Emerging Markets

Navigating Reefs, Shoals Of Emerging Markets At UK's Chikara

Tom Burroughes Group Editor London 26 March 2024

Navigating Reefs, Shoals Of Emerging Markets At UK's Chikara

Emerging market equities have, in overall terms, not fared well in recent years when compared with more developed markets. Quality and active judgement are essential. We talk to a firm that is trying to raise the emerging market game.

Wealth management has its fair share of acronyms, including a few that have fallen by the wayside. No-one talks about “BRICs” (Brazil, Russia, India and China) these days.

While it might not yet be ready for a rebrand or change, the term “GEM” – global emerging markets – can try to fit together a complex and highly diverse set of nations. For those seeking to deliver risk-adjusted returns for clients, this is not an easy proposition – it means that emerging market specialists have to be nimble and focus on quality.

“GEM is a marketing concept that one or two [firms] turned into an investing concept thirty or so years ago,” Tom Prew, portfolio manager and analyst at Chikara, a UK-based investment house founded in 2005, told this news service. Prew spoke alongside Chris Grey, portfolio manager and analyst.

The firm had total assets under management of $1.4 billion at the end of 2023.

The gyration of emerging market stock and bond markets over the years has meant that riding the GEM story has turned out to be a highly stressful way of making money, he said. 

“For us, we are aware that you’re taking people’s money and putting into riskier parts of the world. When emerging markets do better, people assume they are safer, but that’s wrong,” Prew said. 

Finding the quality
To winnow out the wheat from the chaff in these markets, the fund team eliminates companies which they believe are open to governance mishaps and government malfeasance from its investment universe. This is a bottom-up process, focusing on who runs a company, reviewing its track record and motivations, what the company’s franchise is, its strengths, social utility and ability to generate cash over the long term.

“By asking these sort of questions we can reach the point where we are investing in some very solid businesses…and ride out issues in emerging markets,” Grey said. Under the Chikara approach, looking at companies this way reduces the potentially acceptable number of companies to about 100, Grey continued.

Chikara Investments offers a range of Asian, Indian, global emerging markets and Japanese products. The Global Emerging Markets Opportunities Fund was launched in November 2023. In addition to institutional managed accounts, the firm’s funds are under its UCITS V compliant Irish OEIC umbrella, Chikara Funds plc. Two of its Japan funds are also under its UCITS V compliant Irish OEIC umbrella. 

One of the firm's older funds is the Chikara Asian Evolution Fund, which invests in a concentrated portfolio of typically between 20 and 35 stocks. That fund has had a struggle in recent years (-26 per cent over five years, according to its February 2024 factsheet), although it has gained ground in 2024. 

Emerging markets have been through a rough decade, with an appreciating dollar squeezing countries that borrowed in the US currency.

The MSCI EM index has returned an annualised dollar return of 2.8 per cent versus the MSCI World equivalent figure of 9.1 per cent, over the last decade.

So what’s the outlook?

“The only way to address the problem of past difficulties for emerging markets is by focusing on high-quality firms with which Chikara can co-invest over the long term,” Grey said.

The Chikara philosophy here is to invest in the best quality firms where shareholders can tap growth in lower income countries; recognising that such firms are now as likely to be listed in developed as emerging market countries, and importantly, ignoring indices when building GEM portfolios, because the index might inadequately reflect the true investment opportunity. 

What all this means is that Chikara is very much an active fund manager.

Fund managers that charge fees to invest money must take genuinely active decisions and explain why and how they’ve done so, Grey said. 

Certain markets have shown large improvements in governance and systems – India being a good example because of its ongoing reforms across many areas of the economy.

Prew said the fund team tries to make politics as unimportant as possible for the companies it invests in: “We avoid firms dependent on the stroke of a pen by a minister of works, and we [avoid areas] where gearing is inherent." 

As a result of its approach, Chikara’s funds tend to hold companies far from governments' radar, such as those in the consumer sector. These are typically cash generative stocks that have pricing power and which require relatively low amounts of capital. At the other end of the spectrum, resources firms tend to be unappealing because states/governments have the power to grant and withdraw licences, for example.

A country that presents challenges is China, given heavy state involvement in areas such as telcos and banks, and significant influence across others. “For example we’ve never owned Alibaba or Tencent,” Prew said. 

Kicking the tyres
The Chikara team travel – at the point of this interview, members were due to fly to South Africa to hold self-arranged meetings with company management. This is a chance to be “immersed” in that corporate world, build connections, reinforce existing and find new research ideas, said Grey.

“One outcome of our approach is that a disproportionate number of the businesses we invest in happen to be owned by families and entrepreneurs. They tend to  think in terms of generations rather than the next quarter, i.e. long term,” Grey concluded.

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