Evli Emerging Frontier fund focuses on the hidden gems of the emerging markets. Portfolio managers Burton Flynn and Ivan Nechunaev talk about their strategy where meeting every company before investing is essential.
We met up with portfolio managers Burton Flynn and Ivan Nechunaev from Terra Nova Capital. The duo, with combined 23 years of experience in active asset management, has overseen the Evli Emerging Frontier fund for over five years. In 2021, Evli Emerging Frontier B rose 33 per cent*.
Evli Emerging Frontier is a stock fund that focuses on emerging markets and the frontier markets of emerging economies. Most of the fund’s investments are for example in Malaysia, Vietnam, Thailand, South Africa, Indonesia, Philippines, Turkey, and Egypt.
The fund’s strategy is to invest in cheap, growing quality companies. The goal is to find companies that can grow by 100 per cent within 12 months.
“We focus on markets often overlooked by others. In the MSCI Emerging Markets Index, 84 per cent of the holdings are from 6 markets: China, Korea, Taiwan, Brazil, Russia, and India. Our strategy is to focus on the other 50 countries we believe investors tend to forget. Furthermore, we often invest in companies that are not part of an index. Only 15 per cent of our portfolio can be found in one of the leading growth market indices,” explains Flynn.
Meetings with more than 2,100 companies
In addition to the geographical diversification, the fund sets itself apart from other emerging market funds in that it never invests in a company without sitting down with its management first. During the past eight years, the portfolio managers have met more than 2,100 companies in 32 countries. They focus on leadership’s growth expectations and drivers as well as the risk factors.
“The first question we ask is what could make the company’s stock go up 100 per cent in 12 months. What kind of a catalyst is needed for that to happen? The CEO often knows the company better than anyone else and getting insight directly from them is incredibly helpful,” Flynn says.
“Second, we want to understand if there are currently any misconceptions among investors and what critical information are they missing. We believe that if there is nothing the investors don’t know yet, the probability of the stock doubling within a year is very low.”
Flynn and Nechunaev want to bring forward active ownership as a central part of their strategy. In 2020, they made over 120 recommendations to the companies in their portfolio. One of the reasons for this is to help the companies in the process of getting the market to understand their business better.
Insight and data based on the meetings
The last part of the strategy the portfolio managers want to point out is the academic approach to ESG questions. The fund focuses on 4 to 5 academic studies that specifically show how ESG investing can benefit the company’s development.
“All companies we meet fill out a comprehensive form that helps us understand how they work with sustainability issues. We look at small companies that are not often covered by big analysis companies,” Flynn explains.
In 2021, the portfolio managers got to travel significantly less than before. Still, the number of company meetings was on the rise. During their most recent project, dubbed “11 sectors in 11 months”, they doubled the number of companies they met compared to the year before.
“Thanks to this, we have found two more companies that have risen over 100 per cent. At the same time, it’s allowed us to develop our expertise in even more sectors. We have also built a base of companies we can now continue to evaluate. But the most exciting part of this project has been the insights. We have gathered an enormous amount of data and are now in the process of analyzing it,” Flynn continues.
Expectations for 2022
Talking about the expectations for the year 2022, Flynn and Nechunaev tell that one usually doesn’t have a macro perspective on expectations without a bottom-up perspective.
They emphasize again that they look at companies’ stock rate and its likelihood to rise 100 per cent in 12 months. Also, the risks identified by the companies need to be considered. The most common risks are logistical challenges and material costs, but the portfolio managers say that the situation is much better now than it was a few months back.
Before they need to rush off to yet another company meeting, we ask if there is a company that they want to point out in 2022. Nechunaev names the Turkish software company ATP.
“Considering you can hedge your currency exposure, there are many interesting investment opportunities in Turkey. The company sells strong abroad and invoices in dollars while the costs are in Turkish Liras,” he says.
* Past performance is no guarantee of future returns. The value of the investment may rise or fall and the investors may not get back the full amount invested.
The article was originally published on Finwire.