In the third part of his analysis of EM equity investment trends, Rob Griffin grills two rated managers on what role China plays in their respective funds and the wider market.

Geoffrey Wong, AAA-rated manager of the UBS Global Emerging Markets Opportunity fund, says being close to the action is a key competitive advantage in emerging markets.

‘We have a strong, stable and experienced local team, with a particular strength in China where there are specialist analysts,’ says Wong, who is ranked first over three years.

‘Boots-on-the-ground’ fundamental research, along with an investment process focusing on valuations from a long-term perspective, are also important.

The incentives of both portfolio managers and analysts are also significantly tied to the outperformance of the fund – a clear motivation to do well.

‘Our performance has been generated through stock-picking, which is well-diversified across regions, sectors and countries,’ he says.

Over the past three years, a significant part of the fund’s alpha has come from stock selection in financials, consumer discretionary and IT.

‘This was driven by holdings in the Chinese insurance space and the Indian banking sector,’ Wong says. ‘In consumer discretionary, our exposure to South Africa’s dominant media and internet firm also added value.’

Within IT, exposure to Taiwanese hardware & semiconductor companies, and a couple of dominant Chinese internet firms, significantly contributed over this period.

Wong believes better corporate earnings and profitability, an improving economic backdrop and a transition in the fundamental forces driving emerging markets will be among the key drivers.

‘Emerging market equities are increasingly a domestic play, fuelled by secular growth sectors like the internet and consumption, away from highly cyclical industries,’ he says.

Meanwhile, demographics remain supportive of emerging markets over developed ones. ‘Working-age populations continue to grow and incomes are rising,’ he says. ‘These changes should result in increasing emerging market stability and growth over the coming years.’

Dollar dynamics

AAA-rated Gary Greenberg of Hermes Global Emerging Markets agrees that many of these regions have enjoyed powerful recoveries, spurred by the weak dollar.

However, he is optimistic that profitability will continue to improve, suggesting that headwinds turning into tailwinds could make it an attractive time to invest.

‘The market remains inefficient and this presents a great opportunity for us as active managers,’ says Greenberg, who is ranked seventh and second over three and five years, respectively.

In recent years, the fund’s performance has largely been driven by stock selection in China, India, the UAE, Korea and Russia.

Greenberg believes innovative and value-adding emerging market companies are likely to be long-term winners. As such, Tencent is one of his holdings. ‘It’s a leading provider of internet value added services in China and has surpassed its Western peers in the curation of its massive social network,’ he says.

He adds that 80 million people in China will play Honour of Kings on their mobiles during peak days but says the company’s greatest success has been in social networks.

‘It owns WeChat and Qzone, the equivalent of WhatsApp and Facebook, which are banned in China,’ he says. ‘Nine hundred million users are signed up to both networks.’

These comments originally appeared as part of a supplement which was published with the December edition of Citywire Selector magazine.