To capitalise on the global economic recovery, look to emerging markets

From

Alastair Reynolds

As the global economy returns to growth, investors looking to catch the growth wave should be looking to emerging markets, says Martin Currie, the active equity specialist investment manager of Franklin Templeton.

“Take one example. In 2021, the global semiconductor market will approach US$500 billion in sales and there are concerns about a shortage of supply globally,” says Alastair Reynolds, Portfolio Manager of the Legg Mason Martin Currie Emerging Markets Fund.

“The list of leading global semiconductor businesses is now dominated by emerging markets companies. They include Taiwan’s TSMC, which grew revenue 25% in 2020; South Korea’s Samsung Electronics and SK Hynix; and Taiwan’s Globalwafers.”

Reynolds says another sector that highlights the strong prospects of companies in emerging markets is the electric vehicle (EV) market. The demand for EV batteries is expected to grow ten-fold over the next 10 years, and the majority of that growing demand is currently being met by Asian producers, including South Korea’s LG Chem and China’s CATL.

“Emerging markets provide access to young and growing populations and tap into some really important consumption themes, as well as themes that are driven by urbanisation and digitisation. Our Fund provides access to highly profitable companies that are capable of delivering higher levels of growth.”

Launched in 2011, the Legg Mason Martin Currie Emerging Markets Fund has consistently beaten its benchmark, the MSCI Emerging Markets Index (AUD). Since inception it has produced an average return of 10.2% a year (net of fees), compared with average 9.0% annual growth of the benchmark over that period.

Over the five years to the end of April, the Fund returned 17.0% a year (net of fees), compared with the benchmark return of 12.2% a year – top quartile performance for the Morningstar Equity Emerging Markets peer group. And over the 12 months to the end of April, the Fund returned 32.0% (net of fees), compared with the benchmark return of 26.0%.

Reynolds puts this outperformance down to the Fund’s distinctive investment approach. It is an actively managed, high-conviction fund that aims to hold a well-diversified portfolio of 40-60 stocks across about 20 countries and 20 industries. With country exposure generally close to benchmark, alpha is driven by stock selection.

A distinctive feature of the Fund is its industry leading approach to environmental, social and governance (ESG) analysis to help inform investment decisions. A pillar of its investment process for over 20 years, ESG integration is in Martin Currie’s DNA.

“The team considers a lack of ESG credentials as value destructive to a company’s prospects, and stocks without proper ESG credentials can be deemed uninvestable,” Reynolds says.

“The team’s awareness of ESG issues was a key reason for its early position in the EV space. Now the team is finding opportunities further down the EV supply chain, including companies making the equipment used to produce the batteries.”

Another of the Fund’s distinctive features is its collaborative whole-team approach. The portfolio managers conduct proprietary research within their own sectors, such as financial, technology and natural resources. The team then comes together to make collective decisions on the portfolio, an approach designed to lead to fewer biases and better outcomes.

The team takes a long-term investment horizon of at least five years, typically owning their investments for multi-year periods in order to fully exploit market inefficiencies and let companies reach their long-term intrinsic value. Long-term macro conditions are considered as risks in the investment process, rather than a source of alpha generation.

Apart from the managed fund, Australian investors can access the opportunities presented by emerging markets via another vehicle: the BetaShares Legg Mason Emerging Markets Fund ETF (ASX: EMMG), which was launched in 2019.

Both Legg Mason Martin Currie Emerging Markets Fund and the BetaShares Legg Mason Emerging Markets Fund ETF have gained ‘Recommended’ Ratings from Lonsec and Zenith and are available across most leading investment platforms. In addition, Legg Mason Martin Currie Emerging Markets Fund recently received a Morningstar Analyst RatingTM of ‘Bronze’ as of 6 May 2021.

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