Innovation should be a core growth theme within an investor’s allocation to emerging markets.
The is a high-conviction and concentrated equity portfolio, investing in innovative companies in Asia ex-Japan, capitalizing on the new economy and rising disposable income in the region. The fund takes an all-cap fundamental approach and is focused on companies with unique offerings that create or expand markets.
“While innovative sectors like IT and health care have been primary drivers of emerging market returns over many years, we believe the theme is just getting started,” , wrote in a November 28 insight. “In simplistic terms, we view Asia and China innovation today as roughly equating to the U.S. innovation period of the late 1980s and ’90s, when Microsoft, Genentech, Apple and Nike, and Google, Amazon and Facebook respectively were laying down their foundations.”
Dali said that Asia and China’s current stage of development, buying power, and consumer preferences, point to a similar path of demand for innovation.
Innovation, particularly in Asia and China, is also trading at significant discounts to previous valuations. Within the MSCI China Index, for example, innovative sectors like IT are trading at a P/E ratio of 14 times, which is a 67% discount from its five-year high. The healthcare sector is at a 64% discount to its five-year high and communication services is at an 86% discount, according to Dali.
An active strategy is better positioned to capitalize on these opportunities. Emerging markets as a whole are better suited for active management because passive benchmarks often fail to capture some of the ripest investable opportunities.
Emerging market benchmarks also cannot vet quality and corporate governance, and they don’t include world-class companies doing business within emerging market economies if they are domiciled outside those economies, according to Dali.
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