Patience pays off for this bargain-hunting emerging markets fund

Returns have been uneven for Brandes Emerging Markets Value, but long-term performance has been top-notch.

Jeffrey Bunce, CFA 15 August, 2017 | 5:00PM
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Not everyone can abide Brandes Emerging Markets Value's bargain-hunting approach. It requires patience, strong conviction and a knack for differentiating stocks that are temporarily depressed from those that are in secular decline. The managers at this fund have these qualities in spades, though. The fund gains its competitive edge from its diverse, veteran five-person investment committee and its disciplined execution of the firm's thorough and repeatable deep-value approach. As such, the fund earns a Morningstar Analyst Rating of Silver.

Brandes starts by looking for stocks trading well below fair value. Sector analysts bring stocks to the investment committee for vetting after rigorous analysis. Each member of the four-person committee calculates their own, independent fair value calculations for the stocks, which they average to improve the objectivity of the final estimate. The committee requires bigger margins of safety for and limits the position sizes of stocks in which there are wider variations among the committee members' fair value estimates. This helps control risk.

Management sizes positions based on each stock's discount to fair value and the committee's level of confidence in its estimates. Since the financial crisis, Brandes has scored each stock it considers as high, medium or low quality. The managers assign much higher discount rates to and hold smaller positions in lower-quality stocks to reflect their added uncertainty. Overall, the portfolio typically comprises 60 to 80 names, and top holdings rarely grow larger than 7%. They also limit country and industry weightings to the greater of 20% or 150% of the MSCI Emerging Markets Index weighting. There are no minimum allocation requirements, so the committee is free to have no exposure to overvalued regions or sectors.

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About Author

Jeffrey Bunce, CFA

Jeffrey Bunce, CFA  Jeffrey Bunce, CFA, is a senior investment analyst for Morningstar’s Investment Management group.

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