Advisory Research in Chicago has been investing in the international small and SMid-cap market for around eight years now, but until last November, had few emerging market names in its portfolios. That all changed last November.
“We started seeing much more diversity on the emerging market side in terms of what we could include in our portfolios and from a price point, the market had become much more attractive,” said Marco Priani, portfolio manager.
The firm decided to launch a dedicated emerging markets fund, the Emerging Markets Opportunities Value Management fund, to take advantage of those small and SMid-cap opportunities, of which, Priani said, there are many throughout the emerging markets.
Advisory Research finds the best ones by employing a extremely disciplined, value-driven strategy that’s focused on downside protection.
“We look for companies that are trading at or below the liquidation value of their assets. In other words, we like companies that have enough assets that can be liquidated in case things go wrong, and where we won’t lose money below the level at which we invested,” Priani said.
After the team is convinced that their downside is protected through their analysis of the tangible net asset value of a company, their next step is to find a catalyst within a particular company that will improve the profitability and return on its assets.
“This stage of our process is both quantitative and qualitative, time consuming, and centers around our interaction with management, which has to have a clear and credible plan to unlock value,” Priani said.
Once they apply these criteria, the team drills a universe of around 3,500 emerging market small- and SMID-cap securities down to about 500 or 600 names from which they can choose.