Next Gen Emerging Markets Strategy

Next Gen Emerging Markets Strategy

Next Gen Emerging Markets Strategy

 
 
Summary

The Next Gen Emerging Markets Strategy focuses on overlooked areas of emerging and frontier markets. Our goal is to identify the next generation investment ideas in these markets that are in the early stages of the digital revolution, creating significant business opportunities and a path towards more sustainable development. Based on a rigorous investment process, we run a concentrated portfolio of dynamic companies with the capacity to generate attractive and sustainable returns to investors over the long-term.

 
 
Investment Approach
Philosophy

The team believes that within the universe of large but overlooked markets across emerging and frontier markets, digitalization is starting a revolution that will provide compelling investment opportunities with multi-year compounding benefits. 

The team has identified six investment themes related to digitalization from where they source these opportunities, ultimately seeking strong absolute returns on capital. Given the lack of legacy infrastructure in these markets and the large and tech-savvy young populations, investors may be underestimating the potential value these companies will create.

 
Differentiators
Focus on Overlooked Markets

Our investment universe includes frontier and small emerging markets which have largely been ignored by investors and represent a small amount of the MSCI Emerging Markets Index. This universe of Next Gen emerging markets have historically low correlations to global equities, offering diversification benefits at compelling valuations. 

Growth in the Next Generation

We aim to capture the next generation of the digital revolution, which is taking off in these overlooked markets. We focus on six promising emerging markets themes, ranging from digitalization to green tech and unmet service needs, building a concentrated portfolio of high-quality Next Gen emerging markets companies.

Consistent, Accountable Process

Through bottom-up fundamental analysis, we look for appealing economics, which we understand through a combination of attractive unit economics, high returns on invested capital, and a sizable addressable market. We identify a company’s competitive advantage or moat and seek to understand the core competencies that make a company successful in the industry. We use a checklist to assess each part of the thesis independently and ensure we analyze the company on its merits, not our intuition, to help avoid biases.

 
 
 
Investment Process
1
Idea Generation

We conduct primary research, tap into our comprehensive network in the countries we invest in, and travel frequently to identify these Next Gen themes and the most promising stock opportunities within each theme. There are currently six themes in the portfolio: “the smartphone is the new bazaar”, “the rise of the emerging markets creatives”, “the world has a new favorite pastime”, “old problems new infrastructure”, “the Next Gen franchises”, and “sustainable development”.

2
Stock Selection

We do a deep dive of the most promising stock ideas within those themes: we approach company analysis like business owners trying to understand what defines success in the industry, the market opportunity, the unlevered returns of the business, unit economics, capital needs, risk, the sustainability of returns (i.e. there is a competitive advantage), strategy, and the value of the business. We look for companies that face a multi-year opportunity to create value for investors. We use a checklist to make sure we covered all the important topics supporting the investment decision.  We debate the investment thesis for owning the stock, contrasting it with our opportunity cost, market expectations, and our experience.

3
Portfolio Construction

We manage a concentrated portfolio of 20 to 40 names. Some of the companies we own have multi-year opportunities ahead of them, so we expect to remain shareholders for many years until the opportunities fully materialize in the stock valuation. We minimize risk by holding a concentrated portfolio of companies with secular growth stories that we seek to understand very well. Position sizing is a function of conviction, liquidity, volatility, and return expectations. Opportunity cost of capital is an important consideration—the team consistently monitors position sizes and will adjust sizing as conviction, price levels and opportunity costs between investments are re-evaluated.

Next-Gen-EM-Strategy-process
 
 
Portfolio Manager  
Steven Quattry
Executive Director
19 years industry experience
 
 
 
 

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).

Effective June 30 2021, the Morgan Stanley Frontier Markets Strategy was renamed to Morgan Stanley Next Gen Emerging Markets Strategy, with an expanded investment universe to include equity securities of companies operating in emerging market countries, which include frontier emerging market countries, and an updated investment approach to reflect top-down allocations are made at the macro and thematic levels.

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.

 

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