In the first of a three-part series, Rob Griffin sits down with leading EM equity managers to understand what is driving their current thinking and what major themes will dictate investment thinking in 2018.
Thomas Schaffner, who runs the Vontobel Fund MTX Sustainable Emerging Markets Leaders fund with Roger Merz, believes in the benefits of doing your homework.
‘It’s important to know the companies we invest in, so most of our time is spent looking at them and trying to find leading businesses,’ says the Citywire AAA-rated manager, who is ranked joint-second over three years.
Irrespective of its domicile, Schaffner wants answers to key questions before he considers adding a company to their portfolio.
Among the most crucial factors are whether the business model will allow the company to gain market share, increase its product offering, or re-deploy its cash.
‘We try to understand what kind of customers they serve and why they buy its products,’ he says. ‘We also focus on valuation and make sure we don’t overpay.’
For these reasons stock selection is the main driver of performance and portfolios are constructed purely from the bottom up. Sector and country allocations will be defined by these stocks.
‘We like companies which are leading in terms of return on invested capital [ROIC] or industry positioning, trade at a discount to fair value, and meet minimum ESG criteria,’ he says.
At a country level, China remains the fund’s biggest allocation, due to the quality of the companies available and the size of the market, as well as its valuations.
‘From a sector perspective we hold large positions in information technology and financials,’ he says. Schaffner believes the technology sector, especially in Asia, has been competitive because it invested up to 30% of annual profits in research and development.
‘Leading companies like Tencent and Taiwan Semiconductor have superior technology and intellectual property compared with their competitors,’ he says. ‘We still see many structural growth opportunities in that sector.’
The outlook for banks is also positive, while the economic environment has improved. ‘We have seen positive developments in terms of growth in free cash flows and profits,’ he says.
This all adds up to a bright outlook for emerging markets in 2018, with the global economy continuing to improve, which has seen both Brazil and Russia recovering from recessions.
‘In 2017, overall ROICs for emerging markets have been rising for the first time in five years, the importance of which cannot be stressed enough,’ says Schaffner. ‘This is one of the key drivers of the strong emerging markets performance this year.’
He also expects cash flows to improve significantly in 2017 and 2018, driven by improved corporate margins.
‘At the same time, valuations remain benign with emerging markets trading at a discount to developed ones and just below the average historical valuation multiple on both P/E and price-to-book,’ he says.
The Vontobel Fund MTX Sust Emerging Mkts Leaders fund returned 50.4% in US dollar terms over the three years to the end of December 2017. This compares to a 31% rise by its Citywire-assigned benchmark, the MSCI EM (Emerging Markets) TR USD, over the same timeframe.
These comments originally appeared in a supplement which appeared with Citywire Selector magazine’s December 2017 edition.