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Boots on the ground

21 October 2014

Emerging markets specialist Ajay Krishnan of Wasatch Advisors discusses travel, China and Indonesia’s ‘floating ATMs'.

Rigorous attention to numbers is crucial for the investment approach taken by Utah-based fund manager Wasatch Advisors, but emerging markets portfolio manager Ajay Krishnan believes there is no substitute for ‘on the ground’ interaction with company management – wherever they may be located. Wasatch Advisors, manager of the St. James’s Place Emerging Markets Equity fund, takes the same ‘bottom up’ approach – which focuses on the individual attributes of companies – to both developed and emerging markets. Krishnan explains the importance of travel in this process, and casts an eye too on some of the ‘big picture’ issues that face emerging markets…

Q. How important is it to be able to see the companies on the ground?

Ajay Krishnan (AK): Travel is an integral part of the research process because the numbers are only the starting point. What we do next is to get out on the road, meet the management teams and verify their story. This year I’ve been to Indonesia, the Philippines, Mexico, Chile, Peru, Argentina, Thailand and next month I’m in India. I added MercadoLibre – the eBay of Latin America – to the portfolio after I met the management team on a trip to Argentina. This is a very interesting business that derives about 55% of its revenues from Brazil, about 15% from Mexico and the rest from Argentina and Venezuela. It’s a stock we’ve been tracking for about two years but we finally got the opportunity to take a reasonable position in April this year. Company visits allow us a deeper insight but also you get a sense of what the culture is like, their drive and ambition and how excited they are about their business. Those are things that you can’t get from a slideshow presentation.

Q. What’s your current perspective on the opportunities in China?

AK: China is at an interesting point right now. The current concern seems to be about the macroeconomic outlook and the pace of the slowdown of China’s growth. The fact is that China still has the fastest growth rate anywhere in the world of 7%. But the nature of that growth is going to change. It’s no longer going to be investment-driven; there will be a shift to a consumption model. I think the companies that will get hurt are the ones that used to sell commodities like iron ore, coal and steel.

Q. Does this have an impact on other opportunities in the rest of Asia?

AK: We focus more on the domestic demand when we build the portfolio and try to find companies that benefit from what is happening in their home economy. For example, we hold a position in Metropolitan Bank of the Philippines, where penetration of loans at 15% is much lower than the developed world. When people come of economic age in the Philippines they will take out more loans, more credit and grow their business – and that will occur regardless of what happens in China. We see a similar story of opportunity in India, Thailand and Indonesia. For example, in Indonesia the banks operate ‘floating ATMs’ – cash machines transported by boat - to access the country’s different islands and cater for the inhabitants’ different needs. Even if you don’t have exposure to the commodity companies, you can still find interesting investments across the whole of Asia. However, you have to be careful and understand what’s driving the growth for these businesses.

Q. Do you consider political risks when you’re constructing the portfolio?

AK: Absolutely and, if you look at how the portfolio has transitioned over the past 12 months, you can see that in play. We used to have a reasonable weighting in Russia but now we’re at zero, purely because of what’s happened at the political level. Similarly, we’ve reduced our exposure to Turkey, because of our political concerns. We build the portfolio from the bottom up, identify the companies we like and then consider the macroeconomic view and ask ourselves, “Does this make sense?”

Q. What are your thoughts on the opportunities in emerging markets over the next 12–18 months?

AK: I also manage a global equity strategy and I’m very excited about the emerging market aspect because that’s where I see the greatest opportunity. The countries that we’re very excited about right now are India, Mexico, Peru and the Philippines. The macro situation looks great, the fundamentals are great and valuation is reasonable. It’s not super cheap, but it’s reasonable.

The information contained above, does not constitute investment advice.  It is not intended to state, indicate or imply that current or past results are indicative of future results or expectations.  Full advice should be taken to evaluate risks, consequences and suitability of any prospective fund or investment.  Where the opinions of third parties are offered, these may not necessarily reflect those of St. James's Place.

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