Eastspring's Sam Bentley discusses how adopting a value approach can offer huge opportunities in emerging markets
You take a different approach to investing in emerging market equities. Why?
If you look at our universe, most of our peers are taking a growth/quality approach or a combined approach. Very few follow a disciplined value approach. We believe there is a huge opportunity in value and we are doing something different - trying to capture the mispricing that has been created as a result of behavioural biases. There is not just potential for excess returns, but building disciplined value-focused funds offers clients a source of returns that are not correlated with the rest of the market and which could reduce portfolio volatility.
Looking at the long-term picture, value has outperformed and history suggests that taking a value approach is the best approach in emerging market equities. This informs our philosophy and approach to investing. We are not trying to compete with the market on forecasting near-term earnings and growth trajectories. We think value is where the opportunity is and where we can make the most money for clients.
What are the benefits of investing in a value-styled strategy?
Well it certainly helps that many, if not most, investors are focusing elsewhere. We are trying to take advantage of short-term mispricing created by other investors' behavioural biases. People tend to overreact and aggressively sell down stocks they are fearful of or have some sort of near-term concern. Hard-wired human behavioural biases can lead people to overpay for stocks they feel comfortable holding or have an emotional attachment to.
This is a huge opportunity when it comes to emerging markets, which are often driven by big swings in sentiment.
How does the Eastspring Global Emerging Markets Dynamic Strategy seek long-term value opportunities?
We manage around $700m in the strategy, which contains our best ideas from the emerging market universe. The strategy selects from the broadest universe of emerging market equities going beyond the stocks comprising the MSCI Emerging Markets benchmark to look at every stock that is listed across EM markets. It runs all the stocks through a quantitative screen, taking around 3,000 down to the cheapest 500.
Those 500 stocks are looked at on a very high-level basis for indications of a value signal on a weekly basis, taking an initial look at about 100 stocks during the course of a year. We will narrow this down to about 20 to 40 stocks per annum on which we conduct very detailed research before including any in the portfolio. This is a purely bottom-up stock-specific approach, though it does mean the strategy may be overweight in certain markets where we find clusters of opportunities. Thus the strategy is currently overweight in Korea, which is less popular with investors overall, while underweight in the currently popular India-driven by our bottom-up stock- specific research.