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EGA Focuses on Local Consumption Theme for Best Emerging Market Results

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Emerging Global Advisors (EGA) launched its first fund, the Emerging Markets Consumer Fund, in 2010, on the premise that following conventional benchmarks would not yield the kinds of returns that investors in emerging market equity should be getting.

Back then, the idea that consumption would drive the growth of developing economies was quite new, said Nick Smithie, chief investment strategist, at EGA. But the firm’s success has been its focus on “relatively young and undiscovered investment themes and we have led with our research on opportunities we don’t think are in the market yet,” he said.

Following the consumer fund, EGA has launched a suite of other products (including a domestic demand fund and a dividend strategy), all of which play on different dimensions of the consumption theme—one that is, in Smithie’s view, the strongest engine of growth for the emerging markets, yet is not represented enough in the traditional emerging market indices.

“In the past the, commodities were a growth boom, and there was an export and technology boom in late 1990s from Korea and Taiwan,” he said. “Back in the early days of the [emerging markets] asset class, we saw a wave of privatization in utilities, telecom, energy and banks, and all of these have been represented in the emerging market indices, but we haven’t seen a real representation of consumption. It is our belief, though, that market leadership is changing and small countries and small sectors will outperform now that the commodity super cycle is over.”

As it were, 30 of the largest and most liquid consumer companies in the emerging markets are based in the emerging markets and derive more than 80% of their revenues from those economies, said Jay McAndrew, national sales manager at EGA. By including those names in its funds, EGA offers investors “one of the most pure ways to access the emerging markets consumer,” he said.

The thematic approach and focus on consumption also gives EGA’s investors access to growing sectors that are sorely underrepresented in the emerging market indices. Healthcare is one of the most important of these sectors, McAndrew said.

Even though it is still a very small sector in most emerging markets, “there is a huge need for investment in healthcare because it’s important to invest in people and healthcare is gaining prominence as standards of living are improving and people are demanding better healthcare. Emerging market governments also want to provide better healthcare to their citizens,” McAndrew said.

As a sub-set of the consumer sector, healthcare is a long term yet rapidly growing sector within the emerging markets, McAndrew said. “This is an important area for our domestic demand fund – we are at least a double weight in healthcare in the fund and this has contributed to its performance,” he said.

EGA also offers investors roughly an equivalent breakdown between consumer staples and consumer discretionary companies, two sub-sectors that work differently at different times, McAndrew said. This juxtaposition helps avoid volatility and produces better risk-adjusted returns.

This year, EGA’s highest performing product has been its suite of India-themed funds.  

Investors have rewarded those countries that have enacted meaningful reform. Smithie said, and under Prime Minister Narendra Modi, reform in India has been significant. EGA offers an Indian consumer fund, an infrastructure fund and a small-cap fund, all of which give investors direct access to India’s local growth story.