In an age of data abundance and AI-driven insights, is physical presence in emerging markets still valuable for investors? Sharing his latest insights for WealthDFM, Gabriel Sacks, Co-Manager of abrdn Asia Focus plc. makes a strong case for ‘being there,’ for uncovering hidden gems, seeing behind the corporate curtain, and navigating complex cultural dynamics — all to sharpen investment decisions and gain an enduring edge.
Is it essential for investment teams to have an on-the-ground presence in emerging markets (EMs)? This is a debate that has rumbled on for years, and it is arguably raging more fiercely than ever today.
Sceptics claim direct engagement is of strictly limited merit in an era of enhanced disclosure and rapid technological advances. Why go to businesses, they say, when all the required information can come to you?
After all, even companies in EMs are now under considerable pressure to toe the line on transparency. And artificial intelligence (AI) can take all that data and generate a host of wonderful insights, right?
Maybe. It is true that businesses pretty much all around the world have become more forthcoming in their dealings with investors, and it is also true that number-crunching is far from the gruelling chore it was in the past.
Yet my vote still goes to the face-to-face approach. I believe “being there” can be vital to a successful investment process – not least in a region such as Asia, where the fund I co-manage invests.
“Ah,” a cynic might say, “what you really mean is that you enjoy globetrotting. You can get away with jetting here, there and everywhere and then passing it off as work.”
Well, there is no denying that visiting new places can be one of the most enjoyable parts of the job – but hear me out. Here are three reasons in particular why I prefer this kind of close-quarters coverage.
- The search for hidden gems
Even in the age of openness and AI, many good businesses fail to register on the wider investment community’s collective radar. Asian smaller companies serve as a classic illustration.
The problem is simple enough: most investment analysts focus their attention elsewhere. They are far more likely to “eyeball” tech titans and other well-known stocks that are based in developed economies and have sizeable market capitalisations. This has become more of an issue over the years, with Asia and EMs out of favour as investment destinations and research providers cutting back on coverage of less liquid, smaller companies – even though these can represent highly attractive opportunities.
As a result, the task of unearthing hidden gems tends to fall to specialist teams with in-depth knowledge of the regions in which they operate. Their investment decisions are necessarily rooted in a first-hand appreciation of places, people, policies, practices and prospects.
- The chance to see “backstage”
Irrespective of size, setting or sector, there is a Wizard of Oz aspect to every company. It is always useful to peek behind the curtain and try to discover if the image a business projects genuinely reflects the reality of what is happening backstage.
For example, a seemingly spectacular financial statement might disguise the potential shortcomings of a management team whose vision of the way ahead is misguided. Conversely, data revealing short-term underperformance could obscure the likelihood of longer-term recovery and growth.
The sheer diversity of EMs means appearances can be deceptive on multiple levels. For instance, great businesses may be be tucked away in the most unprepossessing surroundings, while deeply flawed companies may lurk in the most opulent offices. This is why it can pay to keep peeling back the layers.
- The importance of cultural understanding
There is a vast body of research highlighting the importance of corporate culture. Crucially, the nature of that culture is likely to vary not only from company to company but from country to country.
Again, take Asia. There are markets in which extraordinary politeness goes hand in hand with a rigid adherence to hierarchies. Interactions are characterised by remarkable warmth in some nations and marked reticence in others. There are economies in which a high proportion of CEOs are women, in which practically every CEO is a man and in which the chances of being granted an audience with a CEO of any sort are virtually zero.
In my experience, an understanding of such customs and quirks provides valuable context. Every EM’s history, prevailing attitudes and unique eccentricities can contribute to the quest for fully informed investment choices.
Conclusion: beyond the quantitative
To return to our original question, then: is it essential for investment teams to have an on-the-ground presence in EMs? In my view, ultimately, this is a matter of balance.
To that end, “essential” is perhaps too strong a word. It may be possible to earn an acceptable return from EMs merely by investing via an index fund that relies entirely on quantitative information.
Nonetheless, I would say direct engagement with companies can be extremely helpful. By extension, I would also say it can deliver an edge. Specifically, it can take us beyond the quantitative.
Of course, the superabundance of data that is nowadays grist to the AI mill should be recognised as immensely instructive. It is nothing less than fundamental to the assessment of any company.
Yet a business’s qualitative aspects can also play a role over the long term. The finer points of its strategy, the ins and outs of its capacity and/or willingness to adapt, the nature of the personalities at its heart – these and other factors can have a substantial influence on investment thinking.
It is worth noting that the face-to-face approach sometimes uncovers reasons not to invest. Such an outcome might be every bit as significant as one in which a company leaves the most positive impression.
Whatever the decision, on-the-ground teams have the comfort of being able to say they have been there and done that. It might sound like a line from a TripAdvisor review, but it is actually a cornerstone of an investment philosophy that is intended to benefit all stakeholders.
Gabriel Sacks is Co-Manager of abrdn Asia Focus plc.
