Perspective: New Frontiers | AAG Wealth Management

Perspective: New Frontiers

Posted: May 28, 2014

Each month, we look at the economic and investment world from a different view point…

May 2014: Ajay Krishnan and Roger Edgley from Wasatch Advisors

New Frontiers

American fund manager Wasatch Advisors, in the years after it was established in 1975, built a reputation as an investor in the US equity markets, but over the last 12 years it turned its attention first to international small cap and then, since 2007, emerging markets. A relatively unfamiliar name to UK investors, the Utah-based firm has $19.3 billion of assets under management for both institutional and retail investors. Wasatch fund managers Ajay Krishnan and Roger Edgley have been appointed to co-manage St. James’s Place’s Emerging Markets Equity fund. Chris Ralph, the chief investment officer at St. James’s Place, talked to Krishnan and Edgley about their investment approach that takes their team to all corners of the globe.

Chris Ralph: Can you explain your ‘multiple eyes’ approach to investment management?
Roger Edgley: An academic, Sam Stewart, founded Wasatch Advisors, and an academic-like air of openness pervades the firm. Our ‘multiple eyes’ approach means that every company is vetted by many different analysts and portfolio managers – each using the same philosophy and process. Wasatch encourages collaboration within the team so that lessons learned about industries, sectors, countries and business models can be applied to each investment. Our investment professionals travel in teams of two to four to perform onsite due diligence. This openness leads to multiple eyes viewing each company and ultimately is a key component of Wasatch’s competitive advantage. Wasatch does not have a ‘silo’ culture where managers operate independently within the same shop. Instead, we have one of the most experienced and comprehensive small and mid-cap research teams in
the industry.

Chris Ralph: Does your approach favour businesses with a certain market cap or those in specific industries/sectors?
Ajay Krishnan: We believe our approach offers clients an opportunity to invest in the market-cap range below the one employed by traditional emerging markets funds. Large-cap stocks are widely covered and are heavily invested into by many emerging markets funds. Small caps can be illiquid and difficult to access. While our strategy is an all-cap approach, Wasatch believes investors can find both inefficient markets and liquidity through a concentrated portfolio with significant allocation to mid caps. Companies that trade between $3 billion and $20 billion are the ‘sweet spot’ for the portfolio, and offer sufficient liquidity for this concentrated approach. However, because they are smaller than the companies typically invested in by traditional emerging markets investors, there are still inefficiencies to be exploited.

The portfolio focuses on companies with strong cash flows and returns on capital sufficient to self-finance the company’s growth. The portfolio seeks to minimise volatility by investing in companies tied heavily to local market demand as opposed to exports or global cyclicals. By investing in companies whose revenue is driven by local market demand, the portfolio is able to take advantage of the low correlations between countries in emerging markets. While the portfolio seeks investments in all sectors, this focus on local market demand leads to consistent exposures in the consumer discretionary, consumer staples, healthcare and financials sectors.

Chris Ralph: Do you need on-the-ground knowledge to invest in emerging markets?
Roger Edgley: It is important to get out in the field and perform in-depth due diligence on potential investments. Our analysts and portfolio managers typically spend two to eight months of each year on the road visiting companies. Our diverse team speaks 10 languages, including Chinese, Russian, Hindi and Vietnamese. We look for the benefits of on-the-ground information and the ability to make global comparisons. Extensive travel provides the benefits of on-the-ground knowledge without the myopia of a local office. Our analysts are not located in one specific country, and are able to find the best companies around the globe. By travelling extensively and visiting companies in several countries, Wasatch compares companies against domestic competitors and global peers. For example, the Emerging Markets Equity portfolio looks for the highest-quality retailers across the global emerging markets, not just in one country. Because the focus is on high-quality, long-duration growth companies, our investment horizon is five years plus. Our competitive advantage is not based upon out-trading local market investors and short-term sentiment and volatility.

Chris Ralph: Could you describe how your global approach looks beyond the BRIC economies?
Ajay Krishnan: We have found that smaller, non-BRIC countries are particularly attractive. One reason for their relative attractiveness is that companies found in the smaller emerging countries tend to have greater exposure to domestic demand. By comparison, traditional emerging markets managers tend to heavily weight the BRIC economies, which results in a portfolio with exposure to global financials, energy, materials and industrials. These sectors within BRIC markets tend to be more highly correlated with developed market returns. The Emerging Markets Equity portfolio seeks to be less correlated than the BRICs to developed markets. We seek to avoid biases at the beginning of our process and evaluate every company in every emerging market. Our multi-factor model is an initial screening tool that allows us to compare companies across many countries and industries.

Chris Ralph: Can you provide some examples of the harder-to-find companies in the portfolio?
Roger Edgley: For example, the number of analysts who’ve made a recommendation on an average company within the MSCI Emerging Markets Index within last three months is 16. SouFun Holdings and Discovery each had five recommendations in the last three months. SouFun Holdings operates a real estate internet portal and home furnishing and improvement website in China, providing e-commerce, marketing, listing and other value-added services and products for the domestic market. Its website supports an online community for the real estate and home furnishing and improvement sectors in China. Discovery is a South Africa-based health administrator, life insurer and asset manager with joint venture operations in the UK, US and China. The founder and chief executive, Adrian Gore, started the company in 1992, which is now a $4.2 billion market-leading franchise with consistent growth in existing markets and a history of innovation and attractive valuation.

Chris Ralph: How much is political risk a consideration when deciding whether to add a new company to the portfolio?
Ajay Krishnan: Wasatch carefully monitors political risk in each country in which it invests. The team travels to each country and performs due diligence, including on companies, regulatory authorities and other governmental officials. One of the best gauges of a country’s fiscal health, which directly impacts its political health, is the strength of its central banking system. We invest in banks across emerging markets and an evaluation and ranking of the relative strength or weakness of a country’s central bank is critical to its investment analysis.

The portfolio seeks to invest in companies tied to domestic demand as opposed to export-driven sectors such as energy and materials. One reason for the portfolio’s tendency to underweight the energy and materials sectors is due to the high frequency with which companies in these sectors endure political and regulatory meddling. Wasatch has an international trade compliance committee which evaluates the risk and suitability of each country considered for investment from an operational/trading perspective. Portfolio managers have the ability to invest in countries only if they are approved for investment by the committee.

Points and Views

  • Wasatch Advisors takes a rigorous, academic-like approach to investment research and selection, with teams of two to four travelling the globe to carry out on-site due diligence.
  • Companies that trade between $3 billion and $20 billion are the ‘sweet spot’ for the portfolio, and offer sufficient liquidity for this concentrated approach, says Krishnan.
  • With a focus on high-quality, long-duration growth companies, the portfolio’s investment horizon is five years plus.
  • The portfolio seeks to be less correlated than the BRICs to developed markets, and uses a multi-factor model as an initial screening tool to compare companies across countries and industries.
  • Examples of ‘harder to find’ companies in the portfolio include Chinese online property and home group SouFun Holdings and South African health administrator and financial services group Discovery.
  • The portfolio invests in companies tied to domestic demand as opposed to export-driven sectors such as energy and materials, which Wasatch believes are prone to political and regulatory meddling.

 

The opinions expressed are those of Ajay Krishnan and Roger Edgley and are subject to market or economic changes. This article is not a recommendation, or intended to be relied upon as a forecast, research or advice.

The information contained is correct as at the date of the article. The information contained does not constitute investment advice and is not intended to state, indicate or imply that current or past results are indicative of future results or expectations.

Alexander Associates Group (AAG) is a holistic Wealth Management group and provider of a wide range of complementary services. The wealth management advice, for both individuals and corporates, is provided by AAG Wealth Management, a Principal Partner Practice of St.  James’s Place Wealth Management. Other services offered by AAG fall outside of wealth management advice and are separate and distinct to the services offered by St. James’s  Place. They are not covered by the St. James’s Place guarantee*, which is solely reserved  for wealth management advice provided by representatives of AAG Wealth Management.

*St. James’s Place guarantees the suitability of the advice given by members of the St. James’s Place Partnership when recommending any of the wealth management products and services available from companies companies in the group.

AAG Wealth Management represents only St. James’s Place Wealth Management plc (which is authorised and regulated by the Financial Conduct Authority) for the purpose of advising solely on the Group’s wealth management products and services, more details of which are set out on the Group’s website www.sjp.co.uk/products. The `St. James’s Place Partnership’and the titles `Partner’ and `Partner Practice’ are marketing terms used to describe St. James’s Place representatives.

 

 

 

 

 

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