- Volatility and market overview.
- Standing firm - why conviction counts.
- How a balanced portfolio is an antidote to short-term noise.
- ESG – are those factors still relevant?
Our decision-making functions well in volatile markets - the process has no short cuts and investment views do not hinge on forecasts or fair values that get thrown around daily.
Introduction: Hello, this is Sophie Heslop from Martin Currie introducing the first of a series of podcasts from Martin Currie’s Global Emerging Markets team. Today’s podcast, entitled ‘Emerging Markets: long-term investing in a short-term crisis’ is presented by Paul Sloane, one of 6 Portfolio Managers in our GEMs team. Our Global Emerging Markets strategy is a high conviction, stock driven yet balanced portfolio of 40-60 of their highest conviction ideas. We look to invest in quality companies with secular growth opportunities. ESG is embedded throughout the process to build increased conviction in these companies. In fact, Martin Currie’s expertise in ESG has been awarded by the PRI an A+ rating across all three categories – strategy and governance, incorporation and active ownership for three consecutive years. With that I will hand you over to Paul who will tell you more.
Yes, even for the most experienced equity teams this has been a genuinely volatile period. Any reading vs history, say on a 20 year view, tells you that volatility in financial markets has dramatically spiked in 2020 and emerging market equities are no different. The Coronavirus and its containment has of course been the most obvious trigger for that spike.
As we speak emerging markets are down 25% YTD in USD terms and down 17% in March and we have seen a meaningful pullback in many asset classes.
Behind those numbers there is great dispersion in country performance, something I’ll come back to later. China is down just 12% this year in USD terms. Other large emerging markets like Brazil are down a multiple of this with currency weakness a factor.
Also behind the headlines we see very pronounced volatility at a stock level. Stocks routinely moving 10-20% or more on daily basis. And that is eye catching even for an experienced team like us.
For investors in the MC emerging market strategy we are pleased to say we have outperformed our index this quarter. That is a short period of time but it helps to build on our strong long-term track record of top decile performance and an especially strong performance in calendar 2019. Last year was of course characterised by rising markets and much lower volatility than we see currently.
Just as pleasing is that we can report we have not changed what we do on a daily basis. We have a clearly defined research and decision making process at a stock level. And we build balanced portfolios that play to our strengths as stockpickers. Today I wanted to describe why these 2 things specifically help us navigate volatile markets.
Sophie. Ok perhaps you can tell us a bit about your research process and decision making at a stock level? How does it hep you when volatility kicks in?
I’ll start by saying we are a low turnover fund. That has not changed this year. We have bought one entirely new position for the fund and sold one this year. Both decisions were unrelated to the virus by the way
We don’t target turnover but neither do we tend to speed up or slowdown in very volatile markets. Both from a behavioural point of view are very possible, even probable outcomes. Trading more is often a function of reacting to performance or trying to “rebalance” a portfolio. Similarly routine daily share price moves of say 10, 20, 30% can cause a form of paralysis where “real” work and decisions grind to halt.
I think there are 2 key points here which explain the durability of our research and decision making.
Firstly the research and decision making process is very well defined. We have a deliberately collegiate way of working, designed to build conviction as a team in defined steps. Its something we will talk more about more in a future podcast. We don’t short circuit this process just because of dramatic share price performance giving us really “cheap” entry points for example. Buying a stock because it has fallen can make sense but only if you have built the conviction first. As investors with a 3-5 year time horizon we don’t have to get our entry or exit points so right that we have to force the pace on decisions. Once we have built the conviction before we do anything in our funds we need someone on the team to recommend it with a stated reason for doing so. This is hugely helpful in normal times but in volatile markets the logic for doing anything needs to be heavily scrutinised for behavioural biases or shortcuts. This clear recommendation requirement is exactly the same for buys, sells, adds, trims. And it is tinkering with weights that can get very tempting in volatile markets.
Secondly it is worth considering exactly what our company research looks like including how we see valuation. We look to build a 3-5 year central case for every stock in the fund. And we do that in calm or volatile markets. But critically we do not believe that we can accurately forecast the future for any company. When something like the Coronvirus hits it will impact every company’s cash flows but it does not send us back to our models to “re-do” our numbers or cause us anguish. We might think hard about vulnerabilities but our company forecasts change far more slowly than share prices. And this humility feeds into our valuation thinking. We do not derive precise fair values which suggest we take action when a gap between a fair value and a share price opens up or closes. A stock might suddenly appear cheap in current markets but is it relatively cheap? What if we are in a period of really uncertain earnings? Do we actually like the busines? What are its ESG characteristics? Cheapness can last a day or reappear in a day in very volatile markets and we are clear we need much more than a sudden, perhaps fleeting value opportunity. That’s why not anchoring to a fair value helps us not get buffeted around too much and helps keep our activity levels in check.
Q: And what about ESG factors – how do you approach those at a stock level in volatile markets?
Yes, its worth considering for a moment the role of ESG which is embedded in our process in all markets. We have built a reputation as ESG leaders in emerging markets which predates ESG really gaining momentum. We think assessing the ESG factors at a stock level are non-negotiable in all market conditions. How individual companies cope and act in these volatile times is just for us another test of ESG credentials. Right now it is critical for all companies to be operationally resilient and for governance structures to pass tests. Well run companies often truly prove themselves in difficult or volatile times. And there are obvious social responsibilities to fulfil right now. We maintain an ongoing dialogue with our companies irrespective of market conditions and currently we are pleased to say that they are coping impressively in difficult times as we would expect. We won’t let up in our engagement efforts here which is the cornerstone of our ESG approach and is what our clients expect.
So in summary; our process and our decision making function well in volatile markets because the process is designed to have no short cuts and because our investment views do not hinge on precise forecasts or fair values which can get thrown around daily. And secondly we function as a team because we don’t change our ESG approach in volatile markets.
Q: You mentioned that one level up, at a portfolio level, the way you build portfolios helps you in volatile markets. How does this work?
OK so we are quality growth investors We run a strategy with an overall quality growth bias. But we try to ensure that we build a balanced portfolio so that the stocks provide as much of the risk as possible. So there are 2 key points here. Firstly we are very careful about building up very large overweights or underweights around countries. And secondly whilst having a quality growth bias we will own some relatively cyclical stocks at all times.
On the first point I used earlier the example of China materially outperforming Brazil in 2020 so far. This can be rationalised – China experienced the virus first but seems to have successfully contained it .Brazil is openly sensitive to the oil price which has been exceptionally weak. We understand all this. If we were running a portfolio with large country bets we would get fully drawn into crowded and difficult economic, political or in this case scientific debates. We don’t ignore macro factors, we just want to pursue our own research agenda and rhythm. That research is all about finding great business models and investing in them. In this way having a balanced portfolio acts as a major noise reduction tool and volatile markets do tend to be very noisy.
Secondly I mentioned that some of the companies we own are more cyclical than others. And they will usually suffer more in tough economic times. Its not mentally draining to us if they do although we do expect our more cyclical ideas to cope with stress at a balance sheet level. If we had a less obviously balanced portfolio we might end up debating whether we should sell all our cyclicals completely or move aggressively into them. At some point volatile markets could give us a dominant asset allocation or market timing decision which we do not want. The portfolio balance here helps us avoid this noisy debate.
So in summary; the balance from multiple angles in the portfolio helps us stay focused in all markets on what we are good at; picking emerging market stocks. That is what our performance track record is built upon and it’s what our clients expect of us, irrespective of how “volatile” or unsual markets may feel.
Summary: Thank you Paul. So to summarise, during this period of volatility the Martin Currie Global Emerging Markets strategy remains true to its philosophy and process. By being geographically and sector agnostic you build a balanced portfolio comprised of quality growth companies which you aim to hold over the long term. Whilst macro factors are considered, investment decisions are based on your bottom up, fundamental research - rather than potentially short-term macro factors. And finally, ESG is considered throughout to ensure that the stocks you invest in are sustainable with time and prove their resilience in a period of market downturn.
That concludes our podcast and I look forward to the next edition. Thank you for your time.
Regulatory information and risk warnings
Past performance is not a guide to future returns
This information is issued and approved by Martin Currie Investment Management Limited (‘MCIM’). It does not constitute investment advice. Market and currency movements may cause the capital value of shares, and the income from them, to fall as well as rise and you may get back less than you invested.
The analysis of Environmental, Social and Governance (ESG) factors form an important part of the investment process and helps inform investment decisions. The strategy does not necessarily target particular sustainability outcomes.
The opinions contained in this recording are those of the named manager. They may not necessarily represent the views of other Martin Currie managers, strategies or funds. These opinions are not intended to be a forecast of future events, research, a guarantee of future results or investment advice.
The information contained has been complied with considerable care to ensure its accuracy. However, no representation or warranty, express or implied, is made to its accuracy or completeness. Martin Currie has procured any research or analysis contained in this recording for its own use. It is provided to you only incidentally and any opinions expressed are subject to change without notice.
The information provided should not be considered a recommendation to purchase or sell any particular security. It should not be assumed that any of the security transactions discussed here were, or will prove to be, profitable.