Global markets never stand still, and the world is changing every day – but are investors anchored on old information and missing potential opportunities? Ross Teverson, head of strategy, emerging markets, outlines why a focus on change is central to his team’s investment process.
In Jupiter’s emerging markets team our investment philosophy is centred on the search for under-appreciated change. This is because we believe that markets are inherently inefficient, overlooking the impact of change on a company’s fortunes.
This inefficiency is due to persistent market characteristics, including a tendency for investors to become anchored on a historic perception of the company or its share price, herding around a relatively narrow range of stocks and short-termism that causes investors to miss the positive long-term changes that are taking place.
Identifying change The sort of changes we look for can be classified into three categories. The first is structural, where there is significant long-term change such as rising penetration of a company’s products or services. The second is industry change, when an industry is becoming more consolidated or seeing improved pricing power. Finally, we also look for company-specific change, which could be down to capital management or a new product offering.
When we have identified a change that is taking place, we try to determine if that change is reflected in the share price. We do this by comparing our own expectations for the stock to sell-side models, analysing the valuation relative to the market and historic averages. Finally, it is important that we can identify a catalyst for why any under-appreciated change for a company will become more recognised by the market.
Third-party company research on emerging market stocks, particularly outside the large caps, can be scarce and poor in quality. This creates a significant opportunity for us to get on the ground, research and visit companies to give ourselves a better understanding than the market of what is changing in a company’s outlook.
Investing through volatility Changing situations are often disruptive, but they create opportunities for some companies to thrive. It is no coincidence that the Mandarin character for crisis is made up of the characters “risk” and “opportunity”.
Investing in emerging markets will always be a relatively high-risk endeavour, but there are a number of approaches we take to mitigate risks and diversify on a relative basis in the Jupiter Emerging Markets strategy, which we believe differentiates us from many of our peers.
Emerging markets indices tend to be heavily skewed towards large cap companies and with high concentrations in a handful of countries and industry sectors, but we are comfortable building portfolios that look different to the benchmark.
This is most clearly evident in our strategy’s unconstrained approach, as we are free to invest in the most promising multi-cap opportunities, with a higher proportion of small and mid-cap stocks than would be typical for an emerging markets fund. In our view, this is a structural positive, given the long-term outperformance of mid and small-sized companies in emerging markets, which we believe can be explained by the higher growth potential and higher levels of management equity ownership.
Being benchmark agnostic is also reflected in our willingness to explore opportunities in frontier markets, such as, for example, in Georgia, Kenya and Nigeria. The favourable demographics and, in some cases, fast-growing economies of certain frontier markets have created a multi-year tailwind, ideal conditions for structural change. Additionally, frontier markets exhibit a low correlation to some of the larger emerging markets, not least China, which aids risk management by offering diversification.
Volatility and risk, whatever their source, are naturally important for us to manage. For long-term investors, however, the short-term fluctuations of markets should be of little concern, and the volatility of emerging markets is, in fact, an effect of the pace and magnitude of change that happens there.
Encouraging a contrarian mindset You might notice that there were few terms I did not use when describing our strategy, such as “value”, “growth” or even “quality”. That is because under-appreciated change can be found in any part of the market, and in any kind of stock. Our focus is on identifying materially under-appreciated change for a company, and where there are catalysts that we believe will focus the market’s attention on what is improving for a business.
This discipline tends to steer us away from universally-liked stocks and encourages a contrarian approach to stock-picking, as well as a forward-looking analysis of each stock. We believe that over the long-term this strategy can result in superior relative returns.
Ross Teverson, head of strategy, emerging markets, Jupiter Asset Management