Lessons learned from investment mistakes

1234

Conrad Saldanha, portfolio manager for emerging market equities at Neuberger Berman, based in New York

Saldanha has learned to become more cautious on emerging market small caps valuations after previously being too optimistic.

In 2011, Saldanha’s emerging markets equity fund underperformed its benchmark because of exposure to small cap stocks, he recalled.

The fund was down -24.19% during the year, while its benchmark, the MSCI Emerging Markets Index, fell -18.17%, according to FE data.

At the time, small caps on average had solid cash flow growth and had net positive positions on the balance sheets. However, an emerging market sell off during the year hit small caps heavily.

“With the exodus [of capital] out of emerging markets, these stocks got hit significantly harder than we had anticipated,” he said.

Because of that, Saldanha has become more cautious on small cap valuations.

“Even though we’re going to own them and nurture them in the long-term, when valuations look more expensive, we should also exercise the discipline and reduce those exposures.”

For example, Saldanha likes India’s growth story. However, when higher-than-historical valuations represent a significant piece of that growth, Saldanha starts to trim those positions.

In the last 18 months he said emerging market small caps have become more expensive and he has therefore been reducing positions.

The emerging market equity fund exposure to small caps is down to 3% versus a “high double digit” 18 months ago, he added.

1234