Kathryn Langridge, Senior Portfolio Manager, Manulife Investment Management has been investing in emerging market equities since the 1980s; and believes fast-growing economies offer compelling investment opportunities for investors seeking growth and global diversification
Despite having 40% of global GDP, emerging markets (EM) represent only 12% of world market capitalization1. Today, only two emerging market countries are in the top seven by GDP; by 2050 it’s expected six will be in that group. Once dominated by commodity-intensive heavy industry and manufacturing, EM countries are becoming home to some of the world’s fastest-growing economies and most innovative companies. Yet, most people have no, or little, exposure to this asset class. Not only is it under-represented but the growth opportunities are often ignored.
Why are investors widely overlooking this vast geographic area rich with innovation and development?
Kathryn Langridge is a Senior Managing Director and Senior Portfolio Manager at Manulife Investment Management, heading up the Manulife Emerging Markets Fund. A veteran in her field with almost 40 years of experience investing in emerging markets, Langridge offers valuable “boots-on-the-ground” perspective of the evolution of emerging market economies.
She believes while there is a stigma around EM as an investment proposition, investors should not disregard these markets based on outdated fears or myths, but instead should consider the benefits these dynamic economies can offer. These are markets at varying stages of economic and political maturity, so there will be periods of heightened volatility associated with uncertainty, often in specific markets or sectors. However, if you take the asset class as a whole, Langridge believes the perception that its volatility is greater than other parts of the world is a myth.
“The specific risk that comes with individual markets or even individual stocks can be extremely volatile,” she said. “But in aggregate, when you focus on actively managing your exposure as we do in our fund and knowing your companies in great detail when building a diversified portfolio, you're seeking to balance out those risks. Ultimately, that’s why we have delivered very strong risk-adjusted returns through the market cycle.”
Investing in EM equities is for the medium to long-term investor; those taking a short-term view risk volatility. Over a three-, five- or 10-year timeframe, however, you’re buying into some of the fastest-growing economies in the world2.
Langridge added: “It’s vital to focus on the strongest long-term equity winners in this very dynamic, rapidly-changing marketplace; that’s why active management is so important when investing in emerging markets. If you're buying the index, you're buying passive-return decay. The average company in emerging markets has not generated strong returns for investors in the past, but the best quality companies have.”
Manulife Emerging Markets Fund is anchored in the belief that well-run businesses in emerging markets can generate superior growth and sustain high returns on capital. Investing in these best-in-class companies at the right valuation can deliver long-term outperformance.
The fund’s conviction and philosophy stems, in part, from Langridge’s personal experience. After leaving Cambridge University, her career began in Asia in the 1980s having also spent vacations in the region during the previous decade. Over the years, she’s witnessed the transformation of Asia and, more generally, emerging markets. She said: “It’s been an extraordinary experience and given me a unique perspective on developing economies, business cycles, political turmoil, political maturity and the challenges that come with that.”
Langridge was one of the first foreign investors in 1985 to visit Samsung Electronics in South Korea. “It’s fair to say that back then they were not expecting a woman”, she recalls. And while companies like Samsung have matured to become household names in emerging markets, Langridge stresses on the importance of choosing investments selectively by taking into account not only company fundamentals but also ESG considerations. “ESG integration in our analysis forms a natural alignment with our philosophy, as it reveals inefficiently valued risks and opportunities”.
Langridge first investment at the onset of her career as a portfolio manager remains influential in how she and her team assess ESG risk in the portfolio. She sold a stock from an inherited portfolio, because she felt the business founder’s story did not add up and that he was “deeply untrustworthy”. Six months later, he was on the Interpol list and his firm was, essentially, bankrupt.
She said: “Those early lessons are powerful. Always trust your instincts and your judgment. Always do your homework and if something does not fit from an ESG perspective, it has the potential to damage the investment thesis, so you shouldn't be there.”
That thinking prevails today. The fund’s five-strong team are active, bottom-up, long-only, fundamentally driven investors. Highly selective, they focus on identifying best-in-class, high-quality growth businesses across the whole spectrum of the 26 emerging markets.
Along with the fund’s other veteran portfolio manager, Philip Ehrmann, their experience goes back almost 40 years. It’s part of the team’s secret sauce, along with its collaborative approach and strong belief in active management.
They manage risk not just in terms of geography and sector but also in terms of the lifecycle of a company. Langridge explained: “We will never have a portfolio that is entirely in mature businesses anymore than we'll have a portfolio exposed entirely to relatively new, rapid-growth businesses. There will be a balance and a blend. The key thing is that we have built a high conviction around the drivers of returns.”
One only has to look at pictures of China’s development to realize growth is super-charged. There is a relentless force of demographics - like the rise of the middle class - and urbanization driving productivity. Then there is the shift from manufacturing to services. The view of EM as commodity intensive featuring heavy industry and state-owned enterprise is now misplaced.
Countries have no legacy infrastructure and, therefore, are building things for the first time in this digitized era, creating exciting investment opportunities.
The global pandemic disrupted that for a spell, of course, but Langridge said the fund’s bottom-up approach meant it navigated the periods of volatility. The fund performed strongly in 2020, with 30.10% calendar year return, led by a strong belief in the upside potential of its stocks as they were sold off at the end of the first quarter.
The team also believed that trends in existence before the pandemic would be amplified. Areas like the 5G rollout, industrial automation, e-commerce, robotics, and the online payments space are all trends that will shape the next decade.
When the markets crashed, the fund’s focus on strong companies that would not only survive but consolidate bore fruit. The team also anchored its portfolio to North Asia - China, South Korea and Taiwan, in particular – because of how well they were managing the pandemic, their flexible monetary policy, and domestic liquidity.
Langridge said: “Of course, there are a lot of markets that have been very badly damaged and are experiencing second and third waves of the virus. It’s a very uneven recovery and hard to predict.
“It’s why knowing your companies is so important, because that gives you real anchoring around what you can understand, what you can feasibly predict, and the risk that you can practically manage in terms of building a diversified portfolio.”
With that investment philosophy, the digitization of emerging market economies means opportunities abound for the discerning investor across Asia and into Latin America. Langridge also views the A-shares market, RMB-denominated equity shares of China-based companies, as the last undiscovered frontier of EM.
She said: “There are companies in Asia that have grown with the region and are now in positions of global leadership, which is very, very exciting to access. It’s a very different story than the conventional one around emerging markets – that it’s a volatile asset class, dangerous, and politically unstable. There are very profitable companies in emerging markets - and that's what we're trying to tap into.”
1 Source: International Monetary Fund, World Economic Outlook Database, October 2020. 2019 share of world GDP, based on USD current prices and MSCI ACWI Index data from FactSet, as of December 31, 2020
2 Source: International Monetary Fund, World Economic Outlook Database, October 2020 and PWC, The Long view, how will the global economic order change by 2050, February 2017
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