By Canada Life Investment Management | May 26, 2023

Patrick Russel, Portfolio Manager and Director at Northcape Capital, outlined his team’s investment approach for the Canada Life Pathways™ Emerging Markets Equity Fund.

What’s in this article:

1. The firm
2. Investment philosophy
3. Investment process
4. ESG
5. Stock story – HDFC Bank (India)
   

Based out of Sydney and Melbourne, Australia, Northcape Capital (Northcape) is an employee-owned organization with a dedicated, highly skilled and passionate emerging markets (EM) team. The firm’s unique structure, combined with low staff turnover, results in a long-tenured team focused on high-performing investments. Its people and vision are keys to success.

Northcape adopts a long-term approach to investing and believes that superior investment returns rely on fundamental research, good judgement and the experience of their investment team. The fund’s strategy was established in 2008 and offers a concentrated portfolio of high-quality businesses in EM, with an aim to deliver strong long-term returns for clients (three-years rolling). Low portfolio turnover demonstrates the team’s conviction in its investments and strategy. “It’s about time in the asset class, not timing the asset class,” says Patrick. 

Finding opportunities in emerging markets

The team’s goal is to outperform the MSCI Emerging Markets Index, but building portfolios for EM takes considerable skill. In fact, there are more than 1,400 companies across large- and mid-cap size segments across 27 countries in the index.¹ From this universe, they hand pick ideas by focusing 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 EM countries are equal. To help, the team leverages local expertise, with the portfolio management team spending a considerable amount of time in the emerging markets they look to invest in.

The investment process for the fund combines deep fundamental stock and sector research with analysis of sovereign and market risks.

Opportunity screening

The team uses fundamental research to find companies that offer above-average growth prospects and high rates of return on equity over the long term.

Environmental, social and governance (ESG) assessment

Northcape integrates their unique ESG scoring system into their risk assessment of any investment. The team believes that ESG factors can impact the risk-return profile of a company and are key elements of long-term value. 

Multi-portfolio manager system

Northcape’s experienced portfolio managers have the autonomy to focus on their best ideas and make investment decisions individually into their segment of the portfolio. Under this system, 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 investment managers leave the portfolio in the hands of a single manager supported by analysts.

With Northcape’s approach, key person risk is reduced with no single manager handling more than a quarter of the portfolio. The firm has seven highly passionate portfolio managers who have been dedicated to a single product for over a decade. They believe this gives them a distinct advantage.

Sovereign risk analysis

The team uses both qualitative factors (corporate governance standards, securities legislation, investor protection, etc.) and quantitative factors to assess the risks unique to each country. They note that this often-overlooked assessment is one of the key factors that support risk mitigation. Currency also factors in here, since countries with high currency inflation like Turkey demand a higher risk premium. This helps account for the cost of conversion back to dollars.  

Northcape is a signatory to the United Nations-supported Principles for Responsible Investment (UNPRI) and has always integrated ESG analysis into its investment processes. The Northcape team firmly believes that ESG factors have the potential to impact the risk-return profile of a company and are key elements of long-term value. Their ESG scoring system is embedded in their research process and is fundamental to the risk assessment of any investment.

Northcape took a closer look at a specific investment on the call to demonstrate the success of their process over the long term. HDFC Bank, India’s leading private bank, offers a great example of why it’s important to consider both company fundamentals and opportunities unique to the country.

India’s mortgage-to-debt ratio has been steadily growing as the country aims for fast urbanization. Northcape identified a growing opportunity in the Indian mortgage industry and generated sustained returns on their investment in HDFC Bank over the past 14 years.

Morningstar Star Ratings reflect performance of F Series as of March 31, 2023 and are subject to change monthly. The ratings are an objective, quantitative measure of a fund’s historical risk-adjusted performance relative to other funds in its category. Only funds with at least a three-year track record are considered. The overall star rating for a fund is a weighted combination calculated from a fund’s 3, 5, and 10-year returns, as available, measured against the 91-day treasury bill and peer group returns. A fund can only be rated if there are a sufficient number of funds in its peer group to allow comparison for at least three years. If a fund scores in the top 10% of its fund category, it gets 5 stars; if it falls in the next 22.5%, it receives 4 stars; a place in the middle 35% earns a fund 3 stars; those in the next 22.5% receive 2 stars; and the lowest 10% receive 1 star. For more details on the calculation of Morningstar Star Ratings, see www.morningstar.ca.

For the Canada Life Pathways Emerging Markets Equity Fund (Series F), the star ratings and number of Canadian mutual funds in the emerging markets equity category for each period are as follows: one year – 4 stars, 294 funds; three years – 5 stars, 254 funds.

For the Canada Life Pathways Emerging Markets Equity Fund 75/75 (P), the star ratings and number of Canadian segregated funds in the emerging markets equity category for each period are as follows: one year – 5 stars, 85 funds; three years – 5 stars, 85 funds.

© 2023 Morningstar. All Rights Reserved. The information contained herein: (1) is proprietary to Morningstar and/or its content providers; (2) may not be copied or distributed; and (3) is not warranted to be accurate, complete or timely. Neither Morningstar nor its content providers are responsible for any damages or losses arising from any use of this information. Past performance is no guarantee of future results.

The views expressed in this commentary are those of this investment manager as of May 11, 2023 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.

This fund is available through a segregated funds policy issued by The Canada Life Assurance Company or as a mutual fund managed by Canada Life Investment Management Ltd. offered exclusively through Quadrus Investment Services Ltd., IPC Investment Corporation and IPC Securities Corporation. Make your investment decisions wisely. Commissions, trailing commissions, management fees and expenses all may be associated with mutual fund investments. Please read the prospectus before investing. Mutual funds are not guaranteed, their values change frequently, and past performance may not be repeated. A description of the key features of the segregated fund policy is contained in the information folder. Any amount allocated to a segregated fund is invested at the risk of the policyowner and may increase or decrease in value.

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