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Factor investing in emerging markets

Factor investing in emerging markets

Origin Asset Management is heavily overweight on emerging markets (EMs) for all its strategies, according to Citywire + rated John Birkhold.

Energy, material and financial companies in EMs are the biggest new positions that Origin AM added to its portfolio over the last six months, he said.

‘Companies in EMs have the underlying fundamentals and the characteristics that we find to be attractive,’ Birkhold said.

Origin AM takes a factor based approach in its investing and looks for companies that displayed four main characteristics.

First the company needs to have a high return investing business. Second, the company has to be innovative. Third the company should be relatively attractive in cash flows basis. Lastly, analysts’ forecast earnings for the company are preferably in the upward trend.

Among all EMs, Origin AM is overweight China.  

‘We are heavily overweight to China and have been for a long time. We are in lots of Chinese stocks,’ Birkhold said, adding that the company has significant exposure to China in IT, consumer discretionary, financial, and healthcare sectors.

There are some world class businesses that are emerging from China and valuations of Chinese companies are very attractive, he said.  

Moreover, there’s more constrained behaviour among EM companies and profitability is becoming more of a focus for EM companies, Birkhold said.

‘What matters is not how big company is, but how profitable a company is,’ he said.

Birkhold said some of the current trade issues actually might be very helpful for China to get away from investing in the old industries that are historically been popular, such as steel companies.

Although Origin AM overweights financial companies, it has no exposure to Indian or Brazilian banks for its EM strategy, Birkhold said.

‘We’ve been underweight financials for a long time up until recently our financial exposure increase,’ he said.

Origin AM invests in between 70 and 90 stocks for its EM strategy, and between 100 to 140 stocks for its global strategy. 

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