Paradice funds performing well even as coronavirus epidemic clips analysts’ wings

The shutdown also hasn’t stopped a Paradice fund yet again outperforming the market.

David Paradice, portfolio manager for Paradice Investment Management, pictured at the company headquarters in Sydney.

Moscow, St Petersburg and Mexico were among the exotic destinations David Paradice’s emerging markets team were set to visit, in keeping with the veteran fund manager’s famed strategy of going the extra mile to find information to base his firm’s stock-picking nous on.

But in mid-March COVID-19 hit and threw those travel plans into disarray.

It has left Paradice and his US-based emerging markets portfolio managers relying on dozens of online meetings and analysts’ notes daily, though they are at least operating from what are still exotic locales by Australian standards: New Mexico, Utah and California.

The shutdown also hasn’t stopped a Paradice fund yet again outperforming the market. The Paradice Investment Management’s Global Emerging Markets Fund — the fifth fund at Paradice’s eponymous $16bn boutique firm — will celebrate the one-year anniversary of its inception next week.

It survived a rocky March quarter to post a return well above its benchmark as it tries to prove Paradice’s belief that there’s now more value to be found in smaller unloved stocks than the big blue chips that receive most of the media and market coverage. This time though, it has been in companies in countries like China, Brazil, Russia and Poland rather than the Australian small and mid-cap market where Paradice has made his name and fortune in over the past four decades.

His wealth is now valued at $552m on The List — Australia’s Richest 250.

“That is what is so good about emerging markets: it is a really good place to find value. It is a bit like small caps in Australia, there are always opportunities there. It is the same … in emerging markets, because the first thing people think about is the volatility and risk there, and so there are much more opportunities in picking value than there is in the more developed countries,” Paradice tells The Weekend Australian.

“Look at the results too. The Australian Index to the end of April was down 18 per cent for FY and the main global emerging markets index was down 3.67 per cent. The Aussie market has underperformed big time and our guys are up about 5 per cent absolute compared to negative 3.6 per cent. People have been really scared of emerging markets, but you’re getting a different feel now and people are becoming ­interested.”

Since inception on May 15 last year, the Paradice Emerging Markets fund has returned 7.32 per cent, compared with a 2.77 per cent fall in its benchmark MSCI Emerging Markets Net Total Return Index. That gives Paradice’s team outperformance of 10.09 per cent in that time.

Not immune from downturn

Paradice’s other funds, including its small caps fund, have not been immune from the overall market downturn, though he says in a time of exchange-traded funds and a shift to index tracking investments there is still plenty of room for stockpickers.

“There are a lot of cheap stocks out there and it’s like when everyone is fearful you should be taking the opportunity. Stocks were expensive prior to this meltdown and interest rates will be low for a while and no one really knows the implications of this may be, other than there will be some unemployment which will create an economic problem. But you shouldn’t stop looking for ideas when something like this happens.”

Paradice is wary of the recent market bounce and says an analysis of the numbers suggests there may be “mountains” in stock movements, where they rise and fall sharply for some time.

“There may be another downturn so you have to position the portfolios accordingly.

“Stocks that are really good quality and should be trading in the mid 20s (times earnings) may be trading on 15 times at the moment. It does create a good opportunity to try to reinvigorate the portfolio and get really good, cheap stocks that have been down into the portfolio. You have to be careful that you don’t get into the stocks that are cheap and are always going to be cheap. It is the stocks that still have good growth prospects that have come back a bit that you want.”

Emerging markets

The emerging markets fund is managed by Paradice recruits Edward Su and Michael Roberge, who are usually based in San Francisco and joined Paradice after working at the $US95bn investment manager Artisan Partners.

Emerging markets can be volatile at the best of times, though Su says his fund’s first year has been particularly testing.

“We started during the China-US trade war and then you had the Hong Kong protests, then the Chile protests, Middle East tensions, you had the oil price collapse and now you’ve had COVID. There have been numerous periods to test us along the way.”

Two diverse markets have been vital for the fund’s outperformance, China and Brazil, though they have taken radically different approaches to dealing with the coronavirus pandemic. China is starting to slowly emerge from a strong lockdown, while Brazilian president Jair Bolsonaro has been a noted sceptic about the impact of the virus.

Su says China, which accounts for about 48 per cent of the fund’s portfolio (including mostly China-focused but Hong Kong-listed stocks), has contributed about two-thirds of the fund’s alpha, with a key being steering clear of export-oriented stocks.

“We tend to focus more on the domestic demand stories in emerging markets, as opposed to the export-driven stories. For us a number of those names have held up pretty well. You’ve got the usual suspects like Alibaba and Tencent, but even other names we have in the portfolio that are not as well known and not as recognisable have done well. It hasn’t just been one or two stocks, it has been a variety of stocks.”

Those include data centre firm GDS, which has enjoyed strong demand during COVID-19, and Shenzhen Mindray Bio-Medical Electronics, which has had a surge in demand for key products such as ventilators and patient monitoring devices.

Good performers

Other good performers have been Dino Polska, a Polish grocery store chain, and the Nasdaq-listed Russian internet and services company Yandex. In Brazil, online retailer B2W Companhia Digital is up almost 50 per cent since January 1.

“The stocks we own in Brazil, we feel really strongly that they will come out of this in a stronger competitive position. They have great balance sheets and enduring business models and on the other side of things they can benefit from consolidation or from peers who can’t weather the storm,” says Su.  Roberge was booked to go to Russia for two weeks in March on a fact-finding mission, a hallmark of the Paradice ethos of getting out and meeting as many companies as possible and seeing economic and trading conditions on the ground rather than just rely on analyst reports.

The COVID-19 lockdown put paid to that trip, though Roberge says it has sparked a quick reaction from companies in at least still providing digital access to fund managers and larger investors.

“We have seen a huge influx of analyst meetings, all virtual. There’s been virtual conferences where you sign up to meet through Zoom multiple corporates on one day. So actually there’s been more touch points with our holdings than pre-COVID in a way, which has been a very interesting side effect. It will be equally interesting to see how much of that persists.”