HEAD-TO-HEAD: Capital Group versus T Rowe Price

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INVESTMENT APPROACH

The Capital Group fund is flexible and risk-averse, with an approach that seeks to cushion the volatility typically associated with emerging market equities by investing a share of the portfolio in developed market firms that derive significant revenues from emerging economies, according to Caquineau.

“The team of managers believes that while emerging markets are growing faster than developed markets, emerging market firms aren’t necessarily the best way to capitalise on that growth,” he said.

Instead, multinationals may sometimes be better options, although the managers operate under guidelines.

Investible firms should generate at least a fifth of their revenues or have 20% of their assets in the developing world, provided a minimum of 35% of the strategy’s portfolio is allocated directly to emerging-market-domiciled securities.

“The managers normally stash 35%-45% of assets in such companies,” said Caquineau.

As usual within Capital Group, the fund has several independent managers — in this case 12 — who look after designated sleaves of the total portfolio and have different approaches.

“Each manager runs an independent slice of the portfolio, which enhances diversification and mutes overall volatility. They are also long-term-oriented, so portfolio turnover is relatively low. Some managers tend to hedge currency exposure only when such risks look high,” said Caquineau.

“Key personnel risk is also reduced,” he added, “and a principal investment officer ensures that the overall portfolio makes sense”.

From mid-2008 to 2015, emerging market bonds comprised 8%-17% of assets, but subsequently, exposure has dropped to around 3% as the managers feared worsening credit conditions.

Developed market equity exposure has increased since bottoming at roughly 20% in June 2005 and is close to 50%.

The portfolio is less dominated by China than the MSCI Emerging Markets index, although Chinese exposure has increased significantly during the past decade to about 23% (including sizeable weightings to Tencent and Alibaba) — but well-below the index’s 41% allocation.

In contrast, the T Rowe Price fund is a much more conventional emerging markets product.

Long-term manager, Gonzalo Pangaro, who intends to retire in January 2022 (see manager review section), looks for industry leaders with strong growth prospects while paying attention to valuations, according to Caquineau.

Given the $3.1bn size of the fund, Pangaro concentrates more on large cap stocks than fund peers and the MSCI Emerging Markets index

“He is committed to issue diversification and moves at a measured pace with turnover of 20%-40% per year,” said Caquineau.

He is also comfortable building oversized positions in countries and sectors that he believes have “compelling opportunities”, which is another reason why the fund’s country and sector weightings often differ from those of its peers and the index.

“Stock-picking adds strong value,” said Caquineau.

Nevertheless, Pangaro avoids extreme over- and under-weightings, perhaps cognisant of the fund’s underperformance in 2008 due to its hefty stakes in some of the hardest-hit countries during the global financial crisis.

Pangaro is sensitive to macro risks and will alter the fund’s geographical exposure if a country’s economic outlook is deteriorating.

“This is important, as currency volatility is a significant risk in emerging markets. He works with the firm’s emerging markets fixed-income team to frame his top-down views,” said Caquineau.

Generally, Pangaro has faith in long-term technology- and consumer-related growth stocks.

For instance, in China, he has overweighted Tencent and Alibaba for several years now, and Taiwan Semiconductor Manufacturing (TSMC) and Samsung are also among the fund’s top 10 holdings.

Pangaro also likes the consumer defensive sector, and has major bets in LG Household & Health Care and China Mengniu Dairy,

The financial services sector is also a favourite, and Hong Kong-listed life insurer AIA, Brazilian bank Itau Unibanco, and Russian bank Sberbank are substantial allocations. Indeed, the fund has a significant overweight to Brazil because of Pangaro’s stock selection.

On the other hand, the portfolio is light on the energy and basic materials sectors, where Pangaro struggles to find companies with durable growth potential, according to Caquineau.

Fund characteristics

Sector allocation:

Source: Morningstar, 31 Dec 2020

Country allocation:

Source: Morningstar, 31 Dec 2020

Top 10 holdings:

Source: Fund factsheets, 31 Jan 2021

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