Baillie Gifford Managed Fund’s Emerging Market Holdings: Five Burning Questions.

Emerging Market

Key Points


  • In EM we pay close attention to macroeconomics, politics, and demographics, and are willing to invest in underperforming businesses that we expect to improve
  • China is the largest country in the emerging markets index and is home to some exciting growth companies, but many excellent opportunities can also be found elsewhere
  • Sustainability is central to our investment process, as companies with better practices are more likely to generate strong long-term returns

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Please remember that the value of an investment can fall and you may not get back the amount invested.

Amid market turmoil and a war in Ukraine, the outlook for emerging markets may appear bleak. Philip Scott, Managed Fund specialist, sat down with emerging markets investment manager, Andrew Stobart, to talk about the Fund’s emerging market holdings, and find out why we remain optimistic.

1. How does investing in emerging markets compare to investing in developed markets?


There are more similarities than differences, and the gap between the developed and developing worlds has been shrinking. A long-term investment philosophy, focused on owning growing companies, is common to all investment teams at Baillie Gifford. In emerging markets, we pay more attention to macroeconomic, political and demographic factors than we ordinarily would in developed markets. In addition, whilst we have a preference for high-quality companies in emerging markets, we are more willing to invest in poorly performing business that are expected to improve. Portfolio turnover is less than 20 per cent p.a., equivalent to an average holding period of over five years for emerging market stocks.


2. China is the largest country in the emerging markets index with an approximate 30 per cent weighting. How do you think about investing there, particularly given the significant policy and regulatory changes over the last two years?


We have a 25+ year track record of dealing with political and regulatory uncertainty in emerging markets. Our aim is to invest in companies that are on the right side of policy. In China, President Xi Jinping’s policy of ‘Common Prosperity’ has brought with it significant regulatory change, much of it aligned with the country’s broader long-term development goals. We have been working through the implications for individual companies, while being mindful of the unintended consequences. We believe there is significant upside in the likes of food delivery and local services company Meituan, ecommerce leader Alibaba and social media and gaming giant Tencent.


3. What about opportunities outside China?


While China often dominates the headlines in emerging markets, we have been really encouraged by the increasing number of exciting and differentiated businesses elsewhere. India has gone from having one of the worst mobile internet infrastructures globally to one of the best, in turn producing more private company unicorns (those valued at over $1bn) in 2021 than any country apart from the US and China. Conglomerate Reliance Industries has been at the forefront of the roll-out of 4G telephony, the digitalisation of retail and now the energy transition in India. Mercadolibre continues to be the leading ecommerce and fintech company across Latin America, as it has been for two decades. Bank Rakyat has built a network of many thousands of microlending outlets across the Indonesian archipelago and has an excellent long-term growth record with high financial returns. For the patient, active investor there is a wealth of opportunity in emerging markets beyond China.


4. How do you consider environmental, social and governance (ESG) issues when investing in emerging markets?


Sustainability has always been central to our investment process in emerging markets. Businesses engaging in practices that are harmful to society may be capable of generating attractive returns in the short term, but these returns are unlikely to be sustainable over our investment time horizon. However, we do not believe that ‘one size fits all’ and we therefore assess ESG practices on a case-by-case basis, without relying on backwards looking and formulaic screens. We also do not seek ‘perfect’ companies, preferring to consider the potential for improvement and engage with management teams accordingly. We believe this approach gives us the best likelihood of adding long-term value for clients. 


5. What are you most excited about in Emerging Markets?


Our experience of investing in emerging markets since 1994 is that the only reliable driver of long-term share price performance is earnings growth. We have invested through many crises and recent elevated levels of market volatility are nothing new. Indeed, recent share price weakness for some companies belies the fact that the vast majority of the holdings are continuing to perform as we had expected in operational terms. These include copper producer First Quantum (Zambia and Panama); Brazilian oil producer Petrobras; the world’s leading semiconductor foundry TSMC; and Korea’s Samsung SDI, one of the world’s leading makers of batteries for electric vehicles and electric storage systems. With companies like these, we are very excited about the prospects for investing in emerging markets over the next decade.

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