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Consumer theme helps drive emerging-markets returns

RBC's Philippe Langham identifies health care, technology and infrastructure as other key growth areas.

Diana Cawfield 14 April, 2016 | 5:00PM
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The rise of the emerging-markets consumer continues to be Philippe Langham's top investing theme in the award-winning RBC Emerging Markets Equity.

Langham, who has managed the $2.3-billion fund since its inception in December 2009, says he has consistently been overweight in the consumer-discretionary and consumer-staples sectors versus his MSCI market benchmark.

"The consumer would be the first point I would mention," says Langham. It's a theme, he says, that's "really driven by a move away from a reliance on exports and commodities, and a move toward boosting the domestic economies in emerging markets." Supporting the growth in consumer sectors are the rising number of middle-income earners, wage increases and population growth, he adds.

The investment team at London-based RBC Global Asset Management (UK) Ltd. favours the characteristics of many well-run consumer companies. These include high-quality companies with well-known brands, strong balance sheets and cash flow, along with good corporate governance and management.

"We think that's very important when you invest in emerging markets," says Langham, who is head of emerging-markets equities and a senior portfolio manager. An example of the fund's consumer-related investments is SM Investments Corp., a retailing, banking and property development conglomerate in the Philippines.

Langham's emphasis on consumer stocks and on quality names has been rewarding for investors. The fund was the winner in the emerging-markets category at the Morningstar Awards in 2015, and it currently holds the top Morningstar Rating of 5-stars in its peer group.

However, even the best funds in the category will have money-losing periods, and RBC Emerging Markets Equity is no exception. Its 12-month returns have ranged from 29.8% for the period ended January 2015, to a loss of 15.7% for the period ended December 2011.

For the 12 months ended in February, the fund lost 12.7%, the consolation being that the median fund tracked by Morningstar fared worse, losing 17.2%. "It's a very difficult asset class at times," says Langham. "But over the long term, driven by faster growth, people are likely to get very good returns."

Along with the growth in the consumer market, Langham's other major themes are health care, technology and infrastructure. "The trends in terms of an aging population and the needs for health care in emerging markets are very similar to the developed world," he says. As well, lifestyle diseases such as diabetes are also prevalent in emerging markets. The trend toward people spending money on healthy lifestyles, personal grooming and natural foods is also an important driver.

Among the fund's recent 10 largest holdings is Lupin Ltd., a pharmaceutical company based in India. Another top-10 holding, which captures both the consumer and health-care themes, is Clicks Group Ltd. Based in South Africa, Clicks operates pharmacy stores there and is a retailer of wellness and cosmetic products, including those offered under the Body Shop brand.

Langham's third major growth theme in emerging markets is technology, especially digitalization. Of particular importance over the coming years is the Internet, he says, driven by growing penetration and growing usage. Based on his research, there's plenty of room for growth, since only about 30% of people in emerging-market countries have access to the Internet.

Langham sees an important digitalization trend and substantial change occurring in the auto industry over the next decade. The change is essentially driven by the "costs of adoption to electric vehicles really tumbling," and the infrastructure improving for both electric and driverless cars.

Within technology, Langham also invests in software and services. He says leading emerging-markets companies in these segments tend to be really well-run companies with higher-than-average returns.

Langham's fourth major theme is infrastructure. The key drivers are urbanization and the subsequent demand for services such as water, sanitation, power and transportation as people move into cities.

"We've started to see much more investment-friendly governments elected in emerging markets," says Langham, "so the needs are more likely to be addressed." In addition, one of the advantages that emerging markets have is relatively low fiscal debt, so governments have the ability to finance infrastructure.

From a geographic perspective, the portfolio currently has a 17% position in China and 16% position in India. "In China, we're actually quite cautious for the time being," says Langham." The fund's exposure is weighted much more to Hong Kong companies and very high-quality ones, which have more exposure to the whole region of Hong Kong and China combined. He cites as an example AIA Group Ltd., which is a regional insurance company that he favours rather than more China-centric companies.

Looking ahead, Langham is encouraged by the rebound in emerging-market currencies since the beginning of this year. "That's normally a good leading indicator that the markets in emerging markets are likely to do better." After several years of disappointing growth, he says, "a lot of measures are occurring in emerging markets, with a lot of reforms, which are likely to boost medium-term growth."

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Diana Cawfield

Diana Cawfield  Diana Cawfield is an award-winning writer who has been a regular Morningstar contributor since 2000. Her numerous publication credits include the Toronto StarAdvisor's Edge and Chatelaine, as well as the Canadian Securities Institute's online educational services.

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