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This week, weíre discussing volatility and opportunity in emerging markets. Iím Brian
Jacobsen and you are On the Trading Desk.
Events unfolding in Russia, the Ukraine, and other parts of the world might have investors
thinking about how they should manage risk in their portfolios. I think that this underscores
why it is that investors shoudl take a broad view of, and rigorous approach to, investing.
Four international portfolio managers join us: Derrick Irwin, Jean-Baptiste Nadal, Alison
Shimada and Dale Winner, to put events in Eastern Europe into perspective for the lesson
to be learned.
Our first question has to deal with volatility in emerging markets. What can you say to put
the volatility in context for investors? Derrick, let's start with you.
Derek: Sure. I think that emerging markets are going through an adjustment period. Any
period like that will have incidences of disruptions, will have protests, will have episodes tha
tmake a lot of headlines. But I think you have to look at the long term growth story
and the long term fundamentals of these countries which, the reality is, remain fairly strong.
Brian: Alison?
Alison: There will be growth because moving up the socio-economic ladder in emerging markets
occurs regardless of geopolitical risk. And we feel that growth in emerging markets is
going to continue over the long-term, and weíre not deterred by short-term issues like
this.
Brian: Jean-Baptiste, what are your thoughts?
Jean-Baptiste: We donít need to be spooked by that level of volatility; it is part of
the life in those markets. The key is to have a long-term approach, first, and secondly,
to be well diversified.
Brian: And Dale, what can you say to investors about volatility?
Dale: Absolutely. We thrive on volatility. We are value investors. We tend to look through
short-term announcements and look at long-term normalized earnings power. So any volatility
coming through temporarily from Russiaóand I do believe it is temporary from Russiaó
any ìknock on effectî on Europe, we will take advantage of that to add to our positions.
Brian: Next, Iím curious, how you stay ahead of events like what weíre see unfolding between
Russia and Ukraine. Jean-Baptiste, how about you?
Jean Baptiste: You donít do risk management after the fact. You do risk management before
these events even happen, by building a comfortable asset allocation that you're going to be able
to live with, knowing that you're going to go through times of high volatility.
Brian: Dale, how about you? Dale: We incorporate risk into our investment
process from the very beginning, when weíre looking at the upside versus downside of stocks.
For emerging market stocks such as Russiaís, which Iíve been constantly following for
over 20 years, we obviously had to have a bigger risk discount to account for the volatility
of those stocks. However, for us it's all about valuation. What is priced into the stock?
Alison, how do you stay in front of events like these?
Alison: I think to be honest it's difficult to stay ahead of such a crisis. But what we
can do is to really understand the nature of what has happened historicallyó the historical
contextóand also what the political motivation is. I think what we can do it we consider
the portfolio weighting, the individual holdings, and what types of holdings we will continue
to hold going forward despite an increase in this kind of volatility or uncertainty.
Brian: Derrick, your thoughts.
Derrick: I think it helps to spend some time on the ground, and to speak with folks who
are closest to these crises. Thatís why we do a lot of travel. Thatís why we spend a
lot of time talking to our management teams and trying to understand where these points
of stress might be.
Brian: And finally, one of the concepts that might be most difficult to understand is how
it is that in risks there can be opportunities. How do you deal with this issue, Dale?
DaleL In emerging markets, we have been a little bit underweight, but we are increasing
our weighting right now in this volatility, because the long-term structural growth prospectsóbased
mainly on demographicsóare phenomenally strong for emerging markets. Weíll probably look
at seeing double the economic growth for emerging markets as a class versus developed markets
over the long-term. And for us itís all about valuation. What is being discounted and what
is not?
Brian: And Alison, how about you?
Alison: I think thatís exactly the right point. It's not that the asset class has changed
that much, itís that we have to restructure our thinking about the way youíre investing
and the reason for doing that. and that is that the longer-term structural story is still
very strong in emerging markets. Thereís a lot of growth left, and you have to make
sure that you understand what you're investing in and that you do it for a long time, because
it's not going to change over the longer term.
Brian: And Derrick?
Derrick: Sometimes these events get blown way out of proportion, and people tend to
focus on one or two factors rather than keeping an eye on the longer-term. And that can create,
over time, some pretty exciting valuation opportunities to buy very strong, high-quality
companies in these markets where people have focused on one or two macroeconomic fundamentals.
Brian: Jean-Baptiste, weíll end with you. What are your thoughts on in riske there are
opportunities?
Jean-Baptiste: The key is, knowing your tolerance for risk, be diversified with a long-term
approach, and use these types of volatility to continue to build your portfolio to what
your targeted exposure is. , if you have a long-term approach, you should not be worried
by these events. You should view those events as opportunities.
Brian: Jean-Baptiste, Derrick, Dale, Alison, thank you very much for joining us.
ALison: Thank you very much.
Derrick: Thanks so much.
Jean-Baptiste: Well, thank you Brian. Happy to help out.
Brian: Iíd like to let our audience know that a four-part series on our blog, AdvantageVoiceÆ,
is available if youíd like to read todayís guests full and complete thoughts on events
in the Ukraine and how they view investing in emerging markets.
As my parting thought for you, Iíd actually like to share with you some insight that we
received here On the Trading Desk from Anthony Cragg a few months ago. Anthony Cragg stated,
ìI think the first phase of emerging markets investment was a rather plain-vanilla one
where most emerging market managers were simply trying to give investors exposure to emerging
markets. I think in the future weíll see a much more targeted approach, sort of laser-guided
approach, as active managers add value over what you could just get through ETF investmentî
Hearing that actually changed the way that I look at the emerging markets, thinking about
how it is that maybe theyíve gone from phase-one to phase-two. And it requires a new approach
to investing in the emerging markets.
Well, that is all the time we have today. Thank you for joining me. Iím Brian Jacobsen.
Stay informed.