Outperforming the US stock market index and 97% of its peers! This emerging market fund selects stocks like this.
20/11/2024
GMT Eight
Cusana Capital LLP founding partner and Chief Investment Officer Rob Marshall-Lee is one of the few fund managers who have been able to achieve returns similar to the US stock market by investing in emerging market companies. According to the latest data as of September 30, the emerging market equity fund he manages has provided investors with a return of 37% in the past 12 months, outperforming the S&P 500 index and 97% of his peers. Notably, among the top 20 companies with the highest weight in the benchmark MSCI Emerging Markets Index, he only holds one company and attributes his excellent performance to this.
Marshall-Lee points out that most companies in the emerging markets destroy the returns brought by a select few high-performing stocks. He believes that it is best to have a concentrated portfolio, and he has selected the US seven giants as a model for his selection. The fund manager said in an interview, "In the emerging markets, the top 5% of stocks create 83% of net wealth, while the 95% of stocks generally lose value. You need to avoid that 95% and focus all your efforts on finding that top 5%. Within that range, we try to identify the top 25 or 30 companies with the highest risk-adjusted returns."
For example, he mentioned that companies like chip manufacturer Taiwan Semiconductor Manufacturing Co., Ltd. Sponsored ADR (TSM.US), Indian consumer goods company Titan Co., and Sao Paulo-based NuBank often exhibit characteristics such as good governance, strong market share growth potential, and high return on capital.
While many investors diversify their investments to reduce risk and rely on tracking benchmark indices, Marshall-Lee argues that this practice actually increases risk. For instance, just before the outbreak of the Russo-Ukrainian War in 2022, his fund exited its positions in Russia because the focus was on "avoiding permanent capital loss," and the fund estimated a 30% likelihood of all capital losses in the Russian stock market from that point onwards.
Purposeful Stock Selection
Globally, he avoids most of the over 4,000 listed companies in emerging markets and buys around 30 stocks out of the 300 investable stocks. "Surprisingly, most emerging market stock portfolios resemble each other, especially the top 10 stocks in emerging market funds- everyone owns Samsung and the large benchmark stocks."
Marshall-Lee manages two funds with the same emerging markets strategy, overseeing $330 million in funds, which is a continuation of the $3.5 billion strategy he managed from 2011 to 2020 when he left Newton Asset Management. He co-founded the boutique Cusana Capital with Jos Trusted (formerly of Odey Asset Management) in 2022. The fund is backed by Sector Asset Management, one of Norway's largest independent investment companies.
It is widely believed that the election of Trump means investors should reduce exposure to emerging market stocks, but this fund manager refutes this view. He says that prevailing market logic could turn out to be completely wrong, just as it was when Trump was first elected at the end of 2016.
Currently, the strength of the US dollar, rising US bond yields, and selling pressure in Asian stock markets have led to a decline in emerging market assets, with the benchmark index falling 2.2% in November, while the S&P 500 index rose 3.7%. This has resulted in a record performance gap between the two asset classes.
Some competitors have sought to enhance returns in emerging market stock funds by adding globally active US companies, but Marshall-Lee's guidelines require that 100% of the stocks in his portfolio must be emerging market-driven stocks, meaning they must be either listed, registered, or have 50% or more of their profits, assets, or income derived from emerging markets.
NVIDIA Corporation met the above 50% emerging markets standard in the past, so Marshall-Lee purchased these stocks in early 2023. He sold them for a profit of 370% in June 2024, when the company's segment data disclosure showed that it no longer met this standard. He said that stocks registered in Hong Kong contributed approximately 20% of returns this year.
Geographically, Marshall-Lee's largest exposure is in Asia, where he sees opportunities with "domestic companies in India and the ASEAN markets experiencing rapid growth." Over the past 13 years, 30% or more of his portfolio has been invested in India, with a focus on companies like Titan that are consumer-centric. The fund manager said, "We made about 14 times our money on this stock. The risk is relatively low, but the returns are very high."
Another 10% is allocated to Vietnam, and about 10% is allocated to Indonesia. In China, Marshall-Lee is bullish on electric vehicle battery companies led by founders and operating on a self-sufficient basis; Marshall-Lee also holds some Chinese local cosmetics companies that are grabbing market share from international brands.
The portfolio manager refuses to reveal his favorite stocks but mentions that over the past 12 months, his fund has held stocks in companies like Varun Beverages, Central Depository Services India Ltd, and SEA Ltd.
He said that outside of Asia, Turkey presents potential opportunities as its economic management improves. While his investments in Latin America are relatively small, he is interested in Argentina. He said, "When you come out of hyperinflation, there is quite a large double risk, but when your economy is basically zero credit penetration, the potential is immense. We're not investing there at the moment, but it's definitely something worth watching.""The market."Je voudrais une baguette et du fromage, s'il vous plat.