Why emerging market investors shouldn’t copy Indiana Jones
Raheel Altaf says that analysing emerging market companies from the UK, rather than the emerging markets themselves, ensures he remains emotionally detached and allows him to focus on what really matters.
Reading some fund sales literature, you might think that it is possible to invest successfully in emerging markets only by being some sort of Indiana Jones character.
I like to imagine myself racing from country to country in my Artemis biplane, covered in dust and bruises from various adventures in a relentless search for companies no one has heard about before.
Relentless, yes, but – for me at least – also pointless. I have not been on a foreign jaunt in years. When I started my career at Fidelity, back in 2002, the legendary Anthony Bolton would say that going to meet companies gave you an edge. The analysts might all be forecasting earnings growth rates of 10% a year, but conversations on the ground could tell you a different story.
I recall an ex-colleague who covered Sub-Saharan Africa. He would go to Ghana and be met at the airport by a motorcyclist who would take him to see businesses so he could get company data disclosure directly. But data availability has really improved for more liquid emerging markets.
Better availability of information
Our investable universe has doubled in the past decade. There are now around 3,000 companies on which there is sufficient and reliable data on which to make an investment decision. The asset class has matured. There are more big companies; they have a longer track record, and they have better data availability.
With so much information available online, are we saying that somehow visiting a factory in the middle of nowhere would allow me to intuit extra vital insights? Ask my wife – intuition is not one of my strengths.
Moreover, I am not sure that I could judge who has these ‘soft’ skills. So it would be no good giving me a global team of analysts to manage and telling them to do the legwork, because that would require me to make similar judgment calls on them – such as ‘that analyst is always very cautious’ or ‘that one can get a bit too enthusiastic’.
Spotting fraud
Some people will say that being on the ground enables you to see the facilities and reduces the chance of fraud. Most experienced fund managers have found at some point one of their holdings touched by this issue. Fraud is hard to spot. If the perpetrators were so blatantly crooked that you could tell by meeting them or visiting their premises, I would hazard a guess that in the larger-cap arena in which we operate, everyone would soon know what they were up to.
Fraud is hard to spot. If the perpetrators were so blatantly crooked that you could tell by meeting them or visiting their premises, I would hazard a guess that in the larger-cap arena in which we operate, everyone would soon know what they were up to.
With the history of markets showing that many companies do not survive the test of time, we like to diversify our exposure across companies, geographies and sectors. This mitigates risk.
Another common argument for investing in a fund with teams on the ground is that they have a better sense of perspective. I understand this. Even despite the recent stimulus announcements, many investors looking at China through the prism of the UK and developed market media see a property sector in turmoil, a failing economy and government curbs that restrict enterprise and growth.
While there are some truths in those observations, the reality is that China is undergoing change. It is becoming more self-sufficient. Many of the changes should have longer-term benefits for the country. The domestic recovery is taking time, but company valuations look attractive. China has seen huge innovation in technology, artificial intelligence (AI) and manufacturing. The government has not suppressed enterprise in these areas.
We have nearly 30% of our fund in China – a significant overweight position that puts us in a good place to benefit from stimulus. But I did not need to travel to China to make this judgment.1
Too much information
I took this position by gleaning insights from a rigorous analysis of data. If anything, there is too much information. We use a proprietary system to sift through data from a range of sources, to make analysis more manageable. The building blocks are company fundamentals, behavioural insights and market trends.
By comparing the characteristics of one company with the rest of the universe, we are able to identify a shortlist of those on attractive valuations with good growth and quality features that merit closer inspection. It helps to ensure we are empowered by information, not overpowered.
And AI is helping even more. Today, managers like us can use a news service from a data provider that takes articles from more than 100,000 international news sources, translates them and feeds them into an ever-improving language-processing algorithm to tell us whether the coverage around any company is positive or negative.
It all adds to our knowledge. And it is fast – if a company has a data leakage, you know about it the next day. It gives you a more objective way of assessing the more granular characteristics of a business beyond company disclosures.
It works for me
This ‘home comforts’ approach is not the only one. I am sure other managers – particularly those with a small-cap bias – will raise objections and say meetings still matter. I acknowledge that.
But this model works for me. It helps us overcome behavioural biases that can develop from tracking companies for long periods of time. It frees us from the emotional attachments to a business that might emerge from visiting. And it focuses our minds on the financial characteristics that really matter.
Moreover, our investment process is designed to deal with a range of market conditions, with diversification at the heart of our risk management approach. Ultimately, I believe this should all feed into performance.