Process
Our competitive edge lies in two unique systems, one for country selection, one for stock selection.
Our ten rules for country selection are designed as a heatmap that helps us navigate rapidly changing emerging markets. We believe ten rules are enough to display all the most powerful predictors of change in real time, not so many that we get lost in detail. Built on economic, financial and political patterns with predictive value, the rules aim to identify the countries most likely to grow faster than their peers in coming years.
Our research shows that the strongest macro predictor of emerging market equity returns is relatively high and particularly accelerating economic growth. So the focus of the system is on identifying relative economic performance and changes in the cycle: distinguishing countries poised for a take-off from those heading for a slowdown or crisis. A complete summary of the rules can be found here.
Our stock selection system screens the listed equity universe for quality and growth. To screen for quality, we look for superior return on equity (ROE). We focus our analysis on trying to understand the source of superior ROE and whether it can sustainably exceed cost of equity, which speaks of a lasting competitive advantage. We account for business cyclicality by analyzing this metric across a complete business cycle, not just for a year or two.
Similarly, we use nominal GDP growth rate as a hurdle in our screen for high growth sectors and companies. Again, our focus is on understanding the source of high growth and whether it is sustainable. We favor companies with low volatility in earnings growth. While such companies may trade at premium valuations, we look for price underperformance caused by temporary or macro factors to seek entry points.
