In recent years, Nedbank Private Wealth has noticed a steady increase in the number of clients seeking guidance from us on 2 main aspects of investing. The first is whether an active or passive investment approach is better in today’s uncertain economic environment. And the second is whether emerging or developed economies offer better opportunities when it comes to investing in global markets.

Of course, there is no simple response to either of these questions as the approach that is best suited will differ for every investor according to their circumstances, preferences and desired outcomes. Recognising that this is not the answer that most of our clients are looking for, we turned to the experts by hosting a webinar on exploring different opportunities when investing internationally. The event delivered some valuable insights – not least that one should never take an ‘either/or’ approach to markets and investment styles but rather seek out ways of extracting the maximum value from both.

Significant changes in a wider range of emerging markets

The vital first step towards extracting such value successfully is through understanding. Which is why the insights into the changing emerging market landscape provided by Ian Beattie, co-chief investment officer at NS Partners, were so valuable. 

He explained that emerging markets are changing significantly, but that this is quite normal. The reason why these changes have captured the attention of investors now, more so than in the past, is that many of the structural changes are happening in the largest emerging markets in the world, like China and India.

‘These changes have become far more impactful in recent years because of the growing number of emerging markets that are increasingly playing a part in global investment movements. When the MSCI Emerging Market Index was launched in 1988, it included just 10 countries, comprising around 1% of global market capitalisation. Today, the MSCI includes 26 countries and makes up 10% of global market capitalisation,’ said Beattie.

He also pointed out that the index weightings of individual countries have shifted quite dramatically over the past 2 decades. In 1988, Malaysia and Brazil had the largest weightings of 29% and 25%, respectively, while China’s representation was non-existent, given that there was no stock market in that country at that time. Today, China makes up 40% of the index, and many of the countries that had fairly large weighting have now shrunk to low single digits.

‘Given that this fluidity remains a feature of many emerging markets today, investors need to be very aware of the development dynamics of any emerging economy where they are considering investing,’ he said. ‘It is important to recognise that emerging markets are not a fixed group of economies, but that most are still cyclical in nature, albeit to a lesser extent than a decade ago. They are also less dependent on the United States and other developed markets for their economic survival and growth.’ With all that in mind, Beattie emphasised that timing remains important, as does an appropriate investment approach, which for many global investors now involves taking a core strategic view and then gradually adding on tactical opportunities in line with cyclical trends.

Focusing on resilient sectors

Marcus Watson, executive director at Morgan Stanley and Fund Manager of the Global Brands Fund, said that emerging markets can significantly compound the earnings of companies domiciled in them over time through structural growth, but that the ability of these markets to do so in a predictable manner is questionable.

‘Emerging markets don’t typically offer the levels of growth predictability that our investment philosophy demands, and the exposure of companies in these markets to single geographies is also something of a limitation,’ he said.  

He pointed out, however, that irrespective of domiciles, the Global Brands Fund concentrates on 3 main areas, namely consumer staples, select, high-quality franchises in software and IT, and healthcare participants. ‘We find that the most compelling companies within these focus areas have a few things in common, most notably high barriers to entry, reliable recurring revenues, strong pricing power and good resilience to tough economic conditions,’ said Watson. ‘We also typically look for companies that have good levels of diversification, which in turn lends itself to significant resilience and opportunities for scale,’ he explained.

In terms of the active versus passive debate, the importance of combining styles rather than selecting only one was emphasised by the webinar speakers. According to Mike Moore, Portfolio Manager and Analyst at Veritas Asset Managers, there are 5 key pillars on which effective asset management rests, the first being a focus on quality businesses that deliver high returns through an ability to reinvest. He also pointed to the importance of a long-term time horizon and the ability of a company to reinvest and deliver compounded returns persistently.

‘Capitalising on tracking error and having concentrated positions are also important elements of an effective active management strategy, which makes a global opportunity set vital, because that enables you to cherry-pick the very best companies. It’s also very important not to become overly focused on the index, because that can end up making you a quasi-passive investor,’ he said.

Moore pointed to effective portfolio risk management as the fourth element of an effective active management strategy and was adamant that it is possible to achieve high returns with a lower risk exposure, primarily by focusing on sectors that achieve durable growth that they can reinvest at high rates over time. Finally, he emphasised the importance of ensuring a low turnover of holdings to allow for the required longer-term compounding of returns.

Improving growth in so-called ‘passive’ investments

Jannie Leach, Head of Core Investments at Nedgroup Investments, maintained that there is in fact no such thing as ‘passive’ investing anymore. ‘The world of exchange-traded funds (ETFs) and index tracking has evolved dramatically in recent years, and today a non-active investment style is more appropriately termed a rules-based approach, because the various non-active approaches to investment today typically have one thing in common, which is that they are built on a set of clearly defined rules that govern how indices are constructed to achieve targeted outcomes,’ he said.

Leach explained that the main advantage of these rules-based approaches is that they afford investors easy access to the global investable market thanks to their broad diversification approach. He highlighted lower costs and more efficient tax liability management as another 2 benefits of a rules-based investment approach. ‘Undertakings for Collective Investment in Transferable Securities (UCITs) and ETFs offer significant tax advantages on dividends, and most rules-based portfolios can levy much lower overall costs than their actively managed counterparts – which can translate to significantly improved growth over time.’

Finally, Leach highlighted the fact that most rules-based investments offer low relative performance risk and volatility, as well as fewer unforced errors relating to asset allocations and entry and exit timings.

Ultimately, what emerged from all 4 speakers in the recent Nedbank Private Wealth webinar is the importance of an investment approach that, irrespective of the style or market focus, accurately identifies opportunities with predictable and consistent cashflows and the proven ability by target companies to compound these flows and the resultant growth.

Want to know more? Contact your wealth manager or stockbroker.

If you’re interested in what we can offer you, we would love to hear from you. You can contact us on 0800 111 263, or complete an online contact form.