At Consilium we firmly believe that active investing should not start with a benchmark. Our index-agnostic approach to portfolio construction relies on dynamic qualitative and quantitative assessments of countries, sectors, and individual companies, a rigorous process that requires experience, patience, and diligence. While there is a sizeable universe of investible companies in Frontier Markets, our goal is to identify the relatively few that can sustainably grow earnings over the long-term. The result of our process, which we will describe here in more detail, is a concentrated, high-quality basket of under-the-radar stocks that offers compelling diversification benefits and bears little resemblance to any index.
Country Analysis: Where It All Begins
Our process begins with an analysis of a country’s liquidity, screened by trading volumes of stocks within a given country to determine whether a meaningful allocation can be achieved. This is followed by a qualitative ranking of the quality of the government’s economic policy and political management. From there, our team ranks the countries based on several quantitative factors. These include a range of macro-economic factors, including but not limited to:
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Inflation
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Interest rates
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Real exchange rate valuation
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Country external debt - government plus private
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Fiscal deficit - total and primary
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Current account and trade account
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Financing of deficits - FDI versus hot money portfolio flows, reserves as % of GDP and as a multiple of months of import cover
Business Owner Mindset for the Long-Term
After we determine our universe of investible countries, we aim to identify businesses that meet the following five investment characteristics:
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Significant competitive advantages
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Durable above-average earnings growth
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Dominant position in its sector
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Financial strength as reflected through profits (cash flow generation) and its balance sheet
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Reasonable valuation relative to the future growth and potential of the business
We believe that over time growth in corporate earnings drives stock price appreciation, and are guided by the principle that investing in high quality, growth franchisees with sustainable business models leads to the highest risk-adjusted returns.
ESG Factors Create Value
As stewards of capital we have a fiduciary responsibility to evaluate the full range of opportunities and risks which can influence investment outcomes. It is our view that ESG factors can and do play a significant role in determining investment returns. There is a wide disparity in the level of ESG progress, and the potential for progress, between Frontier Market countries, sectors, and individual companies which is not reflected in benchmark construction. As such, we strive to own businesses that recognize and consider ESG factors with the goal of maximizing shareholder value over the long-term. We are engaged with the leading organizations on ESG and are signatories to the UN Principles for Responsible Investment (PRI). In addition, we are active members of the Emerging Markets Investor Alliance, the leading emerging markets industry group focused on ESG.
Collective Strength of Experience
Our investment team has, on average, 15 years of industry experience.
Since the coining of the term “Emerging Markets,” we have had a front-row seat to every crisis and “tantrum,” and our clients benefit from the depth of our experience over multiple market cycles. This experience has endowed us with an extensive network of useful relationships in Emerging and Frontier Markets, including management teams, consultants, key shareholders, and various industry participants. Our analysts have also lived in many of the countries in which we invest, and speak many of their languages.
Conclusion
Frontier Markets are highly inefficient and provide excellent opportunities to find companies that benefit from strong structural growth. At Consilium, we are not required to be invested anywhere in particular, but we nonetheless seek to achieve diversification at the country, industry, and individual security level. Furthermore, we believe investing is a long-term endeavor, driven by business cycles and not quarterly fluctuations. As a research organization, our challenge is to look through the increasing amount of market noise and short-term volatility and remain focused on what matters most: long-term company fundamentals overlaid by a realistic assessment of a country’s investability based on its political and economic policy sets.