Emerging Markets Equities: Company Selection
TOM BUTCHER: Hello and welcome to this edition of Van Eck Insights. I'm your host, Tom Butcher. I'm here today with Patricia Gonzalez and David Feygenson, who are both with Van Eck's emerging markets equities strategies. Patricia is an analyst with a specialized focus on Latin America, emerging Europe, the Middle East, and Africa. David is a senior analyst who focuses on Europe, the Middle East, Africa, and Asia. Today we will examine how these strategies, which are bottom up, as opposed to top down, select their investments and discuss examples of those investments. David, perhaps you could kick things off by telling us a little bit about how you select those investments.
FEYGENSON: We employ a bottom-up investment philosophy. We look for companies that demonstrate structural growth, as opposed to cyclical growth, and at a reasonable price. We like companies for which we can see persistent long-term trends in earnings growth. We look for things such as quality of management, an attractive business model, and in some cases, a structural tailwind that can help the company's business. We also pay attention to valuation. We want to make sure that what we are buying is at a reasonable price, and that we can get reasonable upside to what we think the company is worth.
BUTCHER: Thank you. Patricia, perhaps you could tell me about one of those investments.
GONZALEZ: Sure. I think a good example is a company that I have been following for many years and that we have had in the portfolio for a while. It is called Creditcorp. Creditcorp is the holding company for Banco de Credito del Peru (1.61% of net assets of Van Eck Emerging Markets Fund, as of 2/28/15), which is the largest bank in the country. We think this is one of the best structural growth stories within the Latin banking universe. When we look at Peru, we see the penetration of banking is still very low, and therefore we think that there are very good opportunities for bankarization there. The bank has an outstanding market share. It has a very large distribution network. It has been focusing on maintaining costs and efficiencies, and it's a bank that is very proactive in looking for growth opportunities or sectors where penetration is still very low. We think we could see very good growth for the bank over the next few years, and I think, very importantly, that it is a bank that will continue to deliver very sustainable returns. As we said, management is very important to us. In this particular case, I think the management of Creditcorp has been focusing on long-term growth, and I think they understand the dynamics of the country, which is very important. Finally, when we look at the valuation- in particular, when we look at Creditcorp compared to its peers in the region (in Mexico or some of the other Andean countries), we continue to see very compelling valuation when we adjust for the growth and returns that this bank might provide. We think this is a very comfortable name to own, and one that demonstrates structural growth at a reasonable price.
BUTCHER: Thank you very much indeed. David, do you have an example that you can tell us about?
FEYGENSON: Sure. A name that we've owned in the portfolio is called Luxoft (1.82% of net assets of Van Eck Emerging Markets Fund, as of 2/28/15). It is actually a company that's listed on the New York Stock Exchange, but most of its workforce is in Russia and Eastern Europe. As a result of our flexible approach that enables us to go anywhere in emerging markets to invest, the company appeared on our radar screen. What they do is provide high-end technology solutions to a number of industries, mainly the banking, automotive, and telecom sectors. What we like about this company is it takes advantage of a trend of outsourcing of IT spend in these particular industries, and it has built very high-end custom solutions for companies such as Deutsche Bank and UBS. That ingrains a company in their business and the switching costs away from their product is incredibly high. This gives us a high level of recurring revenue and also allows us to see into the future with good visibility as to what earnings might be in a few years' time. We also like a business such as this because it benefits from highly skilled and educated workers in a lower cost jurisdiction (in this case, Central and Eastern Europe). Again, what we see with this type of business is that, over time, as they deliver good product, they're able to then attract new business and as a result, we can see structural growth over time.
BUTCHER: Thank you very much indeed. My thanks to both Patricia and David for an explanation of the investment process and two very interesting examples of their investments. Goodbye from Van Eck Insights.
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