In this series, Investment Week speaks to some of the winners of the Fund Manager of the Year Awards 2020 about their teams, how they construct portfolios, performance drivers and how their particular strategies may develop in the future.
Today we talk to the international business of Federated Hermes, whose Global Emerging Markets Equity fund won the Equities: Global Emerging Markets Award.
Can you tell us about the winning team on the fund and how you construct the portfolio?
Kunjal Gala has been appointed lead portfolio manager for the fund with effect from 1 September. He has been co-portfolio manager of the fund since 2016, working closely with Gary Greenberg, head of global emerging markets, and the emerging markets team over the past eight years on developing and implementing the funds' longstanding investment philosophy and processes.
The team has worked closely to develop their own distinctive investment philosophy and approach. This includes the use of top-down and bottom-up market and sector insights, integration of ESG throughout the process and development of high active share and concentrated portfolios.
The team seeks high-quality, efficient and sustainable companies whose growth is supported by robust, defensible franchises. They have the potential to generate a high return on equity and maintain strong balance sheets.
By purchasing them at attractive valuations, the team not only gains the potential to secure further upside, but also the potential to reduce the risk of capital loss.
The team takes into account the economic conditions in which companies operate, and favour emerging economies that provide environments supportive of growth.
The team invests across the market-cap spectrum and has the flexibility to allocate decisively across regions, concentrating on markets that offer the best opportunities.
The team also considers ESG factors as part of their risk analysis, and vet and investigate opportunities or potential threats to company performance.
The team also work closely with EOS at Federated Hermes, our global stewardship team who engage with key companies and regulators to influence corporate boards, regulators and industry bodies to act in the interests of long-term shareholders.
What has helped drive performance for the fund in recent years?
The team's quality bias has historically enabled the portfolio to deliver in strongly rising markets and offered a measure of protection on the downside in more volatile periods.
The team have identified six major themes across the emerging markets space: 5G; data centres, digitalisation and industrial Internet of Things (IOT); finance; premiumisation; healthcare; and logistics.
The team has captured these themes through bottom-up stock ideas.
As 5G becomes more prevalent, 5G networks will form the backbone for dig data/IOT and be crucial for next-generation technologies such as smart factories, smart cities, smart cars and maybe smart people.
Big data/IOT requires increased density for data storage, paralleling computer upgrades for data processing and bandwidth upgrades for transmission.
Digital software solutions and cloud computing are among the most attractive and fastest growing segments in the IT services space.
Large data sets from connected devices used in industrial and eventually consumer applications will likely drive demand for industrial PCs, automation and robotics.
Emerging markets are seeing increased wealth creation and demand for financial services. The industry is a structurally attractive one, with low level credit penetration and protection gap offering strong long-term growth potential.
With increased wealth, consumers have seen their disposable incomes rise, and more are trading up to premium product categories, stimulating a demand for high-end products.
There is a growing demand for improved healthcare across emerging markets, targeting underserved consumers in underpenetrated markets.