Team work and locally-based experts are the key factors behind the performance of the T. Rowe Price Global Emerging Markets Equity fund, according to Todd Henry, emerging market portfolio specialist at T. Rowe Price.
Based on data provided by Morningstar, this Luxembourg Sicav is the top performer in the equity global emerging markets category over three years. The fund invests in a diversified global portfolio of stocks in emerging economies in Latin America, Asia, Europe, Africa and the Middle East.
“Our approach in the management of global emerging market equities has been to have somebody leading the strategy but the individual decisions are left to local experts,” Mr Henry explains. “Our style is a team-based one because we think that having managers that have long experience in managing investments in emerging markets and a regional focus allow us to go very deep into the opportunities set.” Four portfolio managers are supported by 12 analysts based around the globe whose main focus is to perform fundamental research on companies in their region. “It’s a very bottom-up approach although there is also a top-down element.”
Over 50 per cent of the fund’s total assets are invested in some of the largest emerging economics including Brazil (12.2 per cent), South Korea (11.6), China (11), Taiwan (10.7) and Russia (9.9).
Mr Henry explains that competition in emerging markets equity has grown considerably over the last decade, making it more difficult for managers to differentiate themselves. “Ten years ago there might have been 15 or so different managers with a 10-year track record, and now there might be 50 of them,” he says adding that this hasn’t changed much the way the firm approaches the asset class although the portfolio has become more diversified to include small and mid cap stocks and greater exposure to some more peripheral markets. “We were very early in Egypt where a couple of years ago there was a pretty significant reform at government level.” At the end of February, the fund’s exposure to Egypt represented 3.8 per cent of the total portfolio. “Recently we have been investing a reasonable amount in Kazakhstan and we will continue investing in some of the markets that people call frontier markets,” he says. Allocation to Kazakh stocks represents 2 per cent of the fund’s total investments, which are less well covered and researched.”
For investors in the region volatility is always a main concern. After the sudden sharp fall in Chinese equities in late February and other volatility waves over the last few years, many approach the asset class with caution.
“Overall volatility in emerging markets has actually fallen over the last couple of years, but we would be the first to say that we shouldn’t lure people into a view that volatility is going to be low in this asset class,” he explains. “I think we will continue to see quite a bit of volatility in emerging markets.” He says the firm’s approach is to take advantage of volatile periods to reposition its portfolios by buying high-conviction stocks that are being sold off because of external events.
Corporate governance standards is another consideration for many investing in the region. Mr Henry says that corporate governance practices among companies in the region have generally improved over the last few years. A good example is the success of Brazil’s Novo Mercado – or new market – a stock market who follows corporate governance rules in line with those in the US and Europe that almost double its listings in 2006.
“Things get more difficult when it comes to investing in smaller companies and in some those peripheral markets but that argues for a bigger team and locally-based team to be able to research these companies.”
