3 tips for investing in emerging markets from a Morningstar fundie of the year
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Skerryvore Asset Management lead portfolio manager and co-managing partner Glen Finegan could be classed as a global expert on emerging markets.
Before establishing Skerryvore in partnership with Bennelong Funds Management’s UK arm BennBridge in 2019, Finegan was head of global emerging market equities at Janus Henderson from January 2015 to May 2019, and the Irishman has a 20+ year career in investing.
The Skerryvore Global Emerging Markets All-Cap Equity Fund won Morningstar Australia’s 2023 award for Undiscovered Manager.
“Despite being a relatively new offering, this quality all-cap emerging markets strategy earns our highest conviction, driven by high regard for the investment team and process, which they applied in previous shops,” Morningstar said.
“We are confident this new boutique backed by Bennelong Funds Management and its international arm Bennbridge has the foundations for long-term investment success.”
Stockhead caught up with Finegan during his recent trip to Australia.
While there is no formal definition, the International Monetary Fund said “emerging markets are generally identified based on such attributes as sustained market access, progress in reaching middle-income levels, and greater global economic relevance”.
The IMF approach for identifying emerging markets includes calculations based on several factors including:
The approach identifies the following countries in the emerging market group, in alphabetical order:
“These 20 emerging market countries account for 34 per cent of the world’s nominal GDP in US dollars and 46 per cent in purchasing-power-parity terms,” the IMF said.
“These countries are also featured in commonly used indices for emerging markets, such as those of JP Morgan, Morgan Stanley Capital International, and Bloomberg.”
Finegan said while emerging markets can be risky, they should not be looked overlooked by investors who do their due diligence.
“The reason you should bother is most of the people in the world live in emerging markets, most of the world’s young people are in emerging markets,” he said.
“In large parts of the emerging world you are seeing middle class population growing and of course that creates opportunities for companies selling all sorts of products and services that in the developed world you may take for granted.”
He said retail investors might want to think about having some allocation to what can be exciting growth markets.
So what are Finegan’s tips for investing in emerging markets?
Finegan said with the opportunity comes risk and rule of law may not protect you in emerging markets like in developed countries.
“If you invest on the ASX and if your rights are abused you can go to court and protect them but you can’t assume you can do that in emerging markets,” he said.
“You have to go into emerging markets with your eyes wide open.”
Finegan said while national governance can be challenging you can find companies that are very governed with owners and managers properly aligned with minority shareholders.
“It is possible to de-risk the emerging markets opportunity substantially if you only invest in companies that have demonstrated very strong standards of corporate governance,” he said.
“Fortunately there are plenty of companies in emerging markets that would appear to have very strong growth prospects and also have a long history of looking after all their shareholders in a proper manner.”
There are still a lot of government-controlled companies in emerging markets.
“The largest oil company in Latin America is Petrobras which is a state-controlled company and one of the largest banks in India the State Bank of India is controlled by the government,” he said.
“Obviously huge parts of the Chinese economy are controlled by the government.”
Finegan said he would argue that you are better off not investing in government controlled companies in emerging markets.
He said there was always a risk of corruption in such situations but “more importantly” be aware such companies are often “run in the national interest or political interest”.
“When allocating capital it may not be where they can make highest return for shareholders,” he said.
“If you narrow down to a subset of really well governed companies that are far away from the government you can build a very interesting portfolio of business that should be able to take advantage of this long-term demographic tailwind that exists in places like India, Africa and Southeast Asia.
“There’s lots of young and growing population with middle class aspirations and consuming more products and services so there’s opportunities for good companies to take advantage.”
Finegan said you don’t have to compromise with global leading companies often in emerging markets.
“We find global leading technology companies in emerging markets,” he said.
“TSMC is the largest manufacturer of microchips, is based out of Taiwan and able to make the most sophisticated microchips in the world.
“There isn’t really any company in the world that can do what they do at the scale they do it.”
Finegan said there are global leaders in emerging markets and companies becoming global leaders in their field.
“It is a very exciting part of the world to invest in and too big to ignore and so you have to find a risk aware way of getting exposure,” he said.
The views, information, or opinions expressed in the interviews in this article are solely those of the interviewees and do not represent the views of Stockhead. Stockhead does not provide, endorse or otherwise assume responsibility for any financial product advice contained in this article.