High volatility often presents opportunity

Emerging markets are an incredible investment and a fantastic opportunity to participate in growth Capital Group

Emerging markets are an incredible investment and a fantastic opportunity to participate in growth Capital Group

“Emerging markets are an incredible investment and a fantastic opportunity to participate in growth,” says Valeria Vine, an investment specialist at Capital Group. The first global emerging markets fund was set up 35 years ago and today the firm manages around US$ 77 billion in emerging markets focused strategies and is present in key markets such as India and China.

What is your role at Capital Group?

The role of investment specialist is not unique to Capital Group, but it is particularly relevant because all funds are managed using the so-called Capital SystemSM. We have multiple portfolio managers in each fund that complement each other in their differences: they come from a variety of backgrounds, have differing investment approaches and outlooks on the investment landscape. The result is a portfolio that is high conviction, well diversified and balanced, which reduces the risk for our clients. My role as investment specialist of emerging market funds is to bring the portfolio together to provide a holistic view from the aggregate of portfolio managers. The additional benefit is that it allows our portfolio managers to focus entirely on managing money, which is what they do best.

What makes Capital Group different for emerging markets?

35 years ago, when we launched our first global emerging market equity fund, we were among the first to conduct research on the ground to meet with the suppliers, managers, and customers of various companies to really understand their business. Many of our analysts and portfolio managers have been with Capital Group over an extended period, and have established relationships in these regions, where high volatility often presents investment opportunity. 

Our portfolio managers are remunerated based purely on their results over a one, three, five, and eight-year period, which we believe is an incentive that aligns their interests with the interests of our clients. Ideally in emerging markets people have a long-term approach due to volatility and potential liquidity problems. It is typical for portfolio managers to be personally invested in the strategies that they manage as well. 

Our research portfolio is also unique: some analysts also manage 20% of the portfolio. This allows analysts who enjoy being a specialist in their sector to manage money without having to become a generalist and give up research. The tenure of our analysts is about 15 years of experience: much higher than the industry average.

This is different to what other asset managers are doing.  

Why invest in emerging markets in 2021 and beyond?

In terms of structure, looking at the long-term, growth is expected to bounce back much faster, but the key thing is that there is a changing opportunity set. During the commodity super cycle, the extractive industries in emerging markets were about 25% of the entire emerging market index. It’s natural that when it came to an end, the opportunity set was no longer what was in demand by investors. Fast forward to 2020 and the extractive industries are now less than 10% of the index and instead there are numerous high growth sectors, such as e-commerce, gaming and health care. These industries have done very well in the US market: they were less than 30% of the MSCI Emerging Markets Index 10 years ago, and today they represent over half. With this changing opportunity set, we see a lot of possibilities.

The point of active asset management is to find the future companies that will do well in the next three to ten years. Several countries such as Indonesia are approaching an inflection point of internet services and there are opportunities there. After COVID-19, we see a significant acceleration. Insurance is another area that has been boosted significantly. The demand for insurance in Asia took off after the SARS pandemic, and we can safely predict there will be another such growth as people want to plan ahead, have a safety net. There is a growing demand for financial services across all emerging markets.

Demand in the healthcare sector has been growing in emerging markets in recent years. It is the government’s key strategic sector in China, for example, which has an aging population, rising income, and is urbanising rapidly. Changing lifestyles and diet patterns mean that as incomes rise, people have a higher expectation of better-quality healthcare. You can see supply and demand coming together to create an interesting environment, whereas in the past, emerging market demand for healthcare would have been met by multinational companies. We see a lot of opportunities in the healthcare space but you have to be very selective. If you can get it right, you can have very good investment outcomes.  

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