September 28, 2021

On the Canada Life™ Portfolio Manager Connect Series, we were joined by Ross Cameron, Portfolio Manager and head of Northcape Capital’s Japan office to learn more about how they manage the Pathways Emerging Markets Equity fund. Based out of Sydney and Melbourne Australia, Northcape is an employee-owned organization with a dedicated, highly skilled and passionate emerging markets team focused solely on their portfolio’s strategy.

A vital part of Northcape’s DNA is its multi-portfolio manager system. At Northcape, everyone is an analyst and contributes to the work behind the portfolio. Of these analysts on the team, four are portfolio managers who have been managing the fund since its inception. Under this multi-manager system, each portfolio manager operates a separate portion, which gives them the autonomy to incorporate their best investment ideas into the client portfolio.

Building this portfolio, however, takes considerable skill. In fact, there are over 1,412 large- and mid-cap companies across 27 countries in the MSCI Emerging Markets Index (as of June, 2021). These hand-picked ideas tend to focus on companies with defendable market positions that have high returns on capital with resilient and sustained long-term outperformance.

Beyond picking great stocks, the managers also need to isolate the right markets geographically. But not all emerging market countries are equal. To help, the team leverages boots on the ground, with the portfolio management team spending a considerable amount of time in the emerging markets they look to invest in.

Top-down research focused on sovereign risk analysis also helps inform the relative risk/return characteristics of different markets, affecting each manager’s individual company views. Sovereign risks differ from country to country and political instability might lead to policy changes for businesses and investors. To be compensated for sovereign risks, investors need to understand the political regime and apply appropriate discount rates to company valuations that consider these sovereign risks. Diversity of ideas is critical given all these factors, which is where Northcape’s multi-manager system shines.

The result? Different investment views come together with an aim to increase returns and reduce volatility compared to a consensus approach. Small, highly skilled teams work well for assembling a high conviction portfolio, but some fund mangers leave the portfolio in the hands of a single manager supported by analysts, which can lead to key person risk. With Northcape’s approach, key person risk is reduced with no single manager handling more than a quarter of the fund. Fortunately, this safeguard isn’t something Northcape relies on – their principal portfolio managers have been with the firm for the last decade, implementing a consistent investment philosophy and process.

Dividing the portfolio across managers also adds a critical layer of diversification and avoids biases such as groupthink. For a position in a single company to occupy a big part of the portfolio, each manager must independently conclude that the portfolio and clients are likely to benefit from that investment. Risk is further mitigated through increased investment scrutiny since each manager remains focused on their highest conviction ideas. Ultimately, this high conviction approach gives clients access to a fund that’s uniquely positioned to benefit from the best investment ideas found across emerging markets globally.

The views expressed in this commentary are those of this fund manager as at the date of publication and are subject to change without notice. This commentary is presented only as a general source of information and is not intended as a solicitation to buy or sell specific investments, nor is it intended to provide tax or legal advice. Prospective investors should review the offering documents relating to any investment carefully before making an investment decision and should ask their advisor for advice based on their specific circumstances. Investment funds are not guaranteed, their values change frequently and past performance may not be repeated. Unit values and investment returns will fluctuate.

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