Q: Would you describe your investment philosophy?

A: We are a dedicated emerging markets fund. Emerging markets seem attractive because they are inefficient relative to developed markets in terms of pricing. The inefficiency is a function of the quality and quantity of the coverage of these markets and of the relative lack of research in the marketplace.

We feel we can add value by choosing stocks and by identifying the best opportunities in the emerging markets through a thorough, disciplined and research based process. We run focused portfolios of less than 60 stocks with a target minimum position size of 1%.

We are active managers, so we do not feel obliged to be in any particular sector, country or stock. For example, if we do not find any interesting stocks in Russia or Korea, we do invest there. There is no top-down allocation. Our restrictions come solely from our risk budget, but it is a relatively generous risk budget.

Q: When you search for stocks around the world, do you place higher importance on historic earnings, value, or growth discipline?

A: We look purely at the fundamentals. We try to model and predict cash flows and earnings. It is very much value-based investing with a forward-looking emphasis.

Q: What are the cornerstones of your investment process?

A: The starting point is the portfolio and other stocks that are on its fringes, which are companies that are deemed to be interesting for the portfolio. At any given time, we have 50 to 60 stocks in the portfolio, and our team of six covers a total of 250 to 300 stocks on our radar screen.

Our objective is to find out what are the best stocks for the portfolio. The most attractive stocks are those that have the highest differential between the price target and the current share price. We try to pick the 50 or 60 most undervalued stocks in our emerging markets universe. From a portfolio construction perspective, our job is to ensure that the list is consistent with the risk parameters of the portfolio.

The list is constantly renewed as companies may go out of our research list because of changes in strategy, or new companies can be added based on information acquired from traveling and meeting competitors, for example.

We meet the management of companies in Asia, Latin America, Eastern Europe and Africa four times a year to refine and update our price targets. Since we are familiar with the companies, we ask the managers very specific questions. We define where we stand relative to the previous meeting and get back to our spreadsheets to update our forecasts. The modeling then leads us to refine our price targets for each stock.

It is a very fundamental, hands-on and research-driven. Then we compare the revised share price to the current share price. We want to ensure that the most undervalued stocks on a risk-adjusted basis are the ones that we include in our portfolios.

Because of the price target approach, we are not catalyst-driven or trading-oriented. We typically have low portfolio turnover and a holding period of around a year, which is relatively long for emerging markets. The idea is to hold the stocks until there is a better idea, until the investment case changes, or until the position becomes is inconsistent with our risk budget.

Q: What is unique about your research process?

A: We do not differentiate between the stock selection process and the research process. We do not have separate analysts to do it for us. We, the managers, do it ourselves so it is a manager-driven process. Often in larger investment management companies the buy-side analyst acts as a filter between the manager and the companies in which he is investing. As a function of the size and complexity of these businesses, the senior managers may spend most of their time in internal meetings and business affairs as opposed to researching
companies. In our company, we have a flatter approach and the managers themselves are visiting the companies. Research is only the first part of the investment management process.

Q: How do you approach risk management?

A: The portfolio as whole has to be satisfactory from risk-management perspective. Risk is something to be managed and to be aware of, but is also something to be embraced. Making money is about taking and managing risk, so we have stocks that have a high marginal contribution to risk within the portfolio but we make sure that we are aware of the risk characteristics. Even though we are bottom up investors, we are not betting the house on a particular strategy or theme, or country, or sector.

We use a risk management system, which tells us what is the overall risk of the portfolio, what the individual profile of each stock is and how much risk it contributes to the portfolio. Our risk manager is not in the middle office or back office: he is an integrated part of the portfolio team.

Q: When you select securities, do you compare them to similar companies in other markets across the world, or only to companies in their own market?

A: We have a strong bias towards intra market comparisons. For example, if we are looking at a beer company in Brazil, we will look at the valuation of other consumer stocks in the Brazilian market. We do not like the cross-border market comparisons because they are usually misleading. For example, if you compare a Korean electronics company to a Taiwanese electronics company on a historic basis, the Korean market is consistently cheaper than the Taiwanese market and probably it will always be.