Why RSMR Rate this Fund

• Macro overview of the emerging markets acts as a starting point, with the managers looking for the countries with the best prospects at any moment in time.
• Large cap fund with high active share and conviction on country preferences versus the benchmark.
• Looks to deliver returns in a differentiated manner with a tried and tested process across many cycles.
• The style will shift over time, adapting to the different stages of an economic cycle.
• Can be blended with bottom-up strategies to provide portfolio diversification.

Fund Process

The investment process takes a top-down approach by firstly assessing countries/regions, then sectors/themes and lastly individual stocks. There is a five-point analytical framework with a 24-month investment horizon which drives the country allocation process. The team assess every factor for every market, every month, which is mostly done on a numerical or quantitative basis, with the exceptions being political and governance factors which are considered using a qualitative approach.  The managers assess country fundamentals to understand how economic growth will translate to equity market returns.  They also assess the monetary and fiscal environment for each individual country incorporating a range of economic variables including consumer credit growth. A policy book is produced scoring each factor in every country.

Country allocation targets are set relative to index weighting, country size and degree of conviction. A larger index constituent country with high conviction could be +/- 6% versus benchmark, while a small country will vary between +3% or have a zero-weighting, versus the index, highlighting the high conviction approach taken to country selection.  When assessing valuation, the team look at whether the market is cheap or expensive, ranked versus other emerging markets together with its own history.  Currency views are incorporated within the country view with no hedging as this is expensive in the emerging world. 

The two co-managers use their vast experience to decipher country allocations and are aided by a dedicated analyst, who is fluent in Mandarin, for stock selection. At the stock level, there is a large-cap bias with liquidity being a key consideration for the team. They believe that even at the company level, the key inputs to a stock model will be macro driven, and so they seek companies with strong macro tailwinds behind them.  The investment philosophy is to seek companies exhibiting ‘Growth at a Reasonable Price’ which fit with the top-down themes. Growth needs to be self-financing, or companies need to demonstrate established financial resources to fund the growth while the managers prefer quality companies with a lower level of gearing.

The fund will typically comprise 50 stocks with an average holding period of two years. The team focus their analytical work only on companies that are investable. Stocks which are not liked, either for their own bottom-up issues, or top-down reasons, are not covered.

Evaluation

The fund is best suited to periods of strong global growth due to emerging markets’ beta against that of developed markets. Economic considerations are the starting point for the fund process, thereby giving the investor access to skilled managers to navigate the economic climate at any given point in time.  The focus on those companies which can offer self-financed growth opportunities acts as a buffer in periods of turbulence given the reduction in external influences on a business e.g. loan servicing. The top down nature of the investment process differentiates the fund from many of its competitors.

Application

The large cap exposure grants liquidity in markets which can become volatile. The fund can be used as a core holding given its ability to act defensively in difficult markets through its top-down analysis steering the managers away from areas of potential volatility. 

Our Opinion

This fund takes a differentiated approach to many in the peer group due to its focus on country selection. This is not a homogenous region, either in terms of economic and corporate profit growth, or governance. The co-managers have successfully operated this top-down process focused on country analysis since 2006 working together at Barings before both moving to JOHCM in 2011. They both have specialist knowledge on the key macro drivers within the region and have demonstrated an ability to add value using this approach through a number of emerging market cycles. The process to date has shielded investors to some degree in down years in the market. Whilst this is a relatively small team, the process relies less on bottom-up fundamental stock research than many of the other rated funds and therefore offers investors a different approach to investing in emerging markets.