Emerging Markets (Sustainable)

The Sustainable Emerging Markets Equity strategy aims to outperform its benchmark, MSCI Emerging Markets ex-Fossil Fuels Index, by 3% per annum over a three-year rolling period. It targets high returns and long term capital growth by investing in a portfolio of primarily equity and equity-related securities traded in Emerging Markets.

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Sustainable Emerging Markets Strategy

The Sustainable EM strategy follows an identical approach to that of TT’s standard EM process, which has consistently added value for investors since 2011. However, recognising that there is increasing investor focus and capital flows towards EM companies that display strong ESG credentials, TT’s Sustainable EM strategy has the following additional features:

  • Focuses on companies that are making positive contributions to the UN Sustainable Development Goals
  • Excludes companies that derive >10% of their revenues from fossil fuels & related sectors, tobacco, cannabis, alcoholic beverages, gambling, weapons, and adult entertainment
  • Qualifies as a Light Green (Article 8) Fund, under SFDR classification

The strategy targets strong excess returns through fundamental bottom-up stock selection, within an integrated top-down macro framework.

Our strategy is biased towards smaller EMs as these are earlier in their development and tend to have stronger growth and demographic profiles, thereby offering exposure to structural growth in rapidly developing economies. We will still own larger EM markets selectively, depending on our perception of the opportunity set at the time, from both a top-down and bottom-up perspective.

The following aspects of our investment process provide an edge and set the TT proposition apart from the competition:

  • Unconstrained and concentratedThe strategy will be biased towards the faster growing EMs with younger populations rather than the older, larger EMs that dominate most EM funds. 

  • Top-down and bottom-up linkageTT’s Emerging Market process utilises a combination of top-down and bottom-up analysis. This linkage allows top-down factors to guide the team as to where to focus their resources to find attractively valued growth stocks.  
  • Focus on Free Cash FlowWhilst our fundamental company analysis considers multiple return and valuation metrics, we do have a specific focus on Free Cash Flow.  There are three core reasons for this: 

  1. Fickle capital flows can undermine a company’s ability to grow, especially in Emerging Markets. Balance sheet strength, particularly strong Free Cash Flow, provides greater visibility on growth potential. 
  2. Inflection points at times of declining capital investment and improving Free Cash Flow are often catalysts for improving returns to investors. 
  3. A focus on cash flow ensures an alignment of interests between minority and majority shareholders.  The Free Cash Flow ‘lens’ is a useful one in which to frame our engagement with company management.  
  • Active currency  management. TT has decades of experience managing FX and a consistent, positive record doing so. While currency is a decidedly secondary alpha bucket, its primary function is that it empowers our analysts, who know we can take out FX risk effectively, to analyse stocks more purely in local terms, as they should.
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