Outperforming the US stock market and 97% of peers! This emerging market fund selects stocks this way

According to Zhitong Finance, Rob Marshall-Lee, founding partner and Chief Investment Officer of Cusana Capital LLP, is one of the few fund managers who have achieved returns similar to the U.S. stock market by investing in emerging market companies. According to the latest data as of September 30, his emerging market equity fund has delivered a 37% return for investors over the past 12 months, outperforming the S&P 500 index and 97% of his peers. Notably, among the top 20 companies with the largest weight in the benchmark MSCI Emerging Markets Index, he holds only one company and attributes its outstanding performance to this.

Marshall-Lee pointed out that the reason is that most companies in emerging markets have destroyed the returns brought by a select few star stocks. He stated that it is best to have a concentrated portfolio and selected based on the model of the seven giants in the U.S. stock market. The fund manager said in an interview, "In emerging markets, the top 5% of stocks create 83% of net wealth, while 95% of stocks overall have lost value. You need to avoid that 95% and focus all efforts on finding that 5%. Within this range, we try to identify the top 25 or 30 companies with the highest risk-return profile."

For example, he mentioned that companies like Taiwan Semiconductor (TSM.US), Indian consumer goods company Titan Co., and São Paulo-based NuBank often share consistent characteristics such as good governance, strong market share growth potential, and high capital return rates.

While many investors diversify their investments to reduce risk and rely on tracking benchmark indices, Marshall-Lee stated that this practice actually increases risk. For instance, just before the outbreak of the Russia-Ukraine war in 2022, his fund exited its positions in Russia, as the focus was on "avoiding permanent capital loss," and the fund estimated that since then, the likelihood of total capital loss in the Russian stock market was 30%.

Purposeful Stock Selection

Globally, he has avoided most of the over 4,000 publicly listed companies in emerging markets, purchasing about 30 stocks from 300 investable stocks. "Surprisingly, most emerging market stock portfolios look alike, especially the top 10 stocks in emerging market funds—everyone holds Samsung and large benchmark stocks."

Marshall-Lee manages two funds with the same emerging market strategy, overseeing $330 million in assets, which is a continuation of the $3.5 billion strategy he managed during his time at Newton Asset Management from 2011 to 2020. In 2022, he co-founded the boutique Cusana Capital with Jos Trusted (former manager at Odey Asset Management). The fund is supported by Sector Asset Management, one of Norway's largest independent investment companies.

It is widely believed that Trump's election means investors should reduce their exposure to emerging market stocks, but this fund manager refuted that view. He stated that the prevailing market logic could prove to be completely wrong, just as it did when Trump was first elected at the end of 2016 Currently, the strengthening of the US dollar, rising US bond yields, and the sell-off in Asian stock markets have led to a pullback in emerging market assets, with the benchmark index falling 2.2% in November, while the S&P 500 index rose 3.7%. This has resulted in a record gap in performance between the two asset classes.

Some competitors have improved returns by including globally active US companies in their emerging market equity funds, while Marshall-Lee's guidelines require that 100% of the stocks in his portfolio must be emerging market-driven stocks, meaning they must either be listed or registered in emerging markets or derive more than 50% of their profits, assets, or revenues from emerging markets.

NVIDIA previously met the above 50% emerging market standard, so Marshall-Lee purchased the stock at the beginning of 2023. He sold these shares in June 2024 with a 370% profit, at which point the company's segment data disclosure indicated it no longer met this standard. He noted that stocks registered in Hong Kong contributed about 20% of this year's returns.

Geographically, Marshall-Lee's largest exposure is in Asia, where he is optimistic about the "rapid growth of domestic companies in India and ASEAN markets." Over the past 13 years, 30% or more of his portfolio has been in India, focusing on consumer-centric companies like Titan. The fund manager stated, "We made about 14 times our money on this stock. The risk is relatively low, but the returns are very high."

Another 10% is allocated to Vietnam, and about 10% to Indonesia. In China, Marshall-Lee is optimistic about electric vehicle battery companies, which are often founder-led and self-sustaining; he also holds shares in some local Chinese cosmetics companies that are capturing market share from international brands.

The portfolio manager declined to disclose his favorite stocks but mentioned that over the past 12 months, his fund has held shares in companies such as Varun Beverages, Central Depository Services India Ltd, and SEA Ltd.

He stated that outside of Asia, Turkey presents potential opportunities with improved economic management, and although his investments in Latin America are relatively small, he is very interested in Argentina. He said, "When you come out of hyperinflation, there is quite a significant dual risk, but when your economy essentially has zero credit penetration, the potential is enormous. We are not currently investing there, but it is definitely a market worth watching."