Emerging Markets Retrospective: Key Takeaways from Our Strategy’s First Year

Author

Alice Popescu, CFA, CMT, DMS

Analyst & Portfolio Manager

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04-28-2022

THE LAST 12 MONTHS – AND PARTICULARLY THE LAST THREEⁱ – PROVED THAT “EMERGING MARKETS” FROM AN INVESTOR’S PERSPECTIVE SHOULD BE MUCH MORE THAN A HANDFUL OF NORTH ASIAN COUNTRIES AND CROWDED MEGA CAP STOCKS.

At Altrinsic Global Advisors, our emerging markets equity strategy is managed with a bottom-up, fundamentals-driven approach and an objective to identify high quality, underappreciated investment opportunities across the cap spectrum, truly reflecting the DNA of the EM asset class.ⁱⁱToday, as we assess how our differentiated perspectives and exposures played out during the first year of our strategy.ⁱ, we find great alignment with our previous views (which we outlined in the September 2021 white paper report entitled Exploring the True DNA of Emerging Markets):

1. Geographic breadth: we found underappreciated gems in less popular EM countries
2. Asset class DNA: we stayed true to the DNA of the assets class, finding more opportunities in the small and mid cap space than the index reflects
3. Pandemic reality: our cautious stance on COVID recovery progress in emerging markets drove us toward value in forgotten telecom businesses
4. Contrarian nature: our contrarian approach led us to stock-specific winners in a stormy and volatile sector – Chinese real estate
5. Frontier exploration: our expanded universe and willingness to spend time identifying the path forward for off the beaten track economies allowed us to identify unique contributors in frontier markets

1. The “Other” EMS

The passive reference for emerging markets, the MSCI EM Index, remains lopsided with concentrated exposure in three countries (China, Korea, Taiwan), vastly ignoring the diverse set of smaller countries also classified as emerging markets. These “other” countries have outperformed over the past quarter and year. Our assessment that the Chinese market was expensive and less attractive proved right given our ability to find more compelling investment opportunities in Indonesia, South Africa, and Mexico. Despite China’s underperformance, we continue to find more attractive prospects elsewhere (Chart 1).

2. Small and Mid Cap, the True DNA of EM

Over the past year, we observed the underperformance of large cap EM – driven predominantly by Chinese mega caps – and the broader outperformance of small and mid cap companies. Our bottom-up security selections led us (away from the Chinese mega caps that dominate the MSCI EM Index based on unattractive valuations and significant risks –. Instead, we found attractive opportunities in smaller companies reflecting the true DNA of the asset class where valuations were more favorable – and continue to be so today (Chart 2).

3. Slow, Bumpy, Covid Re-Openings and Consumption Beyond

As we built our strategy, we identified the likelihood for multiple un-synchronized pandemic waves and vastly different policy responses. Our conservative stance led us to identify new sustainable drivers for defensive businesses like telecom services, viewing them as enablers of digital services and consumption. Our investments in traditional communication companies provide a conduit to participate in developing macro trends of greater smartphone penetration and data consumption. In addition, we gain access to various ecosystems of services and benefit from frontier market exposure.

4. Contrarian and Unafraid to Look at the Unloved

Our exposure to Chinese real estate companies has proven to be our most contrarian call. Beijing was tightening the screws on the sector, but despite this upheaval, we saw a clear dichotomy in company-specific performance across the sector. Healthy companies with solid balance sheets have the ability not only to survive, but also to thrive and capitalize on the regulatory headwinds. The market initially treated all participants the same way; we have been rewarded for our patient, bottom-up consideration.

5. Frontier Markets Exposure

We have specifically defined our universe to incorporate frontier markets. We believe there is untapped potential within countries that are evolving toward “emerging” status, and over the past year, certain domestic policy updates, liquidity, and other factors are supportive. As an example, Vietnam has several regulatory tailwinds coming its way. Relaxation of intraday trading and foreign ownership limits, as well as a parliamentary review of the Law on Enterprises, are just a few ongoing projects that underlie current reviews by both MSCI and FTSE Russell to upgrade the market to “emerging” status over the next 12-36 months. We have found, and continue to find, attractive investment opportunities across frontier markets.

The last 12 months – and particularly the last threeⁱ – proved that “emerging markets” from an investor’s perspective should be much more than a handful of North Asian countries (China, South Korea, Taiwan). Investing in emerging markets involves an assumed level of volatility and risk, given the diversity of economies, political policies, and macro considerations that govern this disparate collection of nations. As a result, while many of our hypotheses turned in our favor this year, there will almost certainly be exogenous factors that swing market sentiment the other way across countries, sectors, and stocks during any given period. Over the long term, we believe that by focusing on companies with high quality fundamentals in countries with solid macro foundations, we will find no shortage of attractive investment opportunities.

About Altrinsic Global Advisors, LLC

Altrinsic Global Advisors, LLC, founded in 2000, is an employee-controlled and majority-owned investment management firm. Altrinsic manages approximately US$9.9 billionⁱⁱⁱ in global and international equities, applying a long-term private equity approach to public equities. Altrinsic’s clients include corporate and public pension plans, endowments, foundations, sovereign wealth and sub-advisory clients. For more information, please visit www.altrinsic.com or contact Sara Sikes at +1 (203) 661-0030.

ⁱ Periods (12-month and 3-month) ending 03/31/22.
ⁱⁱ Past performance is not indicative of future results.
ⁱⁱⁱ As of 03/31/22.

Important Considerations & Assumptions

This document has been prepared solely for informational purposes and nothing in this material may be relied on in any manner as investment, legal, medical, accounting or tax advice, or a representation that any investment or strategy is suitable or appropriate to your individual circumstances, or otherwise constitutes a personal recommendation to you. All information is to be treated as confidential and may not be reproduced or redistributed in whole or in part in any manner without the prior written consent of Altrinsic Global Advisors, LLC (“Altrinsic”). The information contained herein shall not be relied upon as a primary basis for any investment decision, including, without limitation, the purchase of any Altrinsic products or engagement of Altrinsic investment management services; there is no and will be no agreement, arrangement, or understanding to the contrary. This material has been prepared by Altrinsic on the basis of publicly available information, internally developed data and other third party sources believed to be reliable. No assurances or representations are provided regarding the reliability, accuracy or completeness of such information and Altrinsic has not sought to independently verify information taken from public and third party sources. Altrinsic does not accept liability for any loss arising from the use hereof. Any projections, market outlooks, opportunities or estimates in this document are forward-looking statements and are based upon certain assumptions and are subject to change. Due to various risks and uncertainties, actual events or results, or the actual performance of any investment or strategy may differ materially from those reflected or contemplated in such forward-looking statements. Except where otherwise indicated, the information provided, including any investment views and market opinions/analyses expressed, constitute judgments as of the date of this document and not as of any future date. This information will not be updated or otherwise revised to reflect information that subsequently becomes available, or changes in circumstances or events occurring after the date hereof.

The data and information presented is based on representative accounts and is for informational and illustrative purposes only. Individual client data and information may vary based on different objectives for different clients. This material, including any specific security or strategy references, does not constitute investment advice and should not be viewed as current or past recommendations or a solicitation of an offer to buy or sell any securities or to adopt any investment strategy. Any documents describing Altrinsic’s products or services shall not constitute an offer to sell or a solicitation to buy the securities from any person in any jurisdiction where it is unlawful to do so. Any specific investments referenced may or may not be held by accounts managed by Altrinsic and do not represent all of the investments purchased, sold, or recommended for client accounts. Readers should not assume that any investments in securities or strategies referenced were or will be profitable. There are no guarantees that investment objectives will be met. Investing entails risks, including possible loss of principal. Altrinsic may modify its investment approach and portfolio parameters, in the future, in a manner which it believes is consistent with its overall investment objective of long-term capital appreciation and reduced risk.

Past performance is not a guide to or otherwise indicative of future results. Any investment results and portfolio compositions are provided for illustrative purposes only and may not be indicative of the future investment results or portfolio composition of any account, investment or strategy managed by Altrinsic.

Disclosure of Risk Factors
An investment in any account, investment or strategy is speculative and involves a significant degree of risk, which each prospective investor must carefully consider. Returns generated from an investment in any account, investment or strategy may not adequately compensate investors for the business and financial risks assumed. An investor in any account, investment or strategy could lose all or a substantial amount of his or her investment. Before making an investment, prospective investors are advised to thoroughly and carefully review any disclosure documents with their financial, legal and tax advisors to determine whether an investment is suitable for them.

Additional Performance Disclosure – Use of Benchmarks Benchmarks are provided for illustrative purposes only. Comparisons to benchmarks have limitations because benchmarks have volatility and other material characteristics that may differ from the accounts, investments or strategies managed by Altrinsic. Because of these differences, benchmarks should not be relied upon as an accurate measure of comparison.

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Emerging Markets Retrospective: Key Takeaways from Our Strategy’s First Year

Alice Popescu, CFA, CMT, DMS

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