Emerging Markets Discovery Equity Strategy Update

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What differentiates this fund from other EM funds?

We are not a traditional EM fund. Most of the competitors who invest in emerging markets, they focus on quality and growth. However, we are a value tilted contrarian portfolio. We aim to capture a very different, differentiated group of alpha compared to any mainstream fund. We invest in sector and countries that mainstream emerging market investors tend not to research and invest in.

We actually think the traditional value way of investing doesn't work in EM. Traditional value required mean reversion to realize an asset’s value. However, there's a lot of barriers that prevent mean reversion from happening in EM. What we do is we deploy a framework called ‘Forgotten Stock Framework’. We bring a large research team into EM and just focus on area, such as country, sectors where mainstream investors are not looking at. If we do our job well, we should be able to find a lot of ideas that has asymmetric reward. That means decent level of downside support and we’ll be earlier than other investors in identify fundamental change.

How do you find ‘forgotten stocks’ in EM?

On ground, fundamental research is the bread and butter of our insight. We are dealing with 20/30 countries. We are dealing with more than a thousand stocks. The sell side, the mainstream media do not cover most of them. So we need to deploy boots on the ground. We need to kick tyres for us to find these differentiated ideas. Sometimes these ideas are not small cap. They're not illiquid. They are just in area that people are not focusing on. We can buy very large cap, liquid ideas, but from a very forgotten country.

Secondly, we have one of the largest research team on the street. We can do research into areas that other people cannot do, and that would yield a differentiated, insightful ideas for clients too.

How do you think about risk and return in emerging markets?

Investing in emerging market definitely is more volatile than a developed market like Europe, UK or the US, but risk also brings opportunity. Emerging markets is a very inefficient capital market, hence that if we do our homework well, we should be able to find great risk reward to our clients.

Managing money – the number one objective is to seek higher return for investors, but every investor would do that. I have been managing portfolio for more than ten years now. I think the second most important thing is to control risk. Portfolio construction is an art as well as a science, but if you do it well, you can seek higher return at the same time not impose excessive volatility to our clients. So risk control is very important too.

Ernest Yeung, Portfolio Manager, highlights examples of countries and industries where he’s seeking to identify forgotten stocks.

Ernest C. Yeung, CFA, IMC Portfolio Manager

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Risks - the following risks are materially relevant to the portfolio:

Country (China) - Chinese investments may be subject to higher levels of risks such as liquidity, currency, regulatory and legal risks due to the structure of the local market.
Country (Russia and Ukraine) - Russian and Ukrainian investments may be subject to higher risks associated with custody and counterparties, liquidity, market disruptions, as well as strong or sudden political risks.
Currency - Currency exchange rate movements could reduce investment gains or increase investment losses.
Emerging markets - Emerging markets are less established than developed markets and therefore involve higher risks.
Equity - Equities can lose value rapidly for a variety of reasons and can remain at low prices indefinitely.
Geographic concentration - Geographic concentration risk may result in performance being more strongly affected by any social, political, economic, environmental or market conditions affecting those countries or regions in which the fund's assets are concentrated.
Small and mid-cap - Small and mid-size company stock prices can be more volatile than stock prices of larger companies.
Style - Style risk may impact performance as different investment styles go in and out of favor depending on market conditions and investor sentiment.

General Portfolio Risks

Conflicts of Interest risk – The investment manager's obligations to a portfolio may potentially conflict with its obligations to other investment portfolios it manages.
Counterparty risk – Counterparty risk may materialise if an entity with which the portfolio does business becomes unwilling or unable to meet its obligations to the portfolio.
Custody risk – In the event that the depositary and/or custodian becomes insolvent or otherwise fails, there may be a risk of loss or delay in return of certain portfolio's assets.
Cybersecurity risk – The portfolio may be subject to operational and information security risks resulting from breaches in cybersecurity of the digital information systems of the portfolio or its third-party service providers.
ESG risk – ESG integration as well as events may result in a material negative impact on the value of an investment and performance of the portfolio.
Investment portfolio risk – Investing in portfolios involves certain risks an investor would not face if investing in markets directly.
Inflation risk – Inflation may erode the value of the portfolio and its investments in real terms.
Market risk – Market risk may subject the portfolio to experience losses caused by unexpected changes in a wide variety of factors.
Market Liquidity risk – In extreme market conditions it may be difficult to sell the portfolio's securities and it may not be possible to redeem at short notice.
Operational risk – Operational risk may cause losses as a result of incidents caused by people, systems, and/or processes.
Sustainability risk – Portfolios that seek to promote environmental and/or social characteristics may not or only partially succeed in doing so.

IMPORTANT INFORMATION

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