(Bloomberg) -- Rob Marshall-Lee is among the few money managers generating US stock market-like returns with investments in emerging-market companies. He does it by avoiding most of them.
The founding partner and chief investment officer of Cusana Capital LLP, Marshall-Lee has provided investors in his EM equity fund with a 37% gain over the past 12 months, beating the S&P 500 and 97% of peers, according to the latest available data as of Sept. 30. He holds only one company among the top 20 with the biggest weightings in the benchmark MSCI emerging-market index, and credits that for the outperformance.
The reason is that the bulk of emerging-market companies destroy the returns generated by a select group of booming stocks, the money manager said. It’s better to own a portfolio of concentrated holdings, he said, modeling his picks after the Magnificent Seven US tech companies.
“In emerging markets, the top 5% of stocks by number generate 83% of net wealth creation, while 95% destroyed value in aggregate,” London-based Marshall-Lee said in an interview. “You need to avoid the 95% and focus all your efforts on finding that 5%. Within that, we try to identify just the top 25 or 30 companies with the best risk-reward.”
He said companies like chipmaker Taiwan Semiconductor Manufacturing Co., Indian consumer goods company Titan Co. and Sao Paulo-based NuBank tend to have consistent attributes such as good governance, strong potential for market share growth and high return on capital.
“Every decision is made with a five-year view, which gives us a big advantage versus the rest of the market who are trying to guess what happens next quarter,” he said.
While many investors diversify to reduce risk and rely on tracking benchmark indexes, Marshall-Lee said that approach actually increases risks. For example, his funds exited from Russian positions just before the invasion of Ukraine in 2022 due to a focus on “avoiding permanent loss of capital” and the boutique’s estimate — from that time — of a 30% chance of losing all the money held in Moscow stocks.
Select Few
Zooming out to a global scale, he avoids most of the more than 4,000 listed emerging-market companies and buys shares in about 30 stocks from an investible universe of 300. “It’s amazing how much most EM equity portfolios look like each other, particularly the top 10 stocks in EM funds — everyone owns Samsung and the large benchmark stocks.”
Marshall-Lee manages $330 million across two funds with the same EM strategy, which is a continuation of the $3.5 billion strategy he ran at Newton Asset Management from 2011 until 2020, when he left the firm. He founded boutique Cusana Capital in 2022 with Jos Trusted, formerly a manager at Odey Asset Management. The fund is backed by Sector Asset Management, one of Norway’s largest independent investment firms.
The money manager pushes back against the consensus that Donald Trump’s election means investors should reduce their exposure to emerging-market equities. Prevailing market logic can prove quite wrong, he said, as it did at the end of 2016 when Trump was first elected.
For now, a stronger dollar, higher US bond yields and a selloff in China have EM assets on the retreat, with the benchmark index falling 2.2% in November, even as the S&P 500 advanced 3.7%. That’s increased the performance gap between the asset classes to a record.
Unlike some competitors who’ve juiced their returns by populating their emerging-market stock funds with US-based companies that are active globally, Marshall-Lee’s guidelines require 100% of stocks in his portfolio to be majority EM-driven, meaning either listed, domiciled or deriving over 50% of their profit, assets or revenue from emerging markets.
Nvidia fulfilled the 50% EM criteria in the past, hence Marshall-Lee bought shares in early 2023. He sold them in June 2024, at a 370% profit, when the firm’s segmental disclosure showed it no longer met this metric. DM-domiciled stocks contributed about 20% of this year’s returns, he said.
Geographically, Marshall-Lee’s greatest exposure is in Asia, where he likes “rapidly growing domestic businesses in India and ASEAN markets.” For the last 13 years, 30% or more of his portfolio has been in India, with a strong focus on consumer-centric businesses like Titan.
“We have probably made about 14 times our money in that stock. Relatively low risk but very high return,” he said.
Consumption Focus
Another 10% is allocated to Vietnam and about 10% to Indonesia. The vast majority of companies in China are still “pretty unattractive,” Marshall-Lee said. He’d like to see government stimulus efforts there focused much more on “rebalancing toward consumption.”
The exception is electric-vehicle battery companies, which tend to be founder-led and self-financing and are outliers in the China index, he said. He also owns some local cosmetics companies that are taking market share away from international brands.
The portfolio manager declined to reveal his favorite stocks, but said that over the last 12 months his funds had held shares in companies including Varun Beverages, Central Depository Services India Ltd and SEA Ltd.
Outside of Asia, he said Turkey offers potential opportunity under improved economic management, and while he has relatively small exposure to Latin America, he’s looking with interest at Argentina.
“There are quite binary risks when you are coming out of hyperinflation, but when you’ve got an economy with basically zero credit penetration, the potential is very substantial,” he said. “We aren’t invested there at the moment, but it is certainly a market worth monitoring.”
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