Latest Emerging Market Viewpoints
From Matt Linsey and the North of South Capital team
We occasionally get asked to summarize our core investment principles.
As we have previously written, we believe that in Emerging Markets active management has a significant opportunity to outperform the index. This is because our markets are less efficient than developed markets.
In order to take advantage of this, we have to find ways of determining the inefficiencies and exploiting them for the benefit of our investors.
In summary, we invest according to three major Investment Principles:
The first is the belief that value investing tends to outperform other styles over long periods of time. By buying equities whose income streams are priced below those of the market and of its peers we expect to receive more income over time. This can be reflected through dividend payments or through an eventual repricing of these income streams which leads to the stock outperforming the market.
The second is the belief that value needs to be seen in the context of domestic risk free rate. We believe that equities need to be attractive relative to their domestic fixed income markets in order to perform over the long term. If this is not the case, investors will prefer eventually switch to the lower risk income streams offered by bonds, and equities in that market will underperform.
The third is that value needs to be assessed relative to the riskiness of the stock. We believe that establishing a consistent methodology for the equity risk premium is essential in this process. The methodology we use is therefore an extended version of the traditional equity risk premium calculation and includes factors such as liquidity of the stock, volatility of the stock, volatility of earnings, underlying leverage and subjective factors such as corporate governance.
When applying these principles consistently to equities in our markets, we find opportunities to buy stocks that we believe will do better than the market.
The principles are based on fundamental economic concepts and not a result of back-testing. There is significant historic evidence on the outperformance of value investing (Fama & French among others). More importantly, we have found ourselves over the past dozen years that this approach adds significant value over any two to three year horizon. This may happen through entire local markets correcting mispricing or by individual stocks adjusting over time.
IMPORTANT INFORMATION | Issued and approved by Pacific Capital Partners Limited, a limited company registered in England and Wales, authorised and regulated by the Financial Conduct Authority . The information contained herein is not approved for use by the public and is only intended for recipients who would be generally classified as investment professionals. Information or opinions contained in this article do not constitute an offer to sell or a solicitation, or offer to buy, any securities or financial instruments or investment advice or any advice or recommendation in respect of such securities or other financial instruments. Where past performance is shown it refers to the past and should not be seen as an indication of future performance.