Our Approach to Emerging Markets Equity: Question & Answer

Demographics, technology and the rising middle class have transformed emerging markets (EM), where 87% of the world’s population live.¹ 77% of the world’s “Gen Z” contingent resides in emerging markets as well. Emerging markets are estimated to be responsible for ~60% of the world’s GDP by 2026,² yet their equity markets only represent 13% of the market capitalization of all international equities.³ This mismatch creates a once-in-a-lifetime, long-term opportunity for global investors – as emerging markets grow, evolve and transform, the size of their capital markets will become more prominent over time as well. This blog intends to answer frequently asked questions about investing in emerging markets equities, and more specifically, the VanEck Emerging Markets Equity Strategy.

• How does VanEck approach investing in emerging markets?
• What is structural growth at a reasonable price?
• What are the benefits of an all-cap approach?
• How does the strategy source and evaluate investment ideas?
• Why choose an active emerging markets approach?
• How can investors buy VanEck Mutual Funds?

How does VanEck approach investing in emerging markets?

VanEck’s Emerging Markets Equity Strategy is an active, bottom-up investment solution focused on identifying and investing in forward-looking, sustainable and structural growth at a reasonable price (“S GARP”) companies in emerging markets countries around the world. The portfolio is powered by our investment team’s quest for innovation, disruption, sustainable business models and responsible management, with the flexibility to invest across market caps, sectors and countries in the EM space.

What is structural growth at a reasonable price?

Growth at a reasonable price, or GARP as it is more commonly known, is an investment approach that strikes a balance between strong earnings potential and attractive value. The VanEck Emerging Markets Equity Strategy takes the GARP investment approach one step further by targeting companies that are also well-positioned to benefit from the structural, long-term growth trends that are fundamentally transforming EM economies.

We believe that companies driven by domestic demand and local consumer trends represent the future of emerging markets and global economic growth. The VanEck Emerging Markets Equity Strategy allows investors access to these growth opportunities, which may not be captured in their existing portfolios as well as widely used market indices.

What are the benefits of an all-cap approach?

The MSCI Emerging Markets Index and the MSCI Emerging Markets Investment Market Index do not fully represent the universe of opportunity in emerging markets. As of today, the indices are dominated by mega-large and large-cap companies, including highly cyclical, state-owned enterprises in the energy and materials sectors, as well as low-growth companies in the utilities and telecommunications sectors. Instead of growing because of forward-looking, sustainable and structural growth themes, many of these mega-large and large-cap companies grew due to being systematically favored by their own governments through cheap capital, access to raw materials and preferential treatment.

Due to their methodology, the aforementioned indices do not fully capture structural growth companies that started small and grew larger through sustainable business models and responsible management. There is no shortage of such companies in emerging markets. In many cases, some of the carefully selected and properly researched small caps (i.e., companies with market capitalizations below $2B) may be the next generation’s disruptive force on a global scale, often powered by new technologies.

The VanEck Emerging Markets Equity Strategy is truly an all-cap portfolio with no market capitalization bias, allowing access to entrepreneurial ownership in growing sectors within emerging markets countries. By investing across market capitalizations, the VanEck strategy delivers access to a richer set of opportunities across emerging markets.

How does the strategy source and evaluate investment ideas?

VanEck has been investing internationally since opening its doors in 1955. Since its inception, our Emerging Markets Equity Strategy has been governed by its time-tested investment philosophy, process and stock selection approach.

VanEck’s Emerging Markets Equity Strategy is led by David Semple, Portfolio Manager, who has over 32 years of dedicated emerging markets investment experience. David is supported by a deeply experienced team of career emerging markets analysts, who are dedicated solely to this product and have significant experience living and working in emerging market countries.

Prior to conducting their bottom-up, fundamental research, the Investment Team screens the EM universe to eliminate stocks with poor governance, unreasonable valuations, liquidity issues, and/or a lack of structural, persistent growth. Eliminating a significant portion of the EM universe allows the team to focus on a targeted subset of forward-looking, sustainable and structural growth stocks. Through many years of investment research, deep expertise and local knowledge of emerging markets around the world, the Investment Team is able to identify stocks of companies with sustainable business models and responsible management teams.

VanEck’s Emerging Markets Equity Strategy also taps into the firm’s broader resources. By leveraging the firm’s broader investment resources, the Strategy can fully evaluate market and factor risks that may affect EM stocks.

Why choose an active emerging markets approach?

Because emerging markets are diverse and evolve at a much faster pace, passive vehicles may be at a structural disadvantage compared to active managers who have the flexibility to continuously evaluate and shift exposures to companies, sectors and countries with the optimal risk-adjusted growth potential in mind.

Sell discipline is a key component of our investment process and risk management, and the Investment Team constantly monitors portfolio holdings. When fundamentals deteriorate due to poor corporate execution, management change, corporate governance issues or industry concerns, the VanEck Emerging Markets Equity Strategy quickly pivots and exits positions.

Through our active management, we are also able to incorporate Environmental, Social and Governance (ESG) factors in the investment process. For example, specific challenges may arise for investments in less developed markets, such as differences in governance arrangements with regards to ownership, regulations and local accounting norms and less sophistication and transparency in general around ESG issues. In cases where it seems warranted, the valuation model for a company may incorporate a higher discount rate or additional estimated future costs to account for certain ESG risk factors. In contrast, future growth estimates for a company with positive ESG factors may reflect higher growth opportunities.

In addition, market-cap weighted indices tracking emerging markets tend to be backward looking, influenced by the movement of companies that have succeeded in the past, without regard for future growth potential or risks. While this approach could work in mature and diverse economies with indices that tend to be more balanced and stable (i.e., the U.S. economy and the S&P 500 Index), it may not be appropriate for emerging markets. Most widely used indices have sector and country exposures that poorly capture current EM trends, leading investors to potentially miss out on forward-looking, sustainable, structural growth opportunities as emerging markets continue to evolve. In our portfolio, country and sector exposures are a byproduct of our bottom-up stock selection process. Given our portfolio’s focus on domestic demand, local consumer trends companies, our sector and country allocations are aligned with the future of emerging markets.

How can investors buy VanEck Mutual Funds?

Learn more here.

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