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Excel Emerging Markets Fund: Maximizing Long-Term Returns Through Secular Growth Themes

Reducing Portfolio Volatility through Sector Diversification

In the Excel Emerging Markets Fund, we focus on identifying and investing in secular growth themes within the various emerging market countries for two key reasons:

  1. To reduce the cyclicality of the portfolio’s performance. Simply put, we are not as worried about absolute GDP growth levels of a country if we’re investing in sectors like healthcare where the current spending per capita is a fraction of the spending in developed countries and growing quickly.
  2. Investing in country-specific growth themes reduce the correlation of earnings and stock performance between individual holdings within the portfolio. For example, the earnings and stock performance of a Korean cosmetics company has almost no correlation (other than broad risk aversion sell-offs) to a waste management company in China. And these two businesses would have very low correlation to a bank in Chile or a tortilla maker in Mexico.

We expect the future growth industries to reflect the “New EM” which focuses on quality of growth and not pace of growth. During the early stages of development, emerging market countries were focused on attaining a rapid pace of growth in order to accelerate urbanization and increase average wages quickly. Now that a certain level of urbanization and wages have been achieved, most developing nations are shifting to quality of growth. This has profound implications for investors and capital allocators.

“New EM” versus “Old EM”: Finding New Secular Growth Themes

Figure 1 summarizes the way our team identifies new secular growth industries.

Figure 1 “New

Dark blue arrows indicate "Old EM" and light blue arrows indicate "New EM". When China was growing at +10% annually and most of emerging markets were similarly at the early phase of growth, the biggest concern was scarcity of oil and hard commodities. Today, the scarcest commodity in emerging markets is water. Not just safe water for consumption but water for agriculture, as emerging market consumers begin to eat more protein and demand higher quality food. To a lesser extent, this is also impacting soft commodities such as cotton, food, sugar and cocoa.

The Development and Rise of the “New EM”

While “Old EM” was built on manufacturing, the “New EM” is centred around technology, e-commerce and service-oriented industries such as healthcare and education. “Old EM” meant investing in greenfield industries; “New EM” means investing in best-in-class operators with competitive moats, or industry innovators.

When emerging market countries were experiencing the first phase of rapid growth and urbanization, they also experienced high wage growth and inflation. Today, with a higher base of urbanization and higher average wages, the pace of wage growth has naturally declined. The result of slower wage growth is lower inflation, which provides emerging market central banks with room for monetary easing from high interest rate levels. In turn, this benefits corporations in the form of lower debt servicing costs as well as emerging market bond investors.

Lastly, "Old EM" was characterized by multinational corporations entering these countries for growth and expansion. For example, McDonalds, Starbucks, and KFC. "New EM" is now characterized by emerging market companies becoming global brands organically or via acquisitions.

A Deep Dive: Top Invest Themes in The Excel Emerging Markets Fund

Firstly, healthcare. This is a sector that we like a lot.

Figure 2 “Healthcare Source: World Bank (

This industry is still in a nascent stage and is growing rapidly as it benefits from both enhanced government coverage and higher personal income. As emerging market governments become wealthier, they will expand their social nets, including healthcare. As emerging market corporations grow beyond a certain threshold, they also begin to provide coverage. Eventually, individuals will be able to afford basic healthcare, such as preventative checks. Figure 2, illustrates how far behind Canada the major emerging market economies are, in terms of healthcare expenditure. To invest in this sector, we really have to go local and own local hospital operators, or traditional Chinese medicine manufacturers because most emerging market countries still cannot afford branded pharmaceuticals from big U.S. corporations.

The second secular growth theme in the portfolio is mobility. In some countries, we invest in the companies that make smartphones or components. In others, we invest in businesses that benefit from this penetration. One example is e-commerce.

A 2015, Ipsos Reid survey showed that, 82% of Canadians said they have shopped online – most did so on a desktop or laptop. If we look at a few of the large emerging market economies, we can see how quickly online shopping penetration has grown in just one year.

China is already very close in penetration rates to Canada, as illustrated in Figure 3.

Figure 3 “Internet Source: Credit Suisse Emerging Consumer Survey

The rest of the emerging markets will likely catch up quickly. Why is this important? Technology is levelling the playing field for small entrepreneurs. So now, you can be a small business in a tertiary city in India or China and sell your goods all over the country and perhaps even globally. Most retail businesses in the emerging markets opt to have bricks and mortar setups in major cities and service tertiary cities via e-commerce. Of course, e-commerce is just the simple example. Banking is also being transformed by mobility. You can now have a FaceTime meeting with your banker without having to go into a branch. Think of the efficiency and time saved!

The final secular growth theme we would like to address is the arrival of emerging market brands on the global landscape. In the 2015, Top 100 Brands report, approximately half of the new top 100 brands were from an emerging market country. Alibaba was recognized was the #1 brand in retail, ahead of Amazon and Walmart! As the largest emerging market economy, China has led the charge. To highlight the growth, there was just 1 brand on the list, in 2006. While in 2015, there were 14. Over that 9-year period, the total brand value of Chinese companies on this list grew 11-fold. In the coming years, we expect more brands from countries like India to join the list.

In summary, we believe that “New EM” is less cyclical because of the emergence of new secular industries, increased economic diversification and stronger domestic drives. These are a few of the themes that help to drive risk-adjusted returns in the Excel Emerging Markets Fund.


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