When it comes to investing in emerging markets, Christopher Garrett credits the discipline of a value approach for the success of the silver-rated Brandes Emerging Markets Value Fund F.
“It’s really being able to look through some of the market noise, and focus on buying companies at a discount to their value at what we think they’re worth,” says Garrett, director, institutional group and portfolio manager at Brandes Investment Partners, L.P. The firm, based in San Diego, is the sub-advisor for the fund that is distributed by Bridgehouse Asset Managers in Canada.
The four-member team think about investing for a three-to-five year period, “and I think that makes a big difference in your perspective on the markets as well as the investments that you’re looking at,” he says.
A blend of value instead of deep-discount
The bottom-up approach blends a variety of value strategies, based on the Graham and Dodd philosophy. If the companies meet the stock criteria, ‘adequate’ discount opportunities generally range from 20% to 30%. “They’re not deep-discount ideas, but they are companies that we think have significant upside opportunity relative to their long-term intrinsic value.”
Buying opportunities fluctuate over market cycles and can be very specific industries, or countries, that offer long-term value. Circumstances that offer out-of-favour buying opportunities may include geopolitical issues, a change in management, changes in an industry that is perceived negatively, a bad quarter, or other factors.
The portfolio invests in 35 to 85 emerging market companies and currently spans about 23 different countries. The approximate 70 holdings represent a diversified mix of industries and sectors across all caps, with the majority in the large-cap space.
From a regional perspective, the fund is weighted approximately 41% in Asia and 32% in Latin America. “The big elephant in the room for our portfolio is that China, such a large weight in the benchmark, is a much smaller weight in our portfolio,” Garrett says. The fund does not adhere to the benchmark. It is weighted about 12% in China compared to the 33% weight in the MSCI EM Index.
Within China, the fund favours a range of different industries and businesses, including apparels and mobile telecom providers. “Some of the interesting things we’ve been picking up lately have been in healthcare,” says Garrett. Some examples include businesses that provide equipment to hospitals, or domestic-oriented companies in the pharmaceutical space that do generic business. The benchmark is focused on some large companies, so the fund finds some great opportunities away from large-cap names.
In Latin America, Mexico represents almost 11% of the portfolio. “A lot of that is in REITs (real estate trusts), where dynamics have turned in favour of these businesses. From a risk standpoint, real estate offers diversification,” he notes. The portfolio also holds one of the large telecom providers, and one of the large industrial-materials cement producers in Mexico.
Long term bets on Brazil
Among the countries, Brazil represents the highest weighting with a 14% position. The investment managers continue to see opportunities in Brazil despite the ongoing challenges with debt in the pension system. Garrett credits the “longer-term perspective, that allows you to look through some of the near-term issues, and not have to react to every action that happens or make bad decisions.”
Today, the portfolio holds companies in Brazil that include oil and gas, telecom, one of the largest beef producers in the country, a major retail supermarket business, and a regional jet manufacturer. “Across the spectrum, many of these countries want to be big participants on the world stage, so they’re trying to make the proper reforms and changes to get themselves on a strong upwards trajectory,” he says.
Research for the fund includes multiple databases, access to company management and internal screening to try to assess the intrinsic value of a company. The investment team draws on the expertise of approximately 24 research analysts doing fundamental, bottom-up research to identify opportunities in the emerging markets areas.
When it comes to buying stocks, the managers want to have low valuation metrics and look for minimal liquidity for investing in a business, but they are not rigid on the stock criteria. “Do we like to see pristine balance sheets, certainly,” says Garrett, “but it’s not a minimum requirement. We would like to have low debt but that’s not always the case. What we would like, and what we would highlight in a company with debt, is that we see a path for them to improve their balance sheet fundamentals, to reduce that leverage.”
Garrett finds that current valuations in the emerging markets are, “super, super attractive.” “If you look at the gap between price-to-earnings for developed markets relative to price-to-earnings in emerging markets, there’s a significant gap and it looks very attractive. We’re excited as we look forward.”
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