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June 19, 2019, 9:42 a.m. EDT

This fund manager goes his own way in China by looking beyond the trade spat

Baillie Gifford partner Richard Sneller also shares insights on Russia, Brazil, Argentina and rising demand for oil

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By Philip van Doorn, MarketWatch


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China National Offshore Oil Corp., or Cnooc, is one of fund manager Richard Sneller’s biggest holdings.

Richard Sneller, the lead manager for the Baillie Gifford Emerging Markets Fund, believes conventional wisdom on various financial topics is incorrect, providing opportunities for him to continue outperforming competitors.

The Baillie Gifford Emerging Markets Fund /zigman2/quotes/206395792/realtime BGEGX -0.29%  has $2.7 billion in assets, and Morningstar gives the fund’s Class I shares five stars, its highest rating. Baillie Gifford is based in Edinburgh, Scotland, and has a total of $252 billion in assets under management.

The fund has an excellent performance record, as you can see below. When asked about the ongoing trade conflict between the U.S. and China, Sneller said “we’ve not really gotten terribly exercised about the trade war per se, as this is one element in the much broader issue of engagement between China, [and] the US.”

Comments about regions and markets

Investors may overuse the word “contrarian” when describing themselves. But Sneller said during an interview: “I would like to think that every single one of our investment ideas is slightly contrarian, because if it isn’t, how do we make money?”

Sneller said his team was focused on a growth strategy “using an abundance of humility, eons of patience and the faintest smattering of arrogance.” The fund holds usually holds between 60 and 100 stocks, and managers typically have a five-year time frame when making an investment.

“We are looking for growth for a longer duration than people expect, faster than they expect or that will come as a total surprise to people,” he said.

Sneller expressed confidence in the long-term trend for improved communications, through smartphones, along with “a much larger set of younger populations that are more likely to be urbanites or aspiring to [move to] the city in search of a better life” to underline continued innovation, economic growth and high investment returns in emerging markets.

“I don’t think we have started to fully understand how the world will change over the next 10 to 20 years,” he said, while discussing the collaborative potential of modern communication networks.

Here are some of Sneller’s opinions about various regions and about the supply and demand for oil /zigman2/quotes/209723049/delayed CL00 -0.21%   /zigman2/quotes/209704782/delayed UK:BRN00 -0.29%

China

Alibaba Group Holding /zigman2/quotes/201948298/composite BABA +0.14% was the Baillie Gifford Emerging Markets Fund’s /zigman2/quotes/201164705/realtime BGEHX -0.28% second-largest investment as of April 30 (a list of the fund’s 10 largest holdings is below). Sneller said: “Our suspicion in the case of Alibaba is that people are underestimating the degree with which people will want to interact with it, in light of the creative genius that resides in that company.”

He also emphasized the importance of increasing “physical mobility” in China. The most obvious opportunity (or the one that gets the most media coverage) is in ride-sharing. However, Sneller is also impressed with the potential for an explosion of air travel within China and international travel by Chinese people. “We have seen 60 large airports [within China] expand significantly over the past 15 years,” he said, adding that “Chinese people want to explore the world. It is not an innovation, it is an acceleration.”

The fund’s sixth-largest holding as of March 31 was American depositary receipts of Cnooc Ltd. /zigman2/quotes/204964401/composite CEO -0.91% /zigman2/quotes/203421416/delayed HK:883 -2.74% , the Hong Kong-based subsidiary of China National Offshore Oil Corp.

And that ties into what Sneller sees as a gross underestimation by many investors for long-term demand for fuel, and therefore for oil. “People say we are coming to the end of the oil age, but we disagree with that. Chinese people will need fuel for those air flights and will need fuel for the hundred million cars [they have] purchased.”

He said that a decline in capital investment in new oil wells was another strong long-term bullish signal for oil.

As for the widely covered concerns about a potential glut of bad loans within China and a possible real estate collapse, Sneller said there is a tendency for investors to become obsessed at debt levels without looking at the other side of the balance sheet. ”In China, the vast majority of loans are secured by productive assets, including airports, cites, occupied buildings and so on. The debt is well underpinned with assets,” he said.

”I believe the Chinese government needs to be careful to manage their acceleration of debt extensions, but they do not need me to tell them to do that. They are doing that themselves,” he added.

Brazil

Sneller’s long-term bullish outlook for oil leads also to an investment in Brazilian oil giant Petróleo Brasileiro SA /zigman2/quotes/200745132/composite PBR -1.64% /zigman2/quotes/208393974/delayed BR:PETR3 -1.28% , better known as Petrobas, which has been a maligned name because of the political scandal that brought down former Brazilian President Dilma Rousseff as well as for its high level of debt. 

Sneller called Brazil “a fantastic country at snatching defeat from the jaws of victory,” as its natural resources and related production have driven economic booms and accumulations of “a vast amount of foreign exchange,” after which the country “blows it all, then sinks into a 30-to-40-year malaise, before fortune brings it back again.”

/zigman2/quotes/206395792/realtime
US : U.S.: Nasdaq
$ 20.96
-0.06 -0.29%
Volume: 0.00
Nov. 12, 2019
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/zigman2/quotes/209723049/delayed
US : U.S.: Nymex
$ 56.68
-0.12 -0.21%
Volume: 15,464
Nov. 12, 2019 11:10p
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/zigman2/quotes/209704782/delayed
UK : U.K. ICE Futures Europe
$ 61.88
-0.18 -0.29%
Volume: 4,198
Nov. 13, 2019 4:10a
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/zigman2/quotes/201948298/composite
US : U.S.: NYSE
$ 186.97
+0.26 +0.14%
Volume: 11.80M
Nov. 12, 2019 6:30p
P/E Ratio
33.45
Dividend Yield
N/A
Market Cap
$488.78 billion
Rev. per Employee
$781,259
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/zigman2/quotes/201164705/realtime
US : U.S.: Nasdaq
$ 21.04
-0.06 -0.28%
Volume: 0.00
Nov. 12, 2019
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/zigman2/quotes/204964401/composite
US : U.S.: NYSE
$ 157.59
-1.45 -0.91%
Volume: 55,849
Nov. 12, 2019 6:30p
P/E Ratio
8.35
Dividend Yield
5.30%
Market Cap
$71.01 billion
Rev. per Employee
$1.78M
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/zigman2/quotes/203421416/delayed
HK : Hong Kong
HK$ 12.08
-0.34 -2.74%
Volume: 19.01M
Nov. 13, 2019 11:59a
P/E Ratio
8.17
Dividend Yield
6.04%
Market Cap
HK$550.06 billion
Rev. per Employee
HK$13.96M
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/zigman2/quotes/200745132/composite
US : U.S.: NYSE
$ 15.64
-0.26 -1.64%
Volume: 18.28M
Nov. 12, 2019 6:30p
P/E Ratio
11.69
Dividend Yield
1.37%
Market Cap
$59.54 billion
Rev. per Employee
$1.39M
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/zigman2/quotes/208393974/delayed
BR : Brazil: Bovespa
R$ 32.52
-0.42 -1.28%
Volume: 9.43M
Nov. 12, 2019 6:08p
P/E Ratio
12.44
Dividend Yield
N/A
Market Cap
R$432.29 billion
Rev. per Employee
R$5.08M
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