Although funds that invest in developing countries have performed poorly so far this year, Alpha Ba says investors need to take a long-term view of these markets. “They’re less mature and you need to give companies time to generate returns,” says Ba, co-manager of the $1.1-billion AGF Emerging Markets Fund, sponsored by Toronto-based AGF Investments Inc.
At the same time, emerging markets represent a growing portion of global economic activity that’s just too big to ignore. “Emerging markets,” says Ba, “now represent probably anywhere between 70% and 75% of global growth in the next couple of years. Thirty years ago, that number used to be less than 20%.”
Ba, a vice president and one of eight members of AGF’s global-equity team, co-manages AGF Emerging Markets Fund along with veteran Stephen Way, senior vice-president of AGF and global-equity team leader.
The duo took over the mandate in May 2012 after the departure of emerging-markets specialist Patricia Perez-Coutts and four of her colleagues. During Perez-Coutts’s tenure, the fund was a six-time awards winner in its category, starting in 2005, at what is now the Morningstar Canadian Investment Awards.
Overall, the global team manages about $9 billion. It employs a growth-at-a-reasonable-price approach, with an emphasis on individual stock selection. Differing from the firm’s global core and global dividend strategies, the emerging-markets mandate does not employ a country-allocation framework. “We back-tested that (strategy),” says Ba, “and it doesn’t work for emerging markets. The framework works best with more freedom given,” with a true stock picking approach.
However, the portfolio is structured to ensure that it is broadly diversified by individual security and by region and industry. AGF Emerging Markets holds 70 to 90 names, and typically has representation in 18 to 20 countries and eight of the 10 main global sectors.
The current geographic weighting in the fund is just over 55% of asset under management in Asian markets, followed by about 20% in Latin America and smaller weightings elsewhere. The maximum weight in any one country is 20%.
The stock-picking process starts with the team whittling down the universe of more than 5,000 companies spanning 27 countries, using quantitative screens. To be eligible to be held in the fund, companies must have a minimum market capitalization of US$500 million, and there must be sufficient trading liquidity. As well, the team employs economic value-added (EVA) criteria. The preliminary screening produces a watch list of about 500 stocks that are subjected to further research.
The current top holding is Samsung Electronics Co. Ltd. of Korea, a leading maker of smartphones that dominates the low-priced segment of the market. “Competition in that sub-$300 (price range) still represents about 28% of their sales, and it is being driven by emerging-markets growth.”
The AGF team’s portfolio turnover tends to be low to moderate. Ba says stock selection for AGF Emerging Markets Fund is based on a three- to five-year investment horizon, and turnover is historically between 5% and 25%.
The sell discipline is triggered when a stock meets AGF’s target price, or if there is a change in fundamentals. A stock may also be divested in favour of a more attractive investment.
Ba, 39, who doubles up as an industrial analyst, travels extensively and will visit Asia twice by the end of the year. He also taps into the experience of five AGF analysts who cover two sectors on average in both emerging and developed markets. Research includes bi-weekly calls with Asian and European colleagues.
A graduate of the Institut Superieur du Commerce de Paris, France, Ba earned a BA in finance in 1996. Pursuing further studies, he received a master of science in finance and investment from Brunel University in London, in 1997.
After moving to Canada in 1999, he was an analyst with the Caisse de dépôt et placement du Quebec in Montreal, specializing in the technology sector. Ba received the CFA designation in 2006, the year he joined AGF. He has been working on global equity, global core and global emerging markets for the past five years.
In positioning the emerging-markets fund in this environment, “obviously China slowing down is an issue,” says Ba, “so we have to be more careful. It’s a challenging time, but in our companies, they still earn a positive spread over the cost of capital, which allows them to reinvest in the business and gain market share.”