Next Gen Emerging Markets Strategy

Next Gen Emerging Markets Strategy

Next Gen Emerging Markets Strategy

 
 
Summary

The Next Gen Emerging Markets Strategy invests in overlooked emerging and frontier market countries which are large and uncorrelated to global equities. We aim to invest in secular growth opportunities by constructing a concentrated portfolio of high quality companies that demonstrate a sustainable competitive advantage, trading at reasonable prices, which we believe will generate long-term capital appreciation. 

 
 
Investment Approach
Philosophy

We believe investors are overlooking large countries with rapidly growing consumer markets in regions such as Southeast Asia and Africa. These markets resemble the original promise of emerging markets—secular growth opportunities in large, overlooked countries with low correlations to global equities. We firmly believe that identifying quality companies–those with high returns on invested capital, a sustainable competitive advantage to protect those returns, and outstanding management teams—and acquiring them at a reasonable price, allows investors to harness the power of compounding growth over the long term. Outstanding businesses are difficult to find, and therefore we aim to construct a concentrated portfolio of companies that are benefitting from multi-year growth tailwinds. We believe this portfolio provides investors with access to the next generation of emerging markets.

 
Differentiators
Access to Overlooked and Uncorrelated Markets

Our investment universe, including Vietnam, Bangladesh, Indonesia and Nigeria mirrors the early days of emerging market investing. We focus on countries with sizeable, fast growing consumer populations that are in the early development stages. These markets have largely been ignored by investors and represent a small fraction of mainstream EM and global equity indices but can offer less correlated returns at attractive valuations. 

Secular Growth Opportunities

The portfolio is diversified across nascent secular growth themes identified through our travels and research. Across our universe of large, young and fast-growing consumer populations, legacy infrastructure is often poor or non-existent. This is likely to lead to fast evolving trends in industries like fast moving consumer goods, health care and financials. We believe these themes offer a long runway for growth where companies with a superior value proposition and sustainable competitive advantage can benefit from or drive this development.

Consistent, Accountable Process

Using a simple fundamental framework that encourages transparency and accountability, we look for companies with appealing economics, a sustainable competitive advantage and a candid, competent management team. We look to purchase these companies at a substantial discount to fair value. We use a checklist to assess each part of the thesis independently to ensure we are analyzing the company on its merits, not our intuition, to help avoid biases.

 
 
 
Investment Process
1
Idea Generation

We conduct primary research through frequent travel, tapping into networks in the countries we invest in, reading extensively and relying on pattern recognition of similar themes that have developed in other parts of the world. As “infovores,” we constantly seek out new and interesting ideas across a variety of mediums to identify the most promising investment opportunities in our universe.

2
Stock Selection

We follow a consistent and repeatable process. First, we assess the business economics (return on invested capital, addressable market, unit economics) to seek multi-year opportunities that can compound returns at strong rates. Second, we study whether a sustainable competitive advantage exists to help protect that opportunity. Then we model future free cash flows to determine whether the business can be purchased at a substantial discount to fair value. Next, we speak with the management team, looking for candid and outstanding teams aligned with minority shareholders. Finally, we use a checklist to ensure we are analyzing each piece of information objectively to help minimize mistakes.

3
Portfolio Construction

We manage a concentrated portfolio of 30 to 50 names. We establish a position when the stock is trading at an attractive valuation (discount to fair value), with initial position sizes of around 1%. Liquidity and volatility of the country and stock are important considerations. We conduct ongoing analysis of the portfolio’s exposures, correlations and risk drivers to ensure the portfolio is well-balanced and a reflection of our high conviction ideas. We look to hold positions for two to three years.

Next-Gen-EM-Strategy-process-v1
 
 
 
 

RISK CONSIDERATIONS  

There is no assurance that a Portfolio will achieve its investment objective. Portfolios are subject to market risk, which is the possibility that the market values of securities owned by the Portfolio will decline and that the value of Portfolio shares may therefore be less than what you paid for them. Market values can change daily due to economic and other events (e.g. natural disasters, health crises, terrorism, conflicts and social unrest) that affect markets, countries, companies or governments. It is difficult to predict the timing, duration, and potential adverse effects (e.g. portfolio liquidity) of events. Accordingly, you can lose money investing in this Portfolio. Please be aware that this Portfolio may be subject to certain additional risks. In general, equities securities’ values also fluctuate in response to activities specific to a company. Investments in foreign markets entail special risks such as currency, political, economic, market and liquidity risks. The risks of investing in frontier emerging markets are greater than risks associated with investments in other foreign or U.S. issuers and they are often considered highly speculative in nature. Investment opportunities in many frontier emerging markets may be concentrated in the banking industry, which could have a disproportionate impact on the portfolio’s performance. Stocks of small- and medium- capitalization companies entail special risks, such as limited product lines, markets and financial resources, and greater market volatility than securities of larger, more established companies. By investing in investment company securities, the portfolio is subject to the underlying risks of that investment company's portfolio securities. In addition to the Portfolio's fees and expenses, the Portfolio generally would bear its share of the investment company's fees and expenses. Derivative instruments may disproportionately increase losses and have a significant impact on performance. They also may be subject to counterparty, liquidity, valuation, correlation and market risks. Illiquid securities may be more difficult to sell and value than public traded securities (liquidity risk).

This communication is only intended for and will be only distributed to persons resident in jurisdictions where such distribution or availability would not be contrary to local laws or regulations.

There is no guarantee that any investment strategy will work under all market conditions, and each investor should evaluate their ability to invest for the long-term, especially during periods of downturn in the market. Past performance is no guarantee of future results.

A separately managed account may not be appropriate for all investors. Separate accounts managed according to the Strategy include a number of securities and will not necessarily track the performance of any index. Please consider the investment objectives, risks and fees of the Strategy carefully before investing. A minimum asset level is required. For important information about the investment manager, please refer to Form ADV Part 2.

Any views and opinions provided are those of the portfolio management team and are subject to change at any time due to market or economic conditions and may not necessarily come to pass. Furthermore, the views will not be updated or otherwise revised to reflect information that subsequently becomes available or circumstances existing, or changes occurring. The views expressed do not reflect the opinions of all portfolio managers at Morgan Stanley Investment Management (MSIM) or the views of the firm as a whole, and may not be reflected in all the strategies and products that the Firm offers.

All information provided has been prepared solely for information purposes and does not constitute an offer or a recommendation to buy or sell any particular security or to adopt any specific investment strategy. The information herein has not been based on a consideration of any individual investor circumstances and is not investment advice, nor should it be construed in any way as tax, accounting, legal or regulatory advice. To that end, investors should seek independent legal and financial advice, including advice as to tax consequences, before making any investment decision.

OTHER CONSIDERATIONS

The MSCI Emerging Markets Index (MSCI EM) is a free float-adjusted market capitalization weighted index that is designed to measure equity market performance of emerging markets

The MSCI Frontier Emerging Markets Net Index is a free float-adjusted market capitalization index designed to serve as a benchmark covering all countries from the MSCI Frontier Markets Index and the lower size spectrum of the MSCI Emerging Markets Index.

The MSCI EAFE Index (Europe, Australasia, Far East) is a free float-adjusted market capitalization index that is designed to measure the international equity market performance of developed markets, excluding the US & Canada. The term "free float" represents the portion of shares outstanding that are deemed to be available for purchase in the public equity markets by investors.

The MSCI World Index is a free float adjusted market capitalization weighted index that is designed to measure the global equity market performance of developed markets. The term "free float" represents the portion of shares outstanding that are deemed to be available for purchase in the public equity markets by investors.

The S&P 500® Index measures the performance of the large cap segment of the U.S. equities market, covering approximately 75% of the U.S. equities market. The Index includes 500 leading companies in leading industries of the U.S. economy.

The indexes are unmanaged and do not include any expenses, fees or sales charges. It is not possible to invest directly in an index. Any index referred to herein is the intellectual property (including registered trademarks) of the applicable licensor. Any product based on an index is in no way sponsored, endorsed, sold or promoted by the applicable licensor and it shall not have any liability with respect thereto.

The information presented represents how the portfolio management team generally implements its investment process under normal market conditions.

Morgan Stanley Investment Management is the asset management division of Morgan Stanley.

 

This is a Marketing Communication.

Please be aware that liquidity instruments may be subject to certain additional risks. Fixed-income securities are subject to the ability of an issuer to make timely principal and interest payments (credit risk), changes in interest rates (interest-rate risk), the creditworthiness of the issuer and general market liquidity (market risk). In a rising interest-rate environment, bond prices may fall. In a declining interest-rate environment, the portfolio may generate less income.

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