INVESTMENT INSIGHTS

Finding Sustainable Sources of Excess Returns

Scott Berg , Portfolio Manager

Key insights

  • Exploring the full opportunity set, including the best that emerging markets have to offer, can help alpha generation.
  • Given diverging fundamentals across the world and especially the emerging world, it is crucial to focus on quality companies with the strongest and most durable earnings power. 
  • Determine the future economic potential of a company, its products, or services, but also focus on attractive industry structures. Have strong conviction and invest when valuation offers high upside potential.

We have enjoyed a remarkable period for equity investing since the global financial crisis, marked by both volatility and opportunity on an unprecedented scale. Since the launch of the Global Growth Equity Strategy, the financial landscape has been shaped by a range of events, forging one of the more remarkable periods in capital markets history. The strategy’s investment principles, which are centered on stock selection and a thoughtful approach to portfolio construction, have been tested in this extraordinary environment. Throughout, the strategy has been able to navigate these more volatile times.
 

This would not be possible without the resources we have at T. Rowe Price. I firmly believe our global research platform provides me with a real advantage, given its breadth and consistency of results. This unique platform allows us to be truly global in nature, diversifying across sectors and geographies. It also enables the strategy to delve deeper into the opportunity set, including the best that emerging markets have to offer. This helps in the quest for durable and repeatable alpha.
 

Here are some of the key reasons why we believe this can be sustainable over the long term:

A Truly Global Approach

Many global equity managers limit their exposure primarily to developed markets, ignoring the full opportunity set available to them. We believe the ability to look beyond the index is crucial to producing a broader and potentially more rewarding opportunity set for a portfolio. Over the last few years, I have visited nearly 60 countries in the quest for new stock ideas. The result is a Global Growth Equity Strategy invested in 29 different countries, 14 of which are individual emerging markets.1 By extending the opportunity set as wide as possible and leveraging the deep research resources of T. Rowe Price, I can discover more companies that meet the rigorous criteria for inclusion in the portfolio.

Our global research platform gives us coverage and an insight advantage over competitors.
- Scott Berg, Portfolio Manager, Global Growth Equity Strategy

Extend Your Horizons and Delve Deeper

Casting the net wider is hugely advantageous. We believe that emerging markets have a range of growth characteristics that are not available in developed markets, allowing higher‑quality companies in certain sectors to generate sustainable earnings growth at a much higher rate than the global average. Banks are a great example, with the return on equity for emerging markets (EM) banks being far higher than their developed market counterparts (Fig. 1).
 

The growth profiles of countries like India, the Philippines, Indonesia, and Peru also offer up some great opportunities. India continues to grow at a fantastic rate, benefiting from a young population, low GDP per capita, and tremendous growth in the labor force. The rising urbanization and growth of its middle class, along with dynamic new growth sectors, also offers great potential for investors. The reelection of Prime Minister Narendra Modi has provided a further boost, while real interest rates in India being among the highest globally at 4%+ offers the potential added benefit of interest rate cuts.

We aim to capture the best of emerging markets through our bottom‑up active management.
- Scott Berg Portfolio Manager, Global Growth Equity Strategy

We would also point out the distorted view some global equity investors have of emerging markets. Many view them as a homogeneous asset class despite their substantial economic, political, and geographic differences. That view has led to periods of ebullience and despair for emerging markets with periods of outperformance and underperformance relative to developed markets.
 

Our strategy has always been to maintain a strong but selective exposure to emerging markets, marked by our nontraditional emerging markets exposure and little overlap with the MSCI Emerging Markets Index. Our active share of the strategy’s emerging markets holdings is 82% compared with the MSCI Emerging Markets Index.2


(Fig. 1) Emerging Market Banks Offer Much Higher Return on Equity

Emerging Versus Developed Market Banks—Return on Equity (ROE)
As of June 30, 2019

Emerging Market Banks Offer Much Higher Return on Equity

 

Past performance is not a reliable indicator of future performance.
Source: MSCI via FactSet (see Additional Disclosures).


The strategy also provides a good complement of emerging market exposure relative to many dedicated emerging market portfolios. This is because we often include peripheral and frontier emerging countries, and our sector orientation is often less diversified than dedicated EM managers due to our focus on long‑term, secular growth opportunities in areas such as financials and the consumer. This has served the strategy particularly well, with much of the outperformance coming from these areas.
 

The performance of the strategy’s EM allocation also compares well with many dedicated EM managers, which typically have a higher exposure to the MSCI EM index. We believe the EM index has areas where company quality is lower—areas we distinctly seek to avoid. Quality issues derive from a range of factors, including poor management, lack of governance (poor environmental, social, and governance practices), or the absence of positive drivers (sector disruption). Some state‑owned enterprises (SOEs) fall into those categories.


High Conviction Is Crucial

Some argue that a highly concentrated portfolio is needed to generate alpha. We believe concentration does not equal conviction. Our research capabilities enable us to have actionable insights into every stock we own, facilitating a high degree of conviction about their potential to achieve our price targets.
 

Selectivity is key, however. Given diverging fundamentals across the world and especially the emerging world, we focus on quality companies with the strongest and most durable earnings power. Valuations are also integral to the process. We have a consistent price discipline with absolute and relative valuation considered versus history, the market, and industry.


Emerging Markets Portion of Global Growth Equity Representative Portfolio

As of June 30, 2019

Emerging Markets Portion of Global Growth Equity - Representative Portfolio

 

The representative portfolio is an account in the composite we believe most closely reflects current portfolio management style for the strategy. Performance is not a consideration in the selection of the representative portfolio. The characteristics of the representative portfolio shown may differ from those of other accounts in the strategy.

We strive to offer clients best‑in‑class stock picking across sectors and geographies.
- Scott Berg Portfolio Manager, Global Growth Equity Strategy

Companies that demonstrate strong cash flow and durable earnings in the future and are yet to be recognized and valued properly by the market also come under the spotlight. Fertile industries conducive to sustainable growth, such as those demonstrating growth in market share and high barriers to entry, fall into that category. Understanding the mechanism and origins of market share gains for a company is imperative here, as it ultimately drives returns.
 

Conviction also extends to themes. When I identify a robust theme, I often have several holdings that align to that idea. For example, specific companies have been targeted for their potential to capitalize on the trend of the growing middle class within emerging markets. Rather than buy a multinational company with EM exposure, the strategy has distinctly focused on EM companies that offer products or services tailored to local tastes.
 

We believe that indirect exposure can, in some cases, be an incomplete substitute for direct EM investment and often doesn’t allow the portfolio manager to capture the intended risk and return thesis. In less consolidated sectors, such as utilities, consumer discretionary, financials, and telecoms, direct investment is often crucial to capturing the premium growth stories.


(Fig. 2a) Our Differentiated Approach to the Emerging World

Emerging Markets portion of Global Growth Equity Representative Portfolio versus EM Portion of MSCI All Country World Index
Country Weights 
As of June 30, 2019
 

Emerging Markets portion of Global Growth Equity Representative Portfolio versus EM Portion of MSCI All Country World Index


Source: MSCI via FactSet (see Additional Disclosures).

T. Rowe Price uses the current MSCI/S&P Global Industry Classification Standard (GICS) for sector and industry reporting. T. Rowe Price will adhere to all updates to GICS for prospective reporting.

The representative portfolio is an account in the composite we believe most closely reflects current portfolio management style for the strategy. Performance is not a consideration in the selection of the representative portfolio. The characteristics of the representative portfolio shown may differ from those of other accounts in the strategy.


(Fig. 2b) Our Differentiated Approach to the Emerging World

Emerging Markets portion of Global Growth Equity Representative Portfolio versus EM Portion of MSCI All Country World Index

Sector Weights
As of June 30, 2019

Emerging Markets portion of Global Growth Equity Representative Portfolio versus EM Portion of MSCI All Country World Index

 

Source: MSCI via FactSet (see Additional Disclosures).

T. Rowe Price uses the current MSCI/S&P Global Industry Classification Standard (GICS) for sector and industry reporting. T. Rowe Price will adhere to all updates to GICS for prospective reporting.

The representative portfolio is an account in the composite we believe most closely reflects current portfolio management style for the strategy. Performance is not a consideration in the selection of the representative portfolio. The characteristics of the representative portfolio shown may differ from those of other accounts in the strategy.


(Fig. 3) Performance—Global Growth Equity Composite

Figures Are Calculated in U.S. Dollars
Periods Ended June 30, 2019

Performance—Global Growth Equity Composite

 

Past performance is not a reliable indicator of future performance.

Gross performance returns are presented before management and all other fees, where applicable, but after trading expenses. Net of fees performance reflects the deduction of the highest applicable management fee that would be charged based on the fee schedule contained within this material, without the benefit of breakpoints. Gross and net performance returns reflect the reinvestment of dividends and are net of all non-reclaimable withholding taxes on dividends, interest income, and capital gains.

1 Returns shown with gross dividends reinvested.

2 The Value Added row is shown as Global Growth Equity Composite (Gross of Fees) minus the benchmark in the previous row.

3 Returns shown with reinvestment of dividends after the deduction of withholding taxes.

Source for MSCI data: MSCI. MSCI makes no express or implied warranties or representations and shall have no liability whatsoever with respect to any MSCI data contained herein. The MSCI data may not be further redistributed or used as a basis for other indices or any securities or financial products. This report is not approved, reviewed, or produced by MSCI.

Effective June 27, 2013, the benchmark for the composite was changed to the MSCI All Country World Index. Prior to June 27, 2013, the benchmark was the MSCI All Country World Index Large Cap. The benchmark change was made because the firm viewed the new benchmark to be a better representation of the investment strategy of the composite. The annualized performance of the Linked Benchmark, which includes the performance of the MSCI All Country World Index Large Cap from October 31, 2008 to June 27, 2013 and the performance of the MSCI All Country World Index from June 28, 2013 forward, is available on the Performance page for the Linked Benchmark.


The Connecting Thread—Bottom‑Up, Fundamental Active Management

We believe that active management driven by bottom‑up, fundamental research is best at uncovering and exploiting anomalies in equity markets. One of the core tenets of our investment philosophy is that quality growth stocks are frequently mispriced because the market underappreciates the durability of a long‑term earnings stream. This is especially true in emerging markets where the demographic and secular drivers are very long term in nature. Another fundamental principle is that stock‑specific factors are the key driver of stock prices over the long term. Ultimately, we look to invest in companies that offer high‑quality, growing businesses in good industries, but that also offer a valuation opportunity that gives high‑conviction upside potential.
 

That goes to the core of active management—making difficult choices and systematically good decisions over long time horizons. The key is finding a sustainable source of excess return after fees, when pressures to reduce costs and avoid disappointment have become intense. We aim for the best‑in‑class set of returns, driven by what we do well over time—finding stocks where we have insights about cash flow and durable earnings that have not been recognized and valued properly by the market.

 

1 As of June 30, 2019.

2 As of June 30, 2019.


Key Risks
—Transactions in securities of foreign currencies may be subject to fluctuations of exchange rates which may affect the value of an investment. The portfolio is subject to the volatility inherent in equity investing, and its value may fluctuate more than a portfolio investing in income-oriented securities. The portfolio may include investments in the securities of companies listed on the stock exchanges of developing countries.


GIPS® DISCLOSURE

Global Growth Equity Composite
Period Ended June 30, 2019. Figures Shown in U.S. dollar.

 

Global Growth Equity Composite Period Ended June 30, 2019. Figures Shown in U.S. dollar

 

1Reflects deduction of highest applicable fee schedule without benefit of breakpoints. Investment return and principal value will vary. Past performance is not a reliable indicator of future performance. Monthly composite performance is available upon request. See below for further information related to net of fee calculations.

2Effective July 1, 2018, the secondary benchmark changed from gross to net of withholding taxes. The change was to provide additional information on potential tax impacts for the composite. Historical benchmark representations were restated. Effective June 27, 2013, the primary benchmark changed to MSCI All Country World Index and the secondary benchmark changed to MSCI All Country World Large-Cap Index. Effective August 1, 2009 MSCI All Country World Index was added as a secondary benchmark to the composite.

3Preliminary - subject to adjustment.

T. Rowe Price (TRP) has prepared and presented this report in compliance with the Global Investment Performance Standards (GIPS®). TRP has been independently verified for the 22-year period ended June 30, 2018 by KPMG LLP. The verification report is available upon request. Verification assesses whether (1) the firm has complied with all the composite construction requirements of the GIPS standards on a firm-wide basis and (2) the firm’s policies and procedures are designed to calculate and present performance in compliance with the GIPS standards. Verification does not ensure the accuracy of any specific composite presentation.

TRP is a U.S. investment management firm with various investment advisers registered with the U.S. Securities and Exchange Commission, the U.K. Financial Conduct Authority, and other regulatory bodies in various countries and holds itself out as such to potential clients for GIPS purposes. TRP further defines itself under GIPS as a discretionary investment manager providing services primarily to institutional clients with regard to various mandates, which include U.S., international, and global strategies but excluding the services of the Private Asset Management group. The minimum asset level for equity portfolios to be included in composites is $5 million and prior to January 2002 the minimum was $1 million. The minimum asset level for fixed income and asset allocation portfolios to be included in composites is $10 million; prior to October 2004 the minimum was $5 million; and prior to January 2002 the minimum was $1 million. Valuations are computed and performance reported in U.S. dollars. Gross performance returns are presented before management and all other fees, where applicable, but after trading expenses. Net of fees performance reflects the deduction of the highest applicable management fee that would be charged based on the fee schedule contained within this material, without the benefit of breakpoints. Gross and net performance returns reflect the reinvestment of dividends and are net of nonreclaimable withholding taxes on dividends, interest income, and capital gains. Effective June 30, 2013, portfolio valuation and assets under management are calculated based on the closing price of the security in its respective market. Previously portfolios holding international securities may have been adjusted for after-market events. Policies for valuing portfolios, calculating performance, and preparing compliant presentations are available upon request. Dispersion is measured by the standard deviation across asset-weighted portfolio returns represented within a composite for the full year. Dispersion is not calculated for the composites in which there are five or fewer portfolios.

Some portfolios may trade futures, options, and other potentially high-risk derivatives which generally represent less than 10% of a portfolio.

Benchmarks are taken from published sources and may have different calculation methodologies, pricing times, and foreign exchange sources from the composite.

Composite policy requires the temporary removal of any portfolio incurring a client initiated significant cash inflow or outflow greater than or equal to 15% of portfolio assets. The temporary removal of such an account occurs at the beginning of the measurement period in which the significant cash flow occurs and the account re‑enters the composite on the last day of the current month after the cash flow. Additional information regarding the treatment of significant cash flows is available upon request.

The firm’s list of composite descriptions and/or a presentation that adheres to the GIPS® standards are available upon request.


Additional Disclosures

Financial data and analytics provider FactSet.  Copyright 2019 FactSet. All Rights Reserved.

MSCI and its affiliates and third-party sources and providers (collectively, “MSCI”) makes no express or implied warranties or representations and shall have no liability whatsoever with respect to any MSCI data contained herein. The MSCI data may not be further redistributed or used as a basis for other indices or any securities or financial products. This report is not approved, reviewed, or produced by MSCI. Historical MSCI data and analysis should not be taken as an indication or guarantee of any future performance analysis, forecast or prediction. None of the MSCI data is intended to constitute investment advice or a recommendation to make (or refrain from making) any kind of investment decision and may not be relied on as such.

IMPORTANT INFORMATION

This material is being furnished for general informational purposes only. The material does not constitute or undertake to give advice of any nature, including fiduciary investment advice, and prospective investors are recommended to seek independent legal, financial and tax advice before making any investment decision. T. Rowe Price group of companies including T. Rowe Price Associates, Inc. and/or its affiliates receive revenue from T. Rowe Price investment products and services. Past performance is not a reliable indicator of future performance. The value of an investment and any income from it can go down as well as up. Investors may get back less than the amount invested.

The material does not constitute a distribution, an offer, an invitation, a personal or general recommendation or solicitation to sell or buy any securities in any jurisdiction or to conduct any particular investment activity. The material has not been reviewed by any regulatory authority in any jurisdiction.

Information and opinions presented have been obtained or derived from sources believed to be reliable and current; however, we cannot guarantee the sources' accuracy or completeness. There is no guarantee that any forecasts made will come to pass. The views contained herein are as of the date noted on the material and are subject to change without notice; these views may differ from those of other T. Rowe Price group companies and/or associates. Under no circumstances should the material, in whole or in part, be copied or redistributed without consent from T. Rowe Price.

The material is not intended for use by persons in jurisdictions which prohibit or restrict the distribution of the material and in certain countries the material is provided upon specific request.  

It is not intended for distribution to retail investors in any jurisdiction.

 

201908‑925110

RELATED FUND
SICAV
Class I USD
ISIN LU0382933116
A growth-oriented portfolio of typically 120-140 companies, seeking to harness the best ideas of our global research team. The fund offers broad exposure to the global equity universe, both developed and emerging markets, investing in around 30 countries.
View More...
3YR Return
(Annualised)
16.68%
Fund Size
(USD)
$488.3m
INVESTMENT VIEWPOINT
INVESTMENT INSIGHTS