Investing in emerging markets means looking for ways to capture faster growth and powerful demographics, says Alan Nesbit, the deputy head of First State’s global emerging markets team.
Nesbit, who works alongside Jonathan Asante and Millar Mathieson on the newly-launched Latin America fund, says a young population in countries like Brazil and Mexico is set to drive future consumer growth.
The manager says he is very much in favour of companies related to domestic consumption. On a sector basis, the team likes consumer-related companies such as retailers, food and beverage franchises, and banks.
However, they are less interested in commodities, which they say are too volatile and unpredictable. “No one can predict how commodities will develop,” he says. “Many companies in the commodity-related sectors are actually destroying value by making big acquisitions when commodity prices are high.”
This is a common characteristic in Latin America, he says, particularly in the commodity sector.
The Latin America fund is a “best ideas fund” and is not constrained by a benchmark. “We don’t care about the index,” says Nesbit. “We look at the best companies, some of which we’ve known for 20 years.”
The team does not rely on quantitative screening but looks for quality management teams and strong balance sheets.
Nesbit says the selection process requires deep understanding of the companies and is not just about numbers. The investment process adopts an absolute return mindset, and the fund managers try to avoid being influenced by the sentiment of the public and markets.
With about 30 holdings, most of them mid- and small-caps, the portfolio of the Latin America fund is highly concentrated. The fund aims to achieve long-term capital growth by investing in a diversified portfolio of equities.
The fund managers prefer companies where management and owners have good long-term track records of delivering value for minority shareholders, mostly in consumer-related areas where strong brands can offer a competitive advantage.
Many successful companies in Latin America have survived some of the most severe economic conditions, Nesbit says. The key case for the region is the economic stabilisation achieved after decades of mismanagement.
Governments learnt bitter but important lessons from the debt crisis during the 1980s and 1990s, he says. This experience, coupled with political reform, means that the cost of borrowing is now under control, leading to greater opportunities for companies and consumers alike.
Inevitably, the team finds most opportunities in Brazil, although the fund is still underweight in the country compared to its peers.
The Latin America fund has a neutral weighting to Mexico and an overweight to Chile. The team is also eyeing Columbia and Peru.
In the future, Nesbit and his team would like to see the fund investing in more esoteric markets such as the Caribbean and Central America.