Building an EM portfolio | Management & valuation
If our research turns up a business that meets our FORS requirements, we then move on to an in-depth analysis of the management team and determine our independent valuation of the company.
When it comes to valuation, we are looking for companies trading at a roughly 30% discount from the intrinsic value we’ve established for the business. This provides us with the margin of safety we’re looking for.
To properly gauge the quality of a management team, we meet them in person at their offices, likely numerous times. In addition, we’ll often meet with suppliers, vendors, analysts and key competitors. This process is demanding, but I believe it is a big part of the “active” in “active management.”
In 2015, I relocated to Hong Kong to better facilitate this part of the process. By being on the ground, I can visit many more companies in the region, with less expense and fewer hours spent travelling. I am closer to the markets in which we invest and am therefore better able to understand the idiosyncrasies of local markets. On top of that, I now have direct access to the Invesco analyst and portfolio management teams in both Hong Kong and Shanghai. Because visiting companies, meeting with management teams and acquiring on-the-ground knowledge are key parts of our investment process, I’ve found many benefits to living and working in the region.
With business quality (FORS), management quality and valuation research all in place, we’ll then decide if we want to make an investment or keep the company on a watchlist for further evaluation.
Long-term EM outperformance
The portfolio building process I’ve described above gives us a high conviction in each of the companies we choose, therefore we tend to choose fewer companies overall than our peers. The historical holdings range for Trimark Emerging Markets Class is 50-70 names. Our active share numbers have been more than 90% since the current team took over in 2013.2
Ultimately, we aim for long-term performance consistency – I hope the charts below help illustrate how we compare.
Source: Morningstar Research Inc., as at September 30, 2017. The since-inception date of Trimark Emerging Markets Class is January 12, 2011. For any given datapoint, the category average is the simple average of all the values for that datapoint for all the funds within a particular Morningstar Category.
If you have any questions about Trimark Emerging Markets Class, the FORS process or our Global Equities (FORS) team, don’t hesitate to reach out. Please leave a comment in the comment area below, or advisors, you can get in touch with your sales rep at any time.
Free cash flow (FCF): The cash that a company is able to generate after spending the money required to maintain or expand its asset base. FCF allows a company to pursue opportunities that enhance shareholder value.
Return on invested capital (ROIC): A profitability ratio that measures the return that an investment generates for those who have provided capital (i.e., bondholders and shareholders. ROIC indicates a company’s ability to turn capital into profits.
Intrinsic value: The actual value of a company or an asset based on an underlying perception of it true value, including all aspects of the business, in terms of both tangible and intangible factors.