J O Hambro Capital Management believes some of the most interesting opportunities in emerging markets sit outside the largest companies and markets that dominate benchmark indices.
After a prolonged period in which US equities have dominated investor attention, emerging markets are beginning to attract renewed interest from investors, according to J O Hambro Capital Management (JOHCM).
The firm has launched a UCITS version of an emerging markets strategy that has been managed for institutional investors since 2010.
However, the more notable aspect for investors may be the team’s view that benchmark indices do not always provide the best route into the asset class.
Emery Brewer, lead senior fund manager at JOHCM, argues that the concentration of emerging market indices means some opportunities can be overlooked.
“After more than a decade overshadowed by US equities, emerging markets are drawing investors back. But the index is a blunt way to capture them: ownership has narrowed to a handful of large companies and markets, and the best opportunities increasingly sit outside it, in businesses most investors never look at. That is where we invest.”
The strategy takes a high-conviction, all-cap approach, investing across the market-cap spectrum rather than focusing solely on the largest constituents of the MSCI Emerging Markets Index.
According to JOHCM, the investment process combines two types of opportunity. The first is what the team describes as secular growth businesses, companies with the potential to build long-term competitive advantages.
The second is recovery growth opportunities, where earnings momentum is improving but is not yet fully reflected in valuations.
Brewer said: “We back two kinds of growth: companies building a durable advantage, and those recovering from a setback the market has written off.”
The team looks for companies at what it describes as inflection points, using indicators including earnings trends, news flow and price momentum to identify changes in corporate prospects.
The process also incorporates screening for accounting and governance risks.
The firm’s approach highlights an ongoing debate within the asset class. While indices remain heavily influenced by a relatively small number of companies and countries, some active managers continue to argue that broader opportunity sets exist beyond the benchmark’s largest holdings.
Brewer added: “Emerging markets move quickly, so what counts is spotting the turn early, acting on it, and selling without sentiment when the case fades.”
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