We believe emerging markets, given their developing status, are inherently inefficient with high volatility relative to developed markets. Our investment approach is based on capitalizing on these fundamental characteristics of emerging markets by investing over the long-term, beyond the investment horizon of the average investor.
We aim to achieve strong performance through an investment process which focuses on compounding strong returns (not valuation change) over long periods of time. We do this because over the long run, management’s ability to exploit opportunities through internally generated funds will drive a company’s earnings and, therefore, its stock price. We concentrate on the following factors over a five-year horizon:
- earnings growth
- change in valuation
The two pillars of our investment approach are understanding and valuation. We aim to develop a deep understanding of companies over long periods through extensive discussions with management teams. We then determine the valuation of growth prospects that our understanding leads us to expect.
The GEM Discovery strategy is managed against the MSCI Emerging Markets Investable Market Index (IMI) which reflects the fact it is a strategy which captures opportunities across the market capitalization spectrum.
Additionally, a bias towards small and mid caps in emerging markets offers better exposure to the "true" EM story and the secular themes of domestic consumption and infrastructure improvement.
At the heart of our fundamental, bottom-up investment process are two questions: "Is this the kind of business we want to own?" and "At what price would we buy and sell it?". The portfolio manager works closely with the analysts to build a deep understanding of the business to answer the first question by considering the underlying economics of the business, the duration of its future growth and governance.
If the business is deemed to be of sufficiently high quality based on these factors, then the analyst’s forecast for the stock’s five-year expected return is used to answer the second question. Idea generation is a team activity centered on company meetings. In 2012, we had over 2,969 meetings with emerging markets companies.
The portfolio manager is responsible for setting the investment agenda and challenging ideas through debate and portfolio construction. The analysts are responsible for identifying suitable investments, building a fundamental understanding of their businesses and then valuing them to identify entry and exit points. Analysts are responsible for producing strategic classifications (long-term dynamics of a business) and five-year expected returns (valuation) for each stock they cover to assist in stock selection.