The Transformation of Emerging Markets – Why an active approach is essential |

By Danilo Martins
Portfolio Manager
Dynamic Funds

There’s an exciting transformation taking place in the Emerging Markets – from Latin America and Asia to Central Europe and beyond. With more than 25 countries and over 85% of the world’s population, emerging markets have become important drivers of global economic growth, considerably outpacing developed markets since 2000¹.

As this large population base continues to grow, new businesses have emerged to meet the needs and wants of a growing middle class, which have been hungry for change and improvement for decades now.

Despite the massive changes taking place, many investors’ perceptions of emerging markets remain tied to the past, when undifferentiated businesses engaged in cut-throat competition and inefficient state-owned companies dominated – often at the expense of innovation and value creation.

And yet, despite the massive changes taking place, many investors’ perceptions of emerging markets remain tied to the past, when undifferentiated businesses engaged in cut-throat competition and inefficient state-owned companies dominated – often at the expense of innovation and value creation.

At Dynamic Funds, we see today’s emerging markets as fertile ground for innovative companies with the potential to create large and growing profit pools at high returns, protected by competitive advantages, such as dominant platforms, strong brands and cutting-edge intellectual property.

A New day in Emerging Markets

Source: Capital Group. As of 8/31/19. Returns in U.S. dollars

Twenty years ago, the undifferentiated nature of many emerging market companies put investors at the mercy of cyclical factors. As the graphic above clearly illustrates, company-specific factors have been increasingly driving the returns for emerging markets investors.

One of the key contributors to this change has been growing access to capital, which has helped pave the way for the creation of some of the world’s most dominant and innovative companies in fintech, gaming, e-commerce, etc.

One of the key contributors to this change has been growing access to capital, which has helped pave the way for the creation of some of the world’s most dominant and innovative companies in fintech, gaming, e-commerce, etc. In other parts of the emerging markets, we see the beginning of a similar path.

Having done business in Brazil, I remember the relative scarcity of funding in the mid-2000s and am constantly amazed by the changes over the last decade alone. Latin America (LatAm) start-ups saw over USD $4.5 billion of venture capital (VC) investments in 2019 – compared to less than USD $150 million as early as 2011, and VC investments have doubled each of 2017, 2018 and 2019. This is a recent phenomenon for LatAm, which has already generated several unicorns and some of the world’s most successful start-ups in e-commerce, fintech/challenger banks.

The mix of listed emerging markets companies has been changing, with more weight concentrated in companies with competitive advantages driving considerably more pricing power – companies increasingly in control over their own destinies.

In emerging markets, experience counts

While we are excited about the transformations taking place, we think navigating this changing environment from the top down can be challenging.

Although there’s no shortage of passive ETFs focused on emerging markets, Dynamic believes an active approach is needed to take full advantage of emerging markets opportunities. In our opinion, simply purchasing the MSCI EM index, with over 1,300 constituents, will not provide the selective exposure needed.

Finding great companies at good prices means literally going those extra miles to meet with management in person, visit supply chains and explore channels, up-close and in-person. When it comes to emerging markets investing, there’s simply no substitute for on-the-ground research. In our view, it’s the best way to build concentrated portfolios to deliver optimal returns.

Introducing Dynamic Active Emerging Markets ETF (DXEM)

On June 15, 2021, Dynamic Funds expanded its active ETF lineup with the launch of Dynamic Active Emerging Markets ETF (TSX Ticker: DXEM). For a management fee of only 85 basis points, Dynamic Active Emerging Markets ETF seeks to provide long-term capital appreciation by investing primarily in equity securities of companies that are located or doing business in emerging market countries without restriction to country, sector or market capitalization.

The ETF will use a focused, long-term investment approach to build a concentrated portfolio of 25 to 55 different companies. Dynamic Active Emerging Markets ETF will be managed by Danilo Martins and Dana Love, members of the Dynamic Core Global Equity team, and will utilize the same investment process, philosophy and discipline that are used on the team’s other global and international funds.

¹ International Monetary Fund, World Economic Outlook, October 2020.

Danilo Martins joined Dynamic in 2017, working closely with Dana Love on the Core Global Equity team. Danilo is a generalist manager by sector and region, with global investment experience, having also lived and worked in North America, Latin America and Asia Pacific. He believes in bottom-up investment analysis aimed at building low-turnover portfolios of undervalued or fairly valued companies that have sustainable competitive advantages protecting high returns on capital, which capital can be allocated towards visible long-term growth opportunities. He looks for management teams with demonstrated ability to recruit and retain owner-minded talent, allocate capital for long-term value creation, develop existing business franchises and innovate.

Disclaimer:

Commissions, trailing commissions, management fees and expenses may be associated with mutual fund investments and active Dynamic ETFs. Please read the prospectus before investing. Mutual funds and ETFs are not guaranteed, their values change frequently and past performance may not be repeated.

Views expressed regarding a particular investment, economy, industry or market sector should not be considered an indication of trading intent of any of the mutual funds managed by 1832 Asset Management L.P. These views are not to be relied upon as investment advice nor should they be considered a recommendation to buy or sell. These views are subject to change at any time based upon markets and other conditions, and we disclaim any responsibility to update such views. To the extent this document contains information or data obtained from third party sources, it is believed to be accurate and reliable as of the date of publication, but 1832 Asset Management L.P. does not guarantee its accuracy or reliability. Nothing in this document is or should be relied upon as a promise or representation as to the future.