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Investing in Emerging Markets with WCM 687KB Investing in Emerging Markets with WCM Key takeaways • Emerging markets are rife with investment opportunities that will participate in a wave of rapid economic development, digitalization, and rising consumer purchasing power. • A passive investment approach to emerging markets has numerous shortcomings. The indices tend to be dominated by lackluster businesses – such as bureaucratic, state-owned enterprises (“SOEs”) – and are likely to be overweight value-oriented, cyclical sectors that will slowly decline in relevance as emerging economies develop. • With an active, long-term investment approach focused on companies with improving competitive advantages and superior corporate cultures, WCM’s Emerging Markets portfolio offers investors partnerships with tomorrow’s leading companies that stand to benefit from a multi-decade tailwind of robust growth. For Financial Professional Use Only 1 INVESTING IN EMERGING MARKETS WITH WCM Why Invest in Emerging Markets? 1Source: BCG;Digital Consumers, Emerging Markets, Benefit from megatrends and robust economic growth and the $4 Trillion Future, September 2018 For the last twenty years, emerging markets economies have substantially outgrown 2Source: IMF Datamapper,GDP based on PPP, share their developed markets counterparts. Most observers expect more of the same for the of world, 2021 foreseeable future, fueled by megatrends such as urbanization, digitalization, and the rise 3Source: IMF Datamapper, Population, millions of the global middle class. As a consequence, companies that are positioned and able to of people, 2021 take full advantage of these trends stand to generate strong and consistent revenue and earnings growth, which bodes well for investor returns in the long run. It is difficult to overstate the growth potential of emerging markets. Indeed, in just the last twenty years, more than a billion people in emerging markets have joined the ranks of the middle class, nearly two billion have moved into cities, and nearly three billion have accessed the internet for the first time.¹ With tailwinds like that, it should come as no surprise that emerging markets GDP growth has consistently surpassed that of developed markets over the last two decades. In fact, since 2000 – when the GDP of emerging markets was just 43% of total global GDP – the emerging markets portion of global production has risen to 60%.2 And there is plenty of runway left. With more than six and a half billion people living in emerging markets today (more than 85% of the global population), an enormous amount of human potential is about to be unleashed.³ Population of capital cities in 2018 GDP based on PPP,2 share of world (percent of world) (thousands) 70 Tokyo Japan 37,468 60 50 Delhi India 40 28,514 30 Mexico City Mexico 20 21,581 GDP share of the world (%) 10 Cairo Egypt 0 20,076 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020 2022 2024 2026 Developed Economies Emerging Economies Beijing China 19,618 Source: IMF, 2021 Urban and rural population projected to 2050 Dhaka Bangladesh Estimates to 2016; UN projections to 2050 19,578 Projections are based on the UN World Urbanization Prospects and its median fertility scenario 10 Buenos Aires Argentina 9 14,967 8 7 Manila Philippines 6 (billions) 5 13,482 4 3 Kinshasa Democratic Republic of Congo Population 2 13,171 1 0 Moscow Russia 1950 1960 1970 1980 1990 2000 2010 2020 2030 2040 2050 12,410 EM Rural EM Urban Source: World Urbanization Prospects: The 2018 Revision Source: World Urbanization Prospects: For Financial Professional Use Only The 2018 Revision 2 INVESTING IN EMERGING MARKETS WITH WCM Yet, despite this inexorable growth, emerging markets remain grossly underrepresented in 4 Source: MSCI, IMF Datamapper (GDP based on global equity benchmarks. While accounting for 60% of current global GDP4 and more than PPP), 2020 60% of global growth in 10 years’ time,5 emerging markets only represent ~12% of global equity value.6 Such an imbalance simply cannot last. 5 Emerging markets: the silver lining amid a challenging outlook; Swiss Re Institute; 2019 6 The Future of Emerging Markets; Dimitris Melas; MSCI Research Insights; April 2019 Share of global GDP vs. weight in MSCI ACWI 100% 80% 60% 40% 20% 0% Developed Markets Emerging Markets Share of Global GDP Weight in MSCI ACWI Source: MSCI, IMF Datamapper (GDP based on PPP), 2020 Attractive long-term returns and diversification benefit Although emerging markets equities have historically been more volatile than their 7 Source: FactSet, MSCI; total return from 31 developed markets counterparts, the asset class has nevertheless delivered strong December 2000 through 31 December 2020 returns over the long term. Since 2000, the MSCI Emerging Markets Index has returned 8 Source: FactSet, MSCI; total return from 1 January 9.94% per annum vs. the MSCI World7 at 6.58%; from the inception of the Emerging 1988 through 31 December 2020 8 Markets Index in 1988, it has returned 10.91% vs. 8.33% for the MSCI World . Moreover, 9 Source: FactSet. Average correlations from 1 and often underappreciated, the MSCI Emerging Markets Index has exhibited a relatively January 1988 through 31 December 2020 low correlation to developed markets equity indices (correlation of 0.74 vs. MSCI World since the inception of MSCI EM9), which means that pairing an emerging markets portfolio with your developed markets portfolio has the potential to both lower your risk and improve your return. Hypothetical growth of 10,000 (USD) Since 2000, the MSCI 350 Emerging Markets Index $305.16 has returned 9.94% per 300 annum vs. the MSCI World7 at 6.58%; from the 250 inception of the Emerging 200 Markets Index in 1988, it has returned 10.91% vs. 150 $140.06 8.33% for the MSCI $ (thousands) World.8 100 50 0 1987 1990 1993 1996 1999 2002 2005 2008 2011 2014 2017 2020 MSCI Emerging Markets Index (total return) MSCI World Index (total return) Source: Factset, MSCI as of 31 December 2020 Past performance is no guarantee of future results. For Financial Professional Use Only 3 INVESTING IN EMERGING MARKETS WITH WCM Why WCM Investment Management? Which would you rather The benchmark is the risk own: an oversized, While the case for allocating to emerging markets equities in general is compelling, implementing an effective strategy requires a more thoughtful approach, which we think bloated Chinese bank begins with building a portfolio that’s different from the benchmark. Today, about 50% being forced to lend of the MSCI Emerging Markets Index is composed of financials, telcos, energy, basic for political reasons, materials, heavy industry, and utilities companies.10 Not only do these sectors grow more or a privately owned, slowly than their underlying economies, they are also dominated by state-owned entities motivated technology (“SOEs”). SOEs naturally operate for – and at – the whim of the state, rather than for private company bringing shareholders’ benefit. Yet in the same emerging markets index, you’ll find some of the most dynamic and fast-growing businesses on the planet – companies that are leapfrogging hundreds of millions the developed world in digital business models, and/or creating entirely new services of people into the and industries. To us, a simplistic, passive approach to emerging markets investing digital age? overexposes investors to the former group, and underexposes them to the latter. For example, which would you rather own: an oversized, bloated Chinese bank being forced to 10 Source: MSCI (www.msci.com) lend for political reasons, or a privately owned, motivated technology company bringing as of 31 December 2020 hundreds of millions of people into the digital age? MSCI Emerging Markets MSCI Emerging Markets Cumulative returns by company type Return breakdown by company type 250% 300% 201.74% 200% 250% 201.74% 150% 200% 150% 100% 118.39% 65.69% 100% 50% 58.48% 65.69% 50% 29.21% Cumulative price returns Cumulative price returns 0% 8.14% 0% 3-Year 5-Year 10-Year -50% Dec-10 Dec-11 Dec-12 Dec-13 Dec-14 Dec-15 Dec-16 Dec-17 Dec-18 Dec-19 Dec-20 Non-SOE SOE Non-SOE SOE Source: WCM, FactSet (>50% formula), MSCI as of 31 December 2020 Past performance is no guarantee of future results. Exposure to structural growth in EM WCM’s Emerging Markets strategy is a bottom-up, fundamental growth strategy seeking WCM Emerging Markets Strategy companies in developing economies that are strengthening their competitive advantages Sector Breakdown (“economic moats”), building superior, moat-complementary corporate cultures, and benefiting from what we believe are some of the strongest global tailwinds in any asset class. This approach tends to steer our portfolio away from non-growth sectors 24.0% 20.5% 18.3% and industries, instead giving investors active exposure to the industries consistently 18.0% 16.5% demonstrating the most robust growth in developing economies. Naturally, then, our 13.8% 12.1% 11.6% holdings will predominantly be in the more traditional growth sectors (i.e., technology, 10.6% 8.9% 8.6% consumer, and healthcare). We think that gives us an added structural advantage: not 7.6% 5.9% 5.0% 4.7% only are companies in these sectors less cyclical than the index at large, they are also 4.3% 2.1% 2.0% 0.9% capitalizing on the most important drivers of wealth creation in emerging economies – 0.0% 0.0% 0.0% namely, rising personal incomes, maturing patterns of consumption, better education, higher quality healthcare, and digitalization. When we do find a gem in, say, the financial Energy Utilities Comms Materials Financials Industrials Healthcare sector (where durable, high-quality growth is rare), it will be in one of the few pockets Real Estate Technology of dynamism – disruptive niche businesses, or champions in regions with low financial Cons Staples services penetration.
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