Scott Spencer, investment manager at Ravenscroft, explains why not listening to the headlines is good investment advice.
As active investment managers, we are constantly reminded by the world’s headline grabbing press of the risks we and our clients face - quite literally from one minute to the next. Whether it is the latest fad in cryptocurrencies, or Donald, Vlad or Kim doing something unexpected, people react and, in some cases, let their emotions get the better of them. This short termism serves to exacerbate what is already an uncertain world; sometimes bordering on total madness. We, like Mr Spock, try and remain calm and unemotional about investment decisions.
Ignoring the noise and distractions, our job is to seek out investment opportunities in this mad world of ours. At Ravenscroft Investment Management, we believe that the best way to build our clients’ wealth is to invest into themes that will benefit from long-term trends in demography, increasing global wealth and technological developments.
One of the world’s most prevalent global trends is the emergence from poverty of millions of people within developing countries and the huge impact this will have on consumption for years to come. Poverty, according the UN, is defined as those people who earn less than $1.00 a day. Never in history have as many people been lifted out of poverty as they have in recent years; with levels having already fallen dramatically from 37% of the global population in 1990 to about 10% today. Although there has been considerable progress, the UN now estimates that there remains about a billion people still living on around $1 per day.
Like Star Trek’s Spock, we are unemotionally prepared to go where others are not. The developed markets are currently growing slowly, whilst simultaneously trading on high valuations. Instead we are seeking out opportunities to grow our clients’ capital where there is high growth and low valuations that reflect the significant changes we can see happening over the years to come. Even when we do find new opportunities, we ensure the allocation is appropriate and remain disciplined, as opposed to the emotional beast who makes decisions based on fear and greed.
An area of interest for us at the moment are Frontier Markets - the countries classified as such are those whose stock markets are too small to be constituents of the MSCI Emerging Markets index. Some of the larger constituents might surprise you as Argentina, Kuwait, Nigeria, Romania and Vietnam all qualify as Frontier. As a group, Frontier Markets represent 25% of the world’s land mass, 19% of the world’s population, 7% of global GDP, but only 2% of the world’s market capitalisation. They typically have younger populations that are growing faster than developed markets and are undergoing rapid urbanisation.
Many investors steer clear of frontier markets altogether; perhaps because of a fear of the unknown, illiquidity, poor corporate governance or political risk. However we believe that – if the right investments are selected and are included as a risk-appropriate weighted position with clients’ portfolios – there are opportunities that can be benefited from. Frontier markets are at an early stage of their development. Many were built around extracting oil and natural resources; supported by basic banking sectors that were built to support those industries. Arguably the real opportunity is within the consumer sector, as growing populations and low labour costs lead to more manufacturing jobs and in turn create an emerging middle class able to purchase goods on a regular basis, and move away from subsistence living.
Via our carefully selected and monitored third party fund managers, we have access what we believe are great companies, in markets which have a low correlation with developed markets and with each other. What holds true in Argentina may well be very different to the goings on in Nigeria or Romania. These markets are at a similar stage to those of the emerging countries 20 years ago and those emerging markets have performed fantastically well over the last two decades. The opportunity for investors lies in the Frontier Markets repeating the success, growth and performance of the Emerging Markets that preceded them.
This article appeared in Business Brief - May 2018