Emerging market investor goes against grain

‘Buy the shares, not the market’

WHEN-stocks in the developing world were withering under a $6.6 trillion (R89.6 trillion) meltdown between June and last month, not every money manager headed for the exit. Phil Langham was among those who stayed put and even bought more.

The head of emerging-market investments at RBC Global Asset Management, who manages about $2.3 billion in assets, lives by one rule: don’t buy the market, buy the shares.

Even as half of the 30 largest developing nations entered a bear market amid concern over China’s slowing growth and a potential increase in US interest rates, his fund expanded its portfolio via stocks such as China Mobile, Brazil’s Banco Bradesco and India’s Housing Development Finance.

“The market is very focused on short-term news flow, short-term earnings,” Langham said in London last week. “By taking a much longerterm view, we feel we are able to catch a more realistic picture of a company’s real valuation.”

Bargain hunting

Langham’s strategy of ignoring broader trends – bull or bear – and hunting for bargains at all times is borne out by his track record. His fund has given better returns than 98 percent of its peers over the past three years. Even as the end of China’s two-year, 165 percent rally pushed most emerging-market money managers into a loss over the past three months, Langham limited his damage to 6.6 percent, the third-best performance among a group of funds investing across emerging markets.

Langham’s stance runs contrary to the nervousness exhibited by emerging-market investors. US exchange-traded funds that invest in these nations have witnessed 10 consecutive weeks of outflows, losing more than $12bn since mid-July alone. Options traders are paying the most since June 2013 to buy insurance against further declines. The benchmark MSCI emerging markets index has tumbled 16 percent this year and price swings are at the highest since 2011.

Investor pessimism is grounded on many reasons. Annual economic growth in China, the biggest component of emerging markets, is forecast to fall below 7 percent for the first time since 1990, the year the Shanghai Stock Exchange was re-established after World War II. That means the country’s equities market hasn’t had this sluggish an economy before.

That has added to nervousness caused by a potential increase in US interest rates this year, which could draw investment flows away from emerging markets and into dollar assets. Smaller developing nations such as Kazakhstan and Vietnam have embarked on competitive devaluation of their currencies, undermining returns for foreign investors.

So what explains Langham’s confidence there’s money to be made in emerging markets even now?

By taking a much longerterm view, we feel we are able to catch a more realistic picture of a company’s real valuation.

“Generally, when it comes to macro, you often only notice the improvement after the share price has rebounded,” Langham said, explaining that there could be a lag between market trends and actual economic performance.

“If you wait to see good data, you’d be too late.”

China and Brazil are the worst performers among emerging markets since Beijing policymakers devalued the yuan in a surprise move last month. Still, those are the very markets that Langham is busy buying shares in.

There is a common theme that binds all of RBC’s stock picks though. Langham said that to qualify for his investment, a company must have a long-term strategy for maintaining profitability and be well-managed, so that short-term vicissitudes do not affect it.

“It’s really very bottom-up focused,” he said. “We look for franchises where the competitive edge will still be there five, 10 years into the future. – Bloomberg