For Jeff Feng, Hong Kong-based portfolio manager of the FundGrade® A-Grade Trimark Emerging Markets Class funds (which returned a
hearty 21.6% for the year through August 31, and a 3-year average annual compound rate of return of 13.5%), the question is moot. As bottom-up investors,
he and his co-manager Matt Peden focus primarily on companies rather than
economies, although the big picture can sometimes have a bearing on returns.
“For us, because of the special nature of emerging markets, we do pay some attention to the macro environment, primarily because of the effect on foreign
exchange rates,” Feng says. “You could have argued that at the end of 2015 and beginning of 2016, some currencies were being undervalued, so if you didn’t
pay attention to FX, you could have had gains from companies being offset by currency losses.”
Feng adds that overall, while the global economic picture may be less than ideal, certain emerging markets have been doing quite well. Although the world
has been focused on slowing growth in China, for example, he points out that India’s growth has been strong, although this presents its own problems.
“We may share some optimism for India, but that optimism is fully reflected in valuations, which are now at the same level as in many developed countries,”
says Feng. “There’s no discount for it being an emerging nation. And we may share a lot of pessimism about China, but the valuations are very attractive.
There are some 2,500 Chinese companies listed on the Hong Kong exchange and we only need to find maybe 10 that meet our requirements for corporate
governance – these are companies that could still grow considerably without becoming overvalued.”
Similarly, Brazil, with its recent scandals and political turmoil, has had a tough time economically in the past couple of years, but Feng points out that
the country’s markets have nevertheless been performing very well compared with most other markets.
“Brazil’s problems are really yesterday’s news,” says Feng. “They’ve gotten rid of their president, and they do need to put their house in order, but they
have some first class companies that can survive and take advantage of their competitive positions. The market has done well, and we’re hopeful of a better
future, so we’re actually overweighted in Brazil compared to the benchmark.”
As for Feng’s stock-picking methods and corporate governance requirements, he says in this regard that he abides by the “FORS” philosophy, which means
looking for companies with:
* Free cash flow, with a high conversion rate driving long-term shareholder value creation.
* Organic growth, with the potential to generate mid-single digit or higher revenue growth.
* Return on capital that is consistent and unleveraged throughout the full market cycle.
* Sustainable competitive advantage that is difficult to replicate (e.g., brand loyalty, scale, market/distribution advantages, route
“We focus on a watch list that consists of companies that have passed through our preliminary quality filter,” says Feng. “These are companies that we’ve
been relentlessly following – visiting their facilities, meeting management, sometimes talking to suppliers, building knowledge, and researching proper
values. Then we wait for the market to present buying opportunities. And if we feel comfortable, we will buy regardless of macro conditions.”
is an experienced financial and business journalist and a frequent contributor to the Fund Library.
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