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TIP SHEET: Not All Geographic Bets Are Even For Schroder Fund

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04/13/2012 | 09:15pm CET

--Schroder Emerging Market Equity Fund's investment thesis begins by analyzing individual nations

--Team considers gross domestic product, political unrest and election news as it picks various nations in which to invest

--Fund has returned 14% so far this year through Thursday and is outperforming the benchmark, according to Morningstar

    By John Kell 

Allan Conway keenly focuses on growth opportunities in emerging markets when investing abroad, saying the selection of the right country is more important than picking a hot stock.

Conway, portfolio manager of Schroder Emerging Market Equity Fund (SEMNX), said his fund's investment thesis begins by analyzing nations. Conway said he believes investing in emerging markets is a smart bet as those nations will be the growth engine for the global economy.

"Being in Russia or Brazil is more important than picking a certain stock," said London-based Conway. He said the fund gets 50% of value-added returns coming from country selection and 50% from stock picks, while many competitors place their bets entirely on stocks.

"For us, it's about country foremost and then finding the best stocks in each country," added Conway about the fund, which was founded in March 2006.

According to Morningstar, the approximately $464 million fund has returned 14% year-to-date through Thursday, about 6.4 percentage points above the benchmark MSCI Europe, Australasia and Far East index, rebounding from 2011's negative returns. Over the three years through Thursday, Morningstar shows that the fund has annualized total returns of 19.2%, outperforming the benchmark by 5.7 percentage points.

Conway said stock analysts are often organized by sector but the Schroder fund's team is split by country to understand regional dynamics, adding that those factors are vital to understanding how the stock will perform.

Schroder's team considers gross domestic product, political unrest and election news as it picks various nations in which to invest, focusing also on broader themes like the euro crisis and the Arab Spring revolution. He cited an example of two theoretical banks, one in Russia and the other in Mexico, saying it is more important to analyze their local environments than the fact that they both are banks.

Regionally, the fund is overweight in China, South Korea, Russia and Thailand. It is neutral in Brazil but underweight in a handful of countries, including Mexico, Hungary, Czech Republic and Poland.

The portfolio's top holdings are in the financial, energy and information technology sectors, including stakes in handset maker Samsung Electronics Co. (SSNHY, 005930.SE), gas company Gazprom (OGZPY, GAZP.RS) and auto maker Hyundai Motor Co. (HYMLY, 005380.SE). Nearly two-thirds of the fund's stock holdings are in Asia.

In the near term, Conway said Schroder is slightly cautious about returns as problems in Europe and ongoing questions about the strength of the U.S. economy affect emerging markets' performance this year, as they did in 2011.

Also, though there have been some concerns about China suffering from a hard landing, Conway said he believes authorities will do whatever it takes to ensure continued economic progress and to maintain political stability.

Over a longer period of investing, looking two to three years out, Conway said buying into emerging markets is a fantastic investment.

"If you are taking a short-term view, there may well be a better opportunity in a month or two's time, but if you are taking a two-to-three-year view, the money you are putting in today could look really good," said Conway.

(John Kell is a general assignment reporter covering alcohol and tobacco companies, drugstores and car-rental firms for Dow Jones Newswires. He can be reached at 212-416-2480 or by email at [email protected])

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