“We believe in active management because our research shows that over the past 15 years it has mostly outperformed passive management. We go for quality companies that have low leverage, a strong business model and franchise as well as attractive valuations. We have exposure to small to mid-cap and tend to favour consumer goods and banks which are tied to domestic growth. However, it is important to have specialist managers with dedicated resources in this area.”
Derrick Irwin, portfolio manager of Wells Fargo Asset Management also looks at companies with robust management teams who have consolidated as well as strengthened their positions. These include Ctrip, a travel agent and Belle International, both based in China as well as retail chain Lojas Americanas in Brazil.
“We have always had an active strategy, but the last few years have been challenging from a macro-economic point of view due to low global interest rates and weak growth. However, I think we are at an inflexion period and see greater opportunity to add value at the individual stock level. The depreciated currencies has made companies more competitive and forced some to make the necessary structural changes.”
SMALL, BUT MIGHTY
Not everyone though is casting their nets wide. Lena Tsymbaluk, manager research analyst, covering emerging market funds for Morningstar believes the small cap sector offers long-term outperformance due to its exposure to the local growth picture.
“If you look over a 10-year period, the MSCI small cap index returned 11% per annum against the mainstream index’s 8.8% with similar volatility. Over a five-year timeframe, this was 6.3% compared to 4%. Also, because ETFs do not track them, they are less impacted by outflows. Active versus passive management is the eternal question, but because emerging markets are so inefficient, unlike the US and Europe, we would favour an active manager that invests in high quality companies.”
Wim-Hein Pals, head of emerging market equities at Robeco also believes there is greater opportunity to add alpha in small to mid-caps in the consumer staples space. Unlike some of his colleagues though the Dutch fund management group applies a more top-down approach which analyses the macro-economics, politics, earnings, business sentiment and valuations in each country.
“One of the main problems with large caps is the valuations are too high. For example, Hindustan Unilever in India is trading at 40-times earnings whereas smaller companies such as Dabur India are trading way below Unilever and are in the same sector. Also, they are much closer to the local community and delivering higher earnings per share growth and return on equity.”
Despite the torrid time emerging markets have undergone recently there are pockets of opportunity to be found. But in an unpredictable sector, rooting out these opportunities is no easy task and takes a skilled manager to buy at the right time.
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