Greg Jones EM Call Transcript


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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