Thomas Schaffner, Vontobel Asset Management
Schaffner, who co-manages the Vontobel MTX Sustainable Emerging Markets Leader Fund, explained to FSA during his recent trip to Asia how he identifies investible future leaders with quantitative metrics.
The portfolio allocates assets only to those companies that fall into the first quartile in terms of consistent returns on invested capital (ROIC) and industry position.
According to the firm’s research, the performance of ROIC is highly correlated to future growth. Measured by ROIC, leaders tend to stay leaders over a five-year period, and vice versa. A better-positioned company is also more likely to show improvements in terms of future returns.
“A lot of people try to find companies in the fourth quartile that are able to move to the first quartile, but the statistical probability is very low and it is extremely difficult to do,” he argued.
Movement of companies among ROIC quartiles over a 5-year period
Source: Vontobel AM
Additionally, higher ROIC levels means the companies generate higher cash flow, which can be re-invested, he said, adding that a “winner takes all” situation happens across industries.
“In the tech hardware sector, for example, the top company can out-spend the second and third [firms] in terms of capital expenditure and research because the leader is far more profitable,” said Schaffner.
Because of the emphasis on a consistent ROIC performance, his benchmark-agnostics portfolio tends to tilt towards larger-cap stocks.
Apart from the quantitative analysis, his team also looks at ESG factors and engages with company management on how to improve ESG levels.
In terms of risk, Schaffner said the major variable for the portfolio is short-term market movements driven by fear or political events. For example, he added that while trade tensions between the US and China may negatively impact market fundamentals, the more immediate consequence is on market sentiment.
After the US imposed its first round of tariffs, he observed that the increasing uncertainty on market outlook started putting off companies from expanding their business and investing for the future. “It is already happening in Asia. When companies are uncertain about where they can export their goods to, they are not going to invest.”
As a result, some companies may hold-off on capital expenditure, so the entire value chain of exports potentially slows down.
On the flipside, he said the portfolio performs better in a rational and fundamental-driven market due to its emphasis on financial strength of the stocks.
Vontobel MTX Sustainable Emerging Markets Leaders Fund versus sector and benchmark
Data: FE Analytics, in US terms. The fund is available for sale to professional investors.
