The challenging headwinds for emerging markets appear to be easing up, according to Austin Forey, lead manager of the award-winning Mackenzie Universal Emerging Markets Class.
Forey, who is managing director, global emerging markets at JP Morgan Asset Management in London, England, notes that emerging markets had a huge recovery after the severe 2008-2009 bear market. But, he adds, "valuations got a bit overdone." In particular, commodity-based companies -- a major part of emerging-market indexes -- "had a tough time as prices began drifting downward."
Currently, Forey considers valuations, based on price-to-book multiples, as a "bit on the cheap side." He also doesn't see "massive valuation discrepancies" between developed and emerging markets.
Forey's investment process is based on bottom-up, company-by-company selection. But macroeconomic and political considerations are also factored in. He favours high-quality companies with strong balance sheets. The portfolio is diversified sufficiently "so that one thing doesn't blow us out of the water if we get it wrong."
Forey asks two simple questions before investing in a company. The first: Is this a business that the managers would like to own, based on fundamental, sustainable value creation? The second question: How does the stock price compare today, being mindful of valuations?
Currently, the $715-million fund holds 67 stocks, with market capitalizations of about $2 billion or higher. Geographically, the fund is weighted approximately 57% in Asia including Hong Kong, 21% in Latin America and 10% in Africa.
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The dip in demand for commodities by mainland China did not affect returns because the portfolio does not have substantial direct exposure to the area. "Our index includes Hong Kong," says Forey, "which is not very much mainland-related. Moving forward, I would think that China is probably looking a lot better, at least in the near term."
Last year, Forey added Indian holdings to the portfolio. He views India as having positive long-term potential as the economy keeps growing. Also of interest are companies in South Africa, "because they are increasingly growing and developing, contrary to popular belief," Forey adds.
Financial-services companies represent about 28% of the fund's portfolio. As emerging economies develop, says Forey, this sector tends to grow relatively quickly. Insurance and banking "offer attractive opportunities compared to some other sectors."
The best investments, says Forey, tend to come from companies whose stocks compound in value over long periods. Some stocks will be held for years, resulting in a low portfolio turnover "typically between 10% and 20% on an annual basis."
Mackenzie Universal Emerging Markets, managed by Forey since August 2004, was honoured as the best Emerging Markets Equity Fund at the Morningstar Canadian Investment Awards gala in 2012.
Over the past 10 years ended Dec. 31, mostly under Forey's tenure, the fund has an annualized return of 9.4% compared with the 8.8% median return in the Emerging Markets Equity category.
Forey, 49, is a native of St. Andrews, Scotland, who received a bachelor of arts in modern languages at Cambridge University in 1984. In 1987, he planned to pursue an academic career after he had completed a PhD thesis on the work of Giovanni Boccaccio, a 14th century Italian author.
Discouraged by the lack of employment opportunities in his areas of study, Forey turned to the financial world. He found it to be "different, interesting, and I liked the people."
In 1988, Forey began working as an analyst of UK financial-service stocks at Robert Fleming. He became head of UK research and eventually took on portfolio responsibilities. Six years later, he was offered an opportunity to work on an emerging-markets investment trust.
Since that time, he has specialized in the same area, while assets under management have grown significantly to approximately US$19 billion. In 2000, the firm was acquired by Chase Manhattan, which later merged with JPMorgan.
Forey draws on an emerging-markets team of 33 investment specialists. Along with London, there are team members in New York, Sao Paulo and Moscow. As part of their extensive research, team members collectively hold thousands of meetings with company management each year.
Forey acknowledges that most emerging markets are still riskier than those of developed markets. Even so, "there's a very big world out there and we're not tied down to a single country or a single region," he adds. "From a portfolio point of view, we tend to look at risks and diversification over a real, long-term perspective, rather than rely too much on statistical patterns from the past."
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