Why Emerging Markets Have Lagged Developed Markets
DAVID SEMPLE: It's true that emerging markets have had a disappointing performance relative to developed markets, although in absolute terms maybe they're not quite as bad. I think there are a number of reasons for this, not least of which the U.S. economy seems to be picking up. Europe may be getting better. Japan has obviously had some significant changes.
Within emerging markets, there are some significant things going on. I think there's a lot of skepticism on China. I think a lot of that is misplaced. There's also the strength of the U.S. dollar, which tends to be unhelpful for emerging markets. But one of the other reasons, which people who are perhaps not intimately involved with emerging markets should realize, is that corporates have failed to deliver the EPS [earnings per share] growth which is in line with the GDP growth, which has been superior in emerging markets. That has been a disappointment over the last couple of years.
Using the GARP strategy
SEMPLE: Our strategy is focused on bottom-up. There are a lot of companies in emerging markets that have done well. But that's really a function of just being there. If you're in an economy that's growing fast, you don't have to be that good to really do well. We focus on meeting management and assessing the management and the business philosophy -- the DNA of the company. It's very important in emerging markets.
There are some companies which actually do very well within emerging markets and are efficiently run. There are also a lot that are not; many state-owned enterprises for instance, are not particularly strongly run. When we find a company that can really talk about managing its capital effectively, managing its costs effectively, then it's very refreshing for us and those are the kinds of companies we seek out.
Examples of Companies
SEMPLE: Obviously the environment has been fairly challenging for many of these companies, but we think we can find stocks that will thrive nevertheless. Our strategy focuses on structural growth at a reasonable price. I can give you a couple of examples.
One example is a company called Tiangong in China. It makes high-speed steel. Amongst other things, it's used for drill bits. Tiangong is a company that has made very good use of the fact that China actually mines the vast majority of rare earth metals. It alloys steel with rare earths to create particular characteristics. It's now the world leader in high-speed steel. The steel industry in China, nothing special; but Tiangong, doing well, protects its margins well -- it's a growth company.
One of the reasons why emerging markets companies have not done so well is corporate governance, and that particularly is the case in Russia. When we invest in Russia, we're really very specific about the types of companies we invest in and we spend a lot of time looking and thinking about management to make sure that we're with the right people. We own a company called Raven Russia. It's an investor in grade-A logistic warehouses in the outskirts of Moscow and St. Petersburg. Raven is very well-run, and it understands how to maximize its capital. They've not only been instituting dividends, but also tendering for shares from shareholders -- it's a form of buyback -- to maximize its balance sheet.
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