maker he is keen on is China’s Great Wall, which may be relatively unknown in Europe as yet, but which recently launched a showroom in Surrey in the southeast of the UK.

In fact, car manufacturers represent the main proportion of the Kon-Tiki fund’s consumer discretionary holdings, and broadly speaking it is avoiding luxury goods firms. Although Asian growth has provided a real boost to luxury goods names like LVHM over recent years this has recently slowed, with Chinese demand looking weak. “We’re seeing disappointing sales in the tier one Chinese cities and the risk is that sales continue to fall,” said Nilsson, “some luxury firms also have inventory issues.” One “small” luxury holding the fund does have however is Hendgeli, the high-end watch retailer.

In fact, Nilsson is generally underweight domestic Chinese equities, owning none of the country’s banks, and he notes that broad Chinese equities have “under-performed grossly over the past ten years.” The trouble, he says, is that when you think an investment story like Chinese growth looks good it’s “probably priced in.”

Looking at what else the Kon-Tiki fund is shunning, Nilsson explained that SRI factors are a concern – and not just for ethical reasons. As might be expected, the firm does not invest in companies which have not signed up to the UN’s sustainability charter but it also shies away from so-called sin stocks more generally. Moral objections aside, Nilsson notes that the litigation risks associated with tobacco companies are a real concern, as is the potential for the licences of gambling companies to be revoked. That said, SKAGEN isn’t overly stringent on its SRI screening and doesn’t negatively screen necessarily, said Nilsson (one exception being child labour, which in his words would "prompt a sell-off"). When it comes to SRI “the direction of the company is more important… it’s a matter of what measures are being taken…if they are improving it’s OK,” he explained.

SKAGEN’s pragmatic approach to SRI issues is also manifest in its expansion plans outside of Norway – the UK high net worth market is  regarded as an important source of future growth (as are Switzerland, Sweden, Denmark, and other European markets as the firm strives to reduce its domestic flow risk). SKAGEN opened a London office in March 2010 and Nilsson believes that the Kon-Tiki fund has a lot to offer high net worth investors who are disillusioned with government bonds and who want active management as part of a “growing appetite for equity risk”.

The Kon-Tiki fund currently has £4.6 billion ($7.3 billion) in assets under management, and with an annualised return of 20 per cent since inception we can expect it to continue to garner funds from UK clients. Don’t expect to see a full-on media assault promoting the vehicle however, since SKAGEN is focusing on promoting the fund through educational events only. In Nilsson’s words, “we’re not aggressively asset gathering”, so it might be that the Kon-Tiki fund remains a hidden gem for a little longer.