China is such an important market, such a difficult market, a market so diverse.
Traditional emerging market investment strategies often focus on sectors related to that market, such as industrial, materials, and energy. However, this top-down strategy has the potential to ignore or underestimate some of the industries that are currently booming in emerging markets, such as technology. Dara White, co-manager of the $2.4 billion Columbia Emerging Markets (EEMAX), believes a different approach is needed to analyze these emerging industries.
White, 46, founded the Colombia Emerging Markets Fund in 2008 when he assembled a team of industry experts, not country experts, to use bottom-up strategies to select stocks and build portfolios. Still, White's team didn't ignore the overall picture of an emerging-market country, taking into account how regulation, demographics and other macro factors would affect the profits and valuations of the companies they held.
This strategy helped the fund perform well, earning Morningstar a four-star rating. Colombia Emerging Markets Funds have 3-, 5-, and 10-year returns that are higher than the MSCI Emerging Markets Index and also higher than the 90% diversified Emerging Markets Fund. The 1.470% rate is at the average of comparable funds.
However, there is one exception to the bottom-up investment strategy of the Colombian Emerging Markets Fund: China, a powerhouse in emerging markets.
"China is such an important market, a market so difficult, and a market so diverse that we find that the approach to looking at this market from two perspectives is very powerful, one from the perspective of the global emerging market sector and the other from the perspective of individual countries," White said.
The fund's co-manager, Derek Lin, is both a sector expert and a national expert. Three other fund managers have made the team more complete: Perry Perry Vickery, Robert Cameron and Darren Darren Powell.
The Chinese government's discussion of "common prosperity" has left some investors worried about the future of the private sector in China, the world's second-largest economy. The Chinese government has tightened its oversight of technology companies and the education and training industry to control what it perceives as excesses.
White and Lin argue that these concerns are exaggerated: They say the recent measures are China's way of expanding the middle class, rather than trying to return to a planned economy. "Today, China has a middle class of 400 million people, White said. Maybe in five years, the middle class will reach 600 million, and it will be really middle class. With these people, there will be a lot of investment opportunities."
China is the largest country in Colombia's emerging market portfolio, reaching 26%, compared to its benchmark of 34%. The team invests in government-encouraged industries, such as innovative healthcare and electric vehicles.
One example is its fifth-largest holding, WuXi Biologics (2269), a technology platform for biologics drug development that has been open to the world as part of its portfolio since 2017. Biologics are drugs made from living organisms, including vaccines and gene therapy. WuXi Biologics has a 5 percent global market share, and the research team said the potential growth of biologics could be comparable to that of the semiconductor industry.
The fund also bought a stake in Chinese electric vehicle maker Xiaopeng Motors (XPEV) in its 2020 IPO. Lin sees not only investment in electric vehicles, but also the potential future of autonomous driving. Electric vehicle manufacturers have high barriers to entry, and autonomous driving could become a subscription-based model.
"All of a sudden, you're more of a software company with very high profit margins and recurring revenue models," he said.
This team takes a long-term view, focuses on high-quality companies, and has been holding some companies for up to 10 years, which explains why it has only a 29% turnover rate. They look for companies whose management is trustworthy and who have a proven track record of capital management. The return on invested capital is their most important measure, so they look for a strong balance sheet with good cash flow.
The fund's patient strategy helps to smooth out some volatility in riskier sectors. The team of fund managers divides companies into three categories: global champions, domestic champions, and future global or domestic champions. Many of the companies they hold positions compete with state-owned enterprises or operate in industries that are still dominated by mom-and-pop shops.
"If a company is really an innovative company, really an innovative management team, then by launching new business areas, or opening up new markets that people don't like, there tends to be some exponential growth," White said.
Note: Holds records as of September 30. Returns as of October 18; 5-year and 10-year returns are calculated annualized. Source: Morningstar Corporation; Columbia Threadneedle Investments
The technology sector is the largest holding sector of the fund, and fund managers prefer e-commerce, especially the fintech sector. The executives said the companies should continue to grow rapidly over the next three to five years as e-commerce penetration expands.
The team believes that russian e-commerce platform OZON (OZON) will be the future domestic champion and bought it at the time of the IPO in November 2020. Russia's retail market is $450 billion a year, and 81% of the population uses the Internet. However, e-commerce penetration in Russia is much lower than in developed markets and many emerging markets, accounting for only 10% of the total market, so there is a lot of room for growth.
White said the fund also bet on low-cost Brazilian airline Azul (AZUL). 95% of airline routes are domestic routes, while Azul is the only option for 80% of its routes. During the outbreak, management focused on its freight business, which coincided with the growth of e-commerce in Brazil. Azul currently has a 35% freight market share, up from 20% before the outbreak.
White believes that now is the best time to buy emerging-market stocks. These companies and their management teams are even more qualified than they were five years ago, and their sensitivity to economic changes has been greatly reduced.
"It's a sea that you can buy and hold now," White said, "and personally, I've never held as many of my own funds as I do today."
| Barron's contributor Debbie Carlson
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Copyright notice: Original barronschina article, may not be reproduced without permission. For the English version, see "Why an Emerging Market Fund Is Sticking With Chinese Stocks." (This article is for your informational purposes only and does not constitute the provision or reliance of investment, accounting, legal or tax advice.) ）