Reasons to invest
Small and medium sized companies (SMIDs) in emerging markets are an under-researched area that present the opportunity to find hidden gems.
Why Global Emerging Markets SMID Equity?
Emerging markets are undergoing rapid change: urban development and technological revolutions are increasing standards of living and creating a growing middle class. Trends such as digitisation, electrification, biotechnology and cyber security present exciting opportunities to identify the winners of structural change.
Analyst coverage of the SMID market in emerging markets is limited, financial disclosure is less extensive and management teams can be less experienced or poorly served by financial advisers. This presents opportunities to dive deep into financial fundamentals, informed by ESG, and discover hidden gems.
In our experience, domestic emerging market SMID investors are often too focused on short-term developments and news flow. The long-term nature of the Strategy and its focus on structural growth opportunities enables us to look through short-term market fluctuations and seek compounding returns.
How we invest
- Structural changes in the world economy are transforming emerging markets.
- The winners that emerge from this transformation will be efficient and sustainable businesses.
- This is a long-term trend requiring a long-term approach.
- Quality companies trading at attractive valuations, in countries with conditions that are supportive of growth, provide the best investment opportunities.
- In addition, we are not averse to investing in lower-quality companies where they are significantly mispriced and where we can determine a catalyst for value to be realised.
- The best way to add value for investors is through a process that integrates top-down analysis with bottom-up fundamental stock selection, augmented by ESG analysis and engagement.
Ideas are generated from a variety of sources, including meetings with company management, our global network of contacts, broker research, industry analysis and quantitative screens.
A proprietary quantitative model ranks companies on valuation, quality, and momentum factors. This screen assigns favourable scores to quality companies with a stable shareholder base and a strong management team.
We pay particular attention to the following investment criteria:
Margin of safety
Proven business models
Improving cash flow generation
Strong balance sheets
Consistency of, and improvements in, revenue and earnings
P/B justified with strong or improving ROE
Low PEG ratios
We seek to establish a company’s financial health and long-term prospects. We model financial forecasts (one- and five-year earnings), cash flow and balance sheet. This is combined with the analysis of operational, financial and ESG risk factors to estimate the intrinsic value of the company.
We aim to hold 80-110 companies in a portfolio. In stock selection, potential long-term outperformers are emphasised. Position sizes are determined by a number of factors, including conviction levels, the degree of upside to ‘fair value’, liquidity, contribution to active risk, ESG rating, country and sector exposures. We initiate positions at typically 50bps and build them incrementally with conviction. Individual stock positions are limited to a maximum 10%.
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