Thirteen years of investing in Global Emerging Markets

WHAT MADE YOU DECIDE TO LAUNCH THE STRATEGY IN 2008, AND WHY DID YOU VOLUNTEER TO MANAGE IT?

Gavin: As part of my role as a South African equity analyst, I wanted to assess how South African stocks compared to their equivalents in countries such as Russia, Brazil and China. I started travelling to Emerging Market conferences and meeting with these companies. In the process, I became interested in those stocks and I realized that we could apply our successful long-term, valuation approach to investing in other emerging markets as well. In addition, we were sitting in an emerging market, we grew up in an emerging market, and we understood emerging markets dynamics.  

Suhail: I was working at a competitor in predominantly fixed income when I saw this advert for investing in emerging market equities from South Africa. I immediately thought it was an amazing opportunity. I mean – no one else did this in South Africa at that stage. I felt I knew a lot about all these countries because I have been interested in them for many, many years.  I didn’t hesitate to reach out and apply. 

WHAT UNIQUENESS DOES BEING BASED IN SOUTH AFRICA BRING TO YOUR APPROACH?

Suhail: Being based in an emerging market gives you the appreciation that not everything that looks like a curveball is the end of the world. We’ve seen changes to regulatory regimes in South Africa, and our currency depreciates and appreciates every couple of years. You do not have to run for the hills every time there is a crisis. Sometimes a short-term crisis creates a buying opportunity. 

TELL US BRIEFLY ABOUT THIS STRATEGY AND WHAT YOU ARE TRYING TO ACHIEVE WITH IT.

Suhail: It is very simple. Anyone can buy a passive product at a fraction of the cost, and they will achieve the market return. We exist to add value, and the only way we can add value is by outperforming the benchmark over a meaningful period of time. 

WHERE DO THE IDEAS FOR A PORTFOLIO COME FROM, AND WHERE DO YOU FIND YOUR BEST IDEAS?

Gavin: The best ideas often come from the decline of the share price of a company that we’ve been following for a long time but that has always been too expensive. The share price declines because the market is worried about a short-term issue, but there hasn’t been a structural change to the five-to-ten-year prospects of the business. That is an opportunity for a long-term investor.

Suhail: In the emerging markets universe, there are roughly 1400 stocks in the benchmark and many more that are not in the benchmark. We can’t, and we don’t want to, cover the entire investment universe. We want 40 to 60 great businesses in the portfolio. You can pick up an investment textbook and look at what makes a great business. From that perspective, what we do is not rocket science. 

What differentiates us is the ability to think long-term. We ask: What will this business earn five to ten years from now and how much should we pay for that, assuming the business can earn this into perpetuity? This approach allows us to whittle down this massive investment universe to around 300 stocks that are worth monitoring. At any one point in time, we would have done extensive analysis on around 200 stocks that are “fresh” and could be owned. Some will be very cheap, and some will be very expensive. 

Our portfolio represents our view on the best investment opportunities in emerging markets but adjusted for risk. A very cheap business might be cheap for a reason. Typically, the stocks with larger positions in the portfolio are those with reasonable upside and a very high level of conviction. The conviction comes from many sources, but the big factors are the track record of the business over long periods of time, what similar businesses earn in other countries, and how they adapt to adversity.

HOW DO YOU DECIDE TO BUY AND SELL SECURITIES, AND HOW DO YOU DETERMINE THE SIZE OF YOUR POSITION? 

Gavin: When making a decision, we consider the risk-adjusted expected return for every individual stock and the context of the portfolio. On the return part of the equation, we consider two key metrics: upside to fair value, based on 5-year plus modelling; and the 5-year IRR [internal rate of return]. Ideally, you would have both. 

You also have to consider the risk part of the equation. A company with a 100% upside to fair value and 5-year IRR of 25% may have a huge amount of debt. In contrast, you may have a business with 25% upside to fair value and a 5-year IRR of 10%, but you have high conviction in the earnings stream. The position size of the latter is likely to be much bigger than the former. We might not even own the former.

We also consider the portfolio as a whole. So, how much do we have in China? How much do we have in Russia? We also find different sources of return. We don’t want the entire portfolio to rely on global recovery or a commodity boom, for example.  

HOW IS CORONATION’S APPROACH TO STEWARDSHIP REFLECTED IN THIS STRATEGY? 

Suhail: From very early on, we have been following the ESG [environmental, social and governance] credentials of the businesses we invest in. We take account of the key E factors, the S factors and G factors and incorporate those into our valuations and therefore a proportion of the valuation reflects a company’s overall ESG standing. Simplistically, companies with very poor ESG credentials are worth less than an equivalent, identical business with great ESG credentials. We are also very active shareholders and regularly engage with companies - both on an ongoing basis and when we believe that the rights of minority shareholders are being compromised. We vote on all shares that we own.

Over the last couple of years, issues such as carbon intensity, energy efficiency, labour standards and supply chain management have become more prevalent, and we have improved our analysis over the years to take account for this. 

WHAT IS YOUR VISION FOR THE FUTURE OF THIS STRATEGY? 

Gavin: We have outperformed the market by 3,5% per annum since inception in 2008. Over the next decade, we’d like to do a similar job. We want to outperform the market by 3% or more, while not taking on excessive risk.

YOU HAVE BOTH BEEN IN THE INDUSTRY FOR A LONG TIME. WHY DO YOU ENJOY WORKING IN THIS INDUSTRY, AND WHAT DRIVES YOU?

Gavin: To generate a return in excess of market return over long periods of time, knowing that this will ultimately benefit our clients. One of our large international clients is a teachers’ fund. So, I think about the teachers – this is someone’s hard-earned savings that we are looking after. If people are entrusting us with their money, we must be able to do better than the index. 

Suhail: I’m a curious person, and I think this is an industry, a job, that allows you to satisfy your curiosity. You get to see businesses, some of the best businesses in the world, in multiple jurisdictions. You are exposed to different management cultures and different country cultures. You have to read constantly; you have to make decisions with imperfect information and live with the consequences – both positive and negative. I genuinely can’t think of any other job that I would rather be doing.

IS THERE ANYTHING ELSE THAT YOU WOULD LIKE TO ADD?

Suhail: We are privileged to be entrusted with people’s hard-earned money. We are trying – in our small way – to help them retire better. It’s not something we ever take for granted, and I thank our clients for partnering with us on this journey. We never forget the responsibility we have toward them. +

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