Greg Jones EM Call Transcript
Greg Jones EM Call Transcript
Portfolio Insights: Alger Emerging Markets Strategy
Greg Jones, CFA Senior Vice President Portfolio Manager
Greg Jones recently provided a portfolio update for clients in the Emerging Markets strategy. The call was hosted by May Poon, a senior vice president and director of national account in our distribution organization. Please note, this transcript is from a call on August 5, 2020, and has been edited for clarity and brevity. May Poon: Thank you very much for joining us. We're joined today by one of our senior portfolio managers, Greg Jones. Greg, along with his co-portfolio manager Pragna Shere, manages our Alger Emerging Markets Fund. Today, we'll be discussing the Alger Emerging Markets Fund, a ‘40 Act mutual fund. It's also available as a UCITs product as well. The ticker for the U.S. mutual fund, which is only available for investors in the United States, is AZEMX . Before we dive in, I would like to introduce Greg. Greg Jones is the senior vice president and portfolio manager of the Alger Global Focus, International Focus, and Emerging Market strategies. Greg has 35 years of experience, joining Alger in March of 2018. He's been a portfolio manager for 30 years and has focused primarily on non-U.S. equities and quality growth. Prior to Alger, Greg worked at Redwood Investments, where he was responsible for non-U.S. strategies, and previously, he was co-CIO and portfolio manager at Ashfield Capital Partners. Additionally, Greg served on the board and management committees of Clay Finlay and Ashfield Capital Partners. Greg earned his BA from Duke University and an MBA from the University of Chicago graduate school of business and is CFA charter holder.
Greg, thank you so much for taking time to join us today.
Greg Jones: May, thank you and greetings to all.
May Poon: So, before getting into the Alger Emerging Markets Fund, it would be great to discuss why investors should be investing in emerging markets (EM) now. We've been hearing about valuations and a demographic shift for years in emerging markets. Can you help us understand why now in emerging markets; and why investors should be consistently invested in emerging markets moving forward? Greg Jones: Sure, and this is probably the most important question; and there's a short-term story and long-term story and both are equally important. The short-term story is based on the two most recent episodes of crises, where EM performed extremely well when those crises were resolved. In 2002 and 2003, we had SARS which was also like coronavirus, but largely contained to the greater China region. Those markets performed poorly relative to the U.S. and other developed markets after the crisis began, as cases peaked to those markets, then began to substantially outperform the U.S. over the following 12 months. In 2007-2010 during the global financial crisis which impacted all countries worldwide, EM once again underperformed the U.S. and other developed markets, peak to trough, as investors naturally sought safe havens.
Greg Jones (continued): From the trough, however, as the worst of the crisis passed and as countries provided fiscal and monetary support to their ailing economies, EM outperformed the U.S. and other developed markets by a factor of nearly 2 to 1, similar to the SARS experience, which again impacted only the greater China region. Long term is even more important. The EM opportunity set today is very different than it was 10 years ago. Today, the EM index looks much more like the U.S. than it did in 2010 with growth sectors representing nearly 60% of the index and commodity sectors 15%. The reverse was true 10 years ago after China grew at double digits from 2000 to 2010, lifting up all EM countries, but most specifically commodity related countries and commodities in economic sectors. EM was the best place to be in the decade of 2000 to 2010. 2010 to 2020, however, was a lost decade as the EM countries retrenched after the excesses of the prior decade. Global growth slowed with EM being light on growth sectors and growth companies. Today, the situation is very different and creates an opportunity for better EM performance going forward. May Poon: Well, it certainly looks like you captured both short- and long-term opportunities this year. As of the second quarter for this year, your strategy has ranked in the top decile, 6% in the Morningstar emerging markets category. What do you believe distinguishes your approach to non-U.S. and emerging markets in particular from others on the market today? Greg Jones: I think there are really three things: one, discipline; two, experience; and three, world view. In discipline, what I'm referring to is remaining focused on core philosophy and process. And for us that means high quality, long runway, wide moat; belief in the power of analyst revision, development of a differentiated view versus consensus; and staying within our comfort zone. And with experience, everyone of course has it, but we have seen a lot of cycles. We've seen markets emerge, and we've seen markets decline substantially. We've traveled extensively around the world. We’ve kicked a lot of tires. We met with a lot of managements and I think we know what red flags to look out for.
And finally, worldview. We try to avoid tunnel vision. There are a lot of our peers who are specialists in a specific region or specific country. We try to have an appreciation for all companies, all sectors, all countries. We consider ourselves global generalists. We look at companies against their peers, including those in the U.S., searching for best in class and understanding of where a company sits in their life cycle of development. May Poon: As a follow up to that Greg, what market inefficiencies are you looking to exploit and what about your philosophy and process allows you to exploit this inefficiency? Greg Jones: There are three things that we care a lot about, and we try to exploit: one, anchoring bias; two, quality; three, long-term growth runway. So, we think anchoring bias or analyst revision may be an alpha generator. It's been well documented in all markets, but our research indicates that it works even better in emerging markets because analysts are slow to react and recognize trend changes and revenue and earnings when they occur. As a result, if you have a change in direction, analysts only move part of the way and fully pulling that into their forward forecast creating an opportunity for future surprises going forward. Quality. We know that quality minimizes disappointment and that is even more true for emerging markets. Quality receives a premium in emerging markets because it is even more difficult to find than in the developed markets. And finally, long-term growth runway. Emerging markets are subject to an above average level of noise due to political and economy issues, geopolitical concerns, currency swings. Managements are far less adept at guiding earnings and far less successful in delivering earnings within normal acceptable range. And domestic investors and analysts typically are far less experienced, although the latter is changing somewhat in certain places. This sets up a situation where there's an intense preoccupation with the short term and often a great underappreciation of the long-term opportunity. If I can, two quick examples might illustrate how those principles play out in our portfolio.
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Greg Jones: Kakao is a holding of ours. Kakao is South Korea's leading and dominant online social media platform. And in fact, we have one user on the call, May, who uses the app, presumably KakaoTalk. Many of you know South Korea is among the most deeply penetrated countries in terms of smartphone ownership and online engagement. But there's a large wide space that still exists for companies like Kakao where there is a large inactive user base for super apps beyond their main social media app. The company has a dominant position in music, video, financial services, gaming, e-commerce, and now digital comics known as web tunes. In the short term, we have a surge in revenue and earnings from app revenues and that's very exciting. But it's the long tail opportunity in the other verticals and the ability to take their content such as web tunes to other markets which really excites us. Another quick example A2Milk. Some of you will have seen the product in the dairy section of your grocery store. It's actually a New Zealand company, but 80% plus of operating profits come from China, largely from infant milk formula. Infant milk formula scandals in China, higher disposable incomes, the well-being of the child have resulted in a strong demand for premium infant milk formula and this has been a trend in place for many years. A2Milk exploited that opportunity and brought forth the brand unique to the market, that stresses the value and benefits of an A2 protein-only milk. Most milk is a combination of the A1 and A2 protein. And a lot of research suggests that many people who have difficulty digesting milk, largely stems from the A1 protein. A2 has built this product and built a body of research around an A2 product and for those of us who drink milk, it actually tastes quite good. In China, they built a very strong distribution network through the specialty stores and online channels. And in recent years, some of the big companies such as Nestle have tried to jump into the category legitimizing the efficacy of A2-only milk, but they've not been able to change A2’s market position or dent their growth rate. We consistently held the view in recent years that A2 would exceed analyst expectations and that has been the case. However, it may not be the case in the future.
May Poon: Pretty interesting actually, especially as you mentioned I am a Kakao user. Getting back to the Emerging Markets Fund, what have been the key drivers of the top decile performance this year? Greg Jones: Year to date, the most important sources of alpha have come from holdings in Korea and China and the stocks in the consumer and technology areas. Early on, we felt the countries that first entered the crisis were likely to be the first to exit, which has been the case with China and Korea. We also took the view that there would be companies that would be less negatively impacted by the current COVID environment. And in fact, the experience uplifted their long-term growth rates with improving visibility because of the current environment. And that has been true for many of the internet companies in China and Korea and in Brazil, and enablers of the digital economy and work from home situation that we all live in. Again, perhaps two more quick examples, Meituan in China is one of the internet champions of the country, but few people outside of China, the region, have heard about it. They are one of the creators of super apps and a brand with now 400 plus million active users. Meituan is a combination of GrubHub, OpenTable, Expedia, Groupon, and much, much more with bike sharing, auto sharing, financial services, digital payments, and a broad array of merchant services which sets it apart from a lot of companies who simply provide a B-to-C service. EPAM is technically headquartered in the U.S., but its roots are in Eastern Europe and 80% of its employees are outside of the U.S., mostly in Eastern Europe. EPAM is one of the small number of IT consultants not weighed down by a lot of legacy businesses. EPAM is a specialist in digital transformation, which of course is very much in need today. But they also have very strong relationships in product engineering and software development. They've grown at a CAGR of over 25% in the last 5 years. They received premium pricing over their peers. Visibility is extremely high, notwithstanding the current environment. Normally, they have no revenues out twelve months to the tune of 90% plus.
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Greg Jones (continued): Those kinds of growth rates, and that kind of visibility are things that we try to find in our holdings. May Poon: Alright. So, given your initial comments about emerging markets, this may imply that emerging markets may be a potentially attractive opportunity for investors seeking long-term capital growth, particularly in consumer sectors and technology. But as you know, with past market cycles the rising tide is unlikely to lift all boats equally. What areas within emerging markets are you finding the most opportunity in general? Greg Jones: A lot of trends that had been in place prior to COVID-19 have been pushed into overdrive. And some sectors in some countries where these trends had yet to even take hold, but were expected to be important in a few years, have been pulled forward quite aggressively. Brazil is one country where that's the case. E-commerce is the obvious place where we're seeing huge acceleration, but also in digital wallets in fintech, restaurant food delivery, grocery delivery, digital on-demand mobile entertainment, contact lists, everything. I would add AI machine learning at the corporate level, again already part of most companies’ plans, but pulled forward and 5G. 5G looked like it would be rolled out slowly; now it's being accelerated in many countries. And this has led us to ecommerce players in China, but also Brazil and a lot of technology enablers in Korea. The other area we have a particular interest in is edtech and there are companies all over the world that are providing effective, cost effective, space and time effective learning solutions. And in developing countries, this is critically important with the education infrastructure lacking. I guess the final thing is that there are a number of companies in traditional industries that are currently struggling, but the leaders with strong balance sheets– some of them are taking advantage of the environment and making changes to their fundamental business structure and we're watching those because even though their short-term visibility may be weak, the actions they are taking are improving their long-term growth rates. May Poon: Okay, great. Greg, you touched on the impact of COVID outside of the U.S. We U.S. investors
are hyper focused on what's happening domestically and there are clearly countries you know that are doing well and countries that are doing not so well. What are your concerns around COVID outside of the USA? In other words, where are you finding opportunities in this environment and what has you concerned? Greg Jones: Yes, it's clear that countries that acted quickly to contain the virus and to work compliance is better. China, South Korea, Taiwan. They didn't suffer the same level of decline as many other countries and have rebounded faster and their economies and corporate earnings look much better than other parts of the world. Other countries with weaker health systems–India, the African continent, those countries with leaders who were in denial early on, President of Brazil Jair Bolsonaro, for example, who now has COVID-19–have lower visibility in terms of the exit from COVID and the impact on their economies and corporate earnings is still a little bit murky. Notwithstanding that, I think it's important to underline that the response from Europe, the U.S., and other countries, including Japan and China, to support their economies has given great comfort to investors and to those even in countries where the trajectory of COVID is still somewhat unclear. So, the COVID situation is still with us and the path it takes in certain countries is likely to be different, but the support that the global economy now has underneath it isn't going to go away. So, there are two sides of the story: the economic side, and monetary support, which, at this point is slightly more important. But I don't want to diminish the fact that the countries that have acted quickest and continue to act quickly, and where individuals are now accustomed to wearing masks, the situation is much better May Poon: Let's take a few minutes to get your thoughts on China, which you’ve touched on throughout the call. You've mentioned that Chinese holdings have been an important contributor to performance this year so far and the country is one of the best performing markets in emerging markets and around the world. What is your outlook going forward given all the negative headlines around China?
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Greg Jones (continued): It's a really complicated question, and I'll try to be brief and break it down to a few components because we could talk about this for a long time. For the most part, and it's something we care a lot about, we strip away all the noise is earnings. And earnings have been lackluster in China over the last five years. And earnings revisions have generally been negative. As a consequence, MSCI China or the CSI300, point to point for the last five years through the end of 2019 didn't actually move a lot. Performance was pretty disappointing. And this is one of the primary reasons for the lag in performance of the EM relative to the U.S. This now appears to be changing and the outlook for earnings and earnings revision is much better for 2021 and 2022 than it has been for a long time. And there are several reasons for this: structural composition, the index–we touched on that as far as the entire EM opportunities set at the beginning. Some of this is cyclical, some of it is recovery after several years of retrenchment in certain industries; also, part of it is harvest opportunities after several years of investment. So, there are lot of factors at play, but it sets up for a much better earnings story and that presses point number one. Point number two, the noise. Our tough relationship with China in my opinion does not appear to be a partisan one; either party appears to want to take a tougher track with China. However, if Biden is elected, that relationship is likely to take on a more civil tone. And this is important because while there may not be significant movement on critical issues, there is likely to be progress on others. And one example is the Senate legislation which has received attention, yet to be passed by the house, which requires a review of the audit books and records of companies listed in the U.S. from China. And if not, the company will be subject to delisting after a three-year period. This is not controversial, but the way it's being presented China takes offense to. The sort of “poke me in the eye,” making this a sovereignty issue. It’s in the best interest of everyone to have greater disclosure and greater oversight. And these are the kind of issues that in the past China has done, but quietly and I don’t think the regulatory body in China, the CSRC, would have an issue with
this. But again, if the relationship takes on a different tone, they'll be progress on this front, and I think investors will benefit from that. I could go on, but I think I'll stop here. There is lot to say about China. M ay Poon: Thanks, Greg. Bringing us back to the beginning of the call when we talked about why investors should be investing in emerging markets over the long term. It seems like the answer here is that there really has been a shift towards growth, more focused on areas like technology, health care, and consumer sectors. But why your strategies , in particular? What gives you the confidence that you know your team will continue to deliver strong results going forward? Greg Jones: Well, my co-manager Pragna and I began working together in 1995. We've developed a unique chemistry complementing each other's inherent strengths and instincts in areas of expertise. We, as investors, have always focused on quality growth. We've always operated as global generalists constantly looking for best in class. We’ve traveled all over the world. We’ve met with hundreds of management teams. And many of our holdings are with companies that we have met with and have spoken to on a regular basis for the last five to ten years. And we believe strongly in our core principles: quality analyst revision, long runway, wide moat, and differentiated view. And then the strategy is focused with fewer than 50 names, and often closer to 40. It's focused in growth areas, as you would expect, often consumer, technology, health care. It's all country, all capitalizations. It is always focused on finding companies that fit our discipline and offer that long runway, wide moat opportunity. May Poon: Great, thanks so much, Greg. Clearly, experiencing consistency in investing in this area in particular is important to your continued success. So, with that, we'd like to open it back up to the audience to take questions. Joe Stein: The question I have is, in the Wall Street Journal, there have been a lot of articles every day regarding the U.S.-China relationship. But the articles that you see popping up a lot lately are on China-India. You have these two tax super powers that are basically buying.
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Joe Stein (continued): It's a horse race. And I was just curious if you might comment on that, given that one is a mature emerging market and one seems to be a regular emerging market. Greg Jones: It's a great question because India is the one large country that is entering the demographic sweet spot and will likely be in that for the next 10-plus years. And with a lot of industries that are still at a sort of pre-takeoff point or at-takeoff point. It's too early to call India a technology leader. They've excelled in IT consulting and they've excelled in pharma, and there are home grown internet companies and India is doing what it can to support and nurture those companies and trying to block Chinese competitors, which is probably a good thing because the size differential is quite significant. I think we look at them as they both can be winners. This is not a zero-sum game. Right now, they're not competing head on. The internet opportunities in India right now, a lot of them are not publicly traded. One of the best opportunities appears to be in the large telecommunications company Reliance. But it's not a time when you have to choose winners between China and India. They're both likely to be winners. It’s probably, at this point, a minor setback for some of the Indian companies that the Indian government has decided to block their apps and India blocked apps of the Chinese internet companies. They largely did that in response to the border clash that's going on in the north, but they also did it to help nurture domestic companies. Joe Stein: So, regarding the military environment over there, are they heading for a show down? Greg Jones: The border situation is interesting. Long ago, they agreed to disarm. So, there are a number of soldiers on either side of the border and there are clashes, but they've agreed, or they have agreed in the past, to keep heavy armaments away from the border. You know these border clashes have occurred for a long period of time and generally they calm down. I think it's a low probability that this develops into something more than that. It’s certainly a risk, but I think it's a low probability.
Joe Stein: You also mentioned ecommerce in India. I believe Facebook put something like $6B dollars into ecommerce. So, that must be something that you would be considering and looking at as a team? Greg Jones: Yes. We're very interested and we are participating in a direct way.
Operator: Your next question comes from Sean Jacobus.
Sean Jacobus: Hi, Greg. Good morning. Just had a geopolitical question for you. With the new national security law that China has implemented in Hong Kong, the businesses that you're looking at and the businesspeople you talk to, do you see a capital slide in Hong Kong? And if you do see a capital slide, do you know who can be the beneficiaries in Taiwan, Singapore, and Japan? Just curious if you're starting to see any movements there because I know recent Chinese national security laws have been passed. Greg Jones: Yes, thanks for the question. We've seen these episodes in the past, and the reaction generally is a lot less than what is discussed at the outset. So, initially companies discussed moving their regional headquarters to places such as Singapore and in the end, not much happens. I mean geographically, Hong Kong is still important. There’s not much that Hong Kong manufactures anymore. There's still a lot of shipping import activity, but Hong Kong is essentially a regional financial center which as time goes on is being supplanted by Shanghai. And in the long run, I don't think there will be major changes. And it's interesting how, if you look at the stock market, there was an initial reaction and then we saw the market come back quite quickly. And in fact, there is talk in Hong Kong of property prices lifting, which is exactly the opposite of what you'd expect. So, I think we need to step back before the security law, before COVID-19 and look at the trajectory of Hong Kong and it still has significance. It's favored by the Chinese for second residences or second offices. It's certainly favored by the Chinese, but the significance of Hong Kong has been in a downward trajectory and I don't think that's going to change. It is still important because of geography.
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Greg Jones: It's much easier to move around the region from Hong Kong than Singapore, just further south. And Taiwan is a different category. Taiwan, because of the China Taiwan situation, is unlikely to be a beneficiary. And this is an important point. Everything China does with regards to Hong Kong is calibrated in a manner as to how little play out of Taiwan. Because Taiwan is the larger prize. It has emotional significance to China. It's far more important than Hong Kong. So, I don't think you're going to see the Chinese military overrun Hong Kong because that would play very poorly in Taiwan.
Sean Jacobus: Thank you.
May Poon: Greg, thanks so much again for joining us. And more importantly to our audience, all of us at Alger want to thank you for taking the time to hear from Greg on the emerging market strategy and emerging markets in general. If you have any additional questions, please feel free to reach out to your local Alger representative which can be found at our website at www.alger.com . Thanks everyone and have a wonderful day.
Greg Jones: Thank you, May. Thanks all of you.
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The views expressed are the views of Fred Alger Management, LLC (“FAM”) and its affiliates as of August 2020. These views are subject to change at any time and may not represent the views of all portfolio management teams. These views should not be interpreted as a guarantee of the future performance of the markets, any security or any funds managed by FAM. These views are not meant to provide investment advice and should not be considered a recommendation to purchase or sell securities. Holdings and sector allocations are subject to change. Risk Disclosures: Investing in the stock market involves risks, including the potential loss of principal. Growth stocks may be more volatile than other stocks as their prices tend to be higher in relation to their companies’ earnings and may be more sensitive to market, political, and economic developments. Foreign securities, Frontier Markets, and Emerging Markets involve special risks including currency fluctuations, less liquidity, inefficient trading, political instability, and increased volatility. Assets may be focused in a small number of holdings, making them susceptible to risks associated with a single economic, political or regulatory event than a more diversified portfolio. Investing in companies of small capitalizations involve the risk that such issuers may have limited product lines or financial resources, lack management depth, or have limited liquidity. Active trading may increase transaction costs, brokerage commissions, and taxes, which can lower the return on investment. Please visit www.alger.com for additional risk disclosures. Past performance is not indicative of future performance. Investors whose reference currency differs from that in which the underlying assets are invested may be subject to exchange rate movements that alter the value of their investments. The Morgan Stanley Capital International (MSCI) Emerging Markets Index (gross) is a free float-adjusted market capitalization index that is designed to measure equity market performance in the global emerging markets. MSCI Index (gross) Index performance does not reflect deductions for fees or expenses. The MSCI China Index is constructed based on the integrated China equity universe included in the MSCI Emerging Markets Index, providing a standardized definition of the China equity opportunity set. The CSI 300 is a capitalization-weighted stock market index designed to replicate the performance of the top 300 stocks traded on the Shanghai Stock Exchange and the Shenzhen Stock Exchange. © 2020 Morningstar, Inc. All rights reserved. The information contained herein: (1) is proprietary to Morningstar and/or its content providers; (2) may not be copied or distributed; and (3) is not warranted to be accurate, complete, or timely. Neither Morningstar nor its content providers are responsible for any damages or losses arising from any use of this information. Past performance is no guarantee of future results. Alger Emerging Markets Fund Z was ranked based on total returns: 6% (43 of 803 funds); 18% (145 of 698 funds) and 24% (159 of 584 funds) for the 1-, 3-, and 5-year periods in the Diversified Emerging Markets category as of 7/31/20. Rankings and ratings may be based in part on the performance of a predecessor fund or share class and are calculated by Morningstar using a performance calculation methodology that differs from that used by Fred Alger Management, LLC. Differences in the
methodologies may lead to variances in calculating total performance returns, in some cases this variance may be significant, thereby potentially affecting the rating/ranking of the Fund(s). When an expense waiver is in effect, it may have a material effect on the total return or yield, and therefore the rating/ranking for the period. The following positions represented the noted percentages of assets as of 6/30/20: Alger Emerging Markets Fund: Kakao Corp., 1.91%; Epam Systems, Inc., 3.30%; A2 Milk Company Ltd., 2.81%; Meituan Dianping, 1.95%; Facebook, Inc., 0%; GrubHub, Inc., 0%; Booking Holdings, Inc., 0%; Expedia Group, 0%; Groupon, Inc., 0%; and Reliance Industries Ltd., 0%. Important Information for US Investors : This material must be accompanied by the most recent fund fact sheet(s) if used in connection with the sale of mutual fund shares. Fred Alger & Company, LLC serves as distributor of the Alger mutual funds. Important Information for UK and EU Investors : This material is directed at investment professionals and qualified investors (as defined by MiFID/FCA regulations). It is for information purposes only and has been prepared and is made available for the benefit investors. This material does not constitute an offer or solicitation to any person in any jurisdiction in which it is not authorised or permitted, or to anyone who would be an unlawful recipient, and is only intended for use by original recipients and addressees. The original recipient is solely responsible for any actions in further distributing this material and should be satisfied in doing so that there is no breach of local legislation or regulation Certain products may be subject to restrictions with regard to certain persons or in certain countries under national regulations applicable to such persons or countries. SHARES IN THE ALGER EMERGING MARKETS FUND (AZEMX) ARE ONLY AVAILABLE TO US INVESTORS. Alger Management, Ltd. (company house number 8634056, domiciled at 78 Brook Street, London W1K 5EF, UK) is authorised and regulated by the Financial Conduct Authority, for the distribution of regulated financial products and services. FAM and/or Weatherbie Capital, LLC, U.S. registered investment advisors, serve as sub-portfolio manager to financial products distributed by Alger Management, Ltd. Alger Group Holdings, LLC (parent company of FAM) and Fred Alger & Company, LLC are not an authorized persons for the purposes of the Financial Services and Markets Act 2000 of the United Kingdom (“FSMA”) and this material has not been approved by an authorized person for the purposes of Section 21(2)(b) of the FSMA. Important information for Investors in Israel : This material is provided in Israel only to investors of the type listed in the first schedule of the Securities Law, 1968 (the "Securities Law") and the Regulation of Investment Advice, Investment Marketing and Investment Portfolio Management Law, 1995. The Fund units will not be sold to investors who are not of the type listed in the first schedule of the Securities Law.
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