In the world of emerging markets investing, China often dominates. That is no surprise, given that the nation is the group’s largest economy.
But Ajay Krishnan, lead portfolio manager for the $415 million
Wasatch Emerging Markets Select
fund (ticker: WAESX), believes Indian companies offer better long-term return on capital.
In China, launching new businesses can be easier because of access to capital, whereas India’s government hasn’t provided ample capital, Krishnan says. That makes Indian companies better stewards of money in general. “China’s companies are focused on being the biggest,” he says. “India’s companies are focused on being more profitable and generating returns on capital and cash flow.”
This view is clear from the fund’s allocation to India, at 30%, while its China exposure is just 6% of the portfolio. In comparison, the fund’s benchmark,
MSCI Emerging Markets,
has a 13.2% weighting to India, and a whopping 33% of the index is in China.
Emerging Market Select’s focus on India has helped the fund vastly outperform its benchmark and its diversified emerging markets peers and index—by roughly 20 percentage points on a three-year basis about 12 percentage points on a five-year basis. It ranks in the top 1% of its peers, with a 23.1% annualized return for the past five years. While the Morningstar gold-medalist fund has no load, its 1.5% expense ratio is high versus its peers.
Krishnan, 53, helped launch Emerging Markets Select in 2012. He was instrumental in expanding the firm’s emerging markets portfolio in the mid-2000s, when it started exploring the space, led at the time by then-director of international investing, Roger Edgley, now-retired. Krishnan is also lead portfolio manager for the $653 million
Wasatch Emerging India
(WAINX).
Krishnan has been at Wasatch since he was hired as a junior analyst in 1994. He stayed at the Salt Lake City–based firm as its assets grew during the tech boom and thrived in its culture of collaboration. That corporate culture and a focus on long-term investing gives Wasatch its edge, he says. Scott Thomas and Matt Dreith are associate portfolio managers on the fund, and they all work with 10 researchers who support the firm’s emerging markets strategies.
The team uses a mix of quantitative and bottom-up fundamental research to select companies in any sector or country, looking for what Krishnan calls “high-probability targets”—companies with desirable metrics like high returns on capital and low debt.
Wasatch wants to own companies for more than five years, so analysts build their own earnings models to understand the value of a long-term opportunity. That lets them to buy favorable companies without having to worry about short-term price swings. They don’t hedge currencies, but work currency risk into an investment’s potential return by using macroeconomic analysis, Krishnan says.
Technology and financial services are the No. 1 and No. 2 sectors in the fund. Although the managers don’t start with themes, sometimes one comes together, such as providing financial services to underbanked and unbanked populations.
No. 1 holding
Bajaj Finance
(BAF.India) exemplifies how Krishnan thinks and acts. In 2015, the fund bought shares of the Indian nonbank consumer-finance company, impressed by its management and how the firm uses data. Bajaj uses technology and analytics to tweak its service offerings, adjusting loan supply depending on market conditions. “They are more a technology company that happens to be in the lending business,” he says.
In the fall of 2018, the sector buckled under bad loans, dragging the stock’s price down 40% from its all-time high. The fund swooped in to add to positions, since its research showed Bajaj could access capital. The share price has since doubled.
Investors underappreciate India’s digitization push, Krishnan says. Over the past five years, India’s government expanded broadband internet infrastructure and created a public digital-payments system so everyone has a bank account as well as a secure, cloud-based digital locker to store, share, and verify documents. Combine that push with a young, digitally savvy population, and India is starting a virtuous cycle that could last for years to come.
“Up until now, India has not had a tailwind like this,” he says. “India is building a digital country and I think that’s what is going to serve it well over the next decade.”
This shift toward digitization and digital banking should benefit other Indian companies, such as No. 6 holding
HDFC Bank
(HDFCB.India), a premier private lender providing basic banking services, which the fund has owned since 2002.
While in aggregate Indian stocks have become more expensive, Krishnan says many lower-quality companies are the ones with increased valuations, and there are “plenty of high-quality companies that trade at very reasonable valuations.”
Total Return | |||
---|---|---|---|
1-Yr | 3-Yr | 5-Yr | |
WAESX | 22.6% | 31.8% | 23.1% |
MSCI Emerging Markets Index | -0.1 | 11.4 | 10.5 |
Top 10 Holdings | |||
Company / Ticker | % of Net Assets | ||
Bajaj Finance / BAF.India | 7.0% | ||
Larsen & Toubro Infotech / LTI.India | 5.9 | ||
Sea Ltd / SE | 5.6 | ||
Silergy / 6415.Taiwan | 5.3 | ||
Globant / GLOB | 5.1 | ||
HDFC Bank / HDFCB.India | 4.8 | ||
Voltronic Power Technology / 6409.Taiwan | 4.6 | ||
MercadoLibre / MELI | 4.4 | ||
TCS Group Holding / TCS.UK | 4.3 | ||
Lasertec / 6920.Japan | 4.2 | ||
TOTAL: | 51.2% |
Note: Holdings as of Sept. 30. Returns through Dec. 27; three- and five-year returns are annualized
Sources: Bloomberg; Wasatch Global Investors
Krishnan sees e-commerce opportunities in Latin America, as well. The fund has held Argentina’s
MercadoLibre
(MELI) since 2014, now a No. 8 holding. He bought it as an e-commerce business, but now thinks the firm’s payments division, MercadoPago, could be a fintech disrupter. In 2021, the company announced a $1.8 billion investment in its Brazilian operations. That could make MercadoLibre a competitor to Brazil’s banks if it moves into e-lending.
Krishnan acknowledges worries about the impact on emerging markets if the Federal Reserve raises interest rates, which is widely expected in the first half of 2022. When the Fed raised rates in 2013, it caused the U.S. dollar to rise and many emerging market currencies to sharply fall, including in Brazil and India, because those countries had low foreign currency reserves and high foreign currency debt.
Today is different, Krishnan says. Most of the major emerging market countries are running current account surpluses and are building foreign exchange reserves, he notes: “From a macro standpoint, emerging markets are extremely well positioned.”
Email: editors@barrons.com
Read More: A Top Emerging Markets Fund Puts the Spotlight on India