Small- And Mid-Cap Companies Are The Catalyst For This Emerging Markets Fund's Outperformance

One emerging markets fund performed better than others throughout the pandemic thanks to a deep awareness for concepts that go unnoticed.

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Vivek Tanneeru stated that he has maintained his focus on small- and mid-cap firms to produce alpha since joining the Matthews Emerging Markets Little Companies (MSMLX) fund in 2020. (returns above a benchmark). The MSMLX has a five-star Morningstar rating and $409 million in assets under management.

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The fund is well regarded for a reason: MSMLX not only ranks in the top 4% of funds in its category over the past year, but also among peers during the past three, five, and ten years. It has increased this year by 3.5%, outpacing the category's 2.4% increase and coming close to line with the S&P 500.

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Tanneeru joined MSMLX in the early stages of the epidemic, so his time there was quite brief. But, the portfolio manager has been with Matthews Asia since 2011, and he brings a solid career history with him. For instance, Morningstar awards his 2015-founded Matthews Emerging Markets Sustainable Future fund (MISFX) five stars.

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Such accomplishment was made possible in part by Tanneeru's respect of field research. Before the epidemic, Tanneeru claimed his company had up to 4,000 meetings a year with businesses, and he anticipates that after travel has resumed since the middle of 2022, Matthews will finally reach that number of meetings.

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In our universe, about half of the small-cap companies lack research coverage. So, the sell-side researchers are not aggressively covering them, according to Tanneeru. "It really opens up options for folks who are prepared to put in the work and go meet these companies on the ground," one individual said.

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Investors might find a goldmine of ideas as a result of that due investigation. Tanneeru, who claimed to have experience working on all four continents, stated that concentrating on small-cap stocks has helped him identify well-run businesses that are taking advantage of the booming consumer development in Asia as well as cutting-edge innovations emerging in developing nations.

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I've considered small and mid caps as a pretty good approach to obtain ideas that can increase performance throughout my career, he continued.

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Pandemic champions

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For the past three years, the MSMLX has outperformed its competitors. According to Morningstar, it declined 16.8% in 2022, which was still less than the approximately 20.9% decline in its category. It increased by 22% in 2021, significantly above the 0.4% gain among peers. In contrast to the 17.9% growth observed in the category, it increased by 43.7% in 2020.

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Beneficiaries of economies reopening after the epidemic were among the profitable stocks that helped the portfolio prosper. Consumer discretionary brand names experienced a significant increase as Covid limits were relaxed, whether in India or the Philippines.

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The portfolio's greatest gainers in 2022 included hotel operator Lemon Tree Hotels located in India, are the retail mall operator Phoenix Mills.

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In the midst of the epidemic, MSMLX began purchasing Lemon Tree Hotels. According to Morningstar, the fund had a 4% allocation to the company as of September 2022, making it the fifth-largest investment at that time. The stock shot up 84% last year after India loosened Covid limits and consumption increased above 2019 levels.

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The firm also purchased stock in Phoenix Mills, a real estate investment company that owns a number of desirable properties. The stock of the corporation increased 43% in value in 2022 due to relationships with significant pension plans like the Canada Pension Plan Investment Board and other sovereign wealth funds like Singapore's GIC.

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"When it came to reopening post Covid, India and Indonesia were two of the last to do so. Thus, the sector did exceptionally well as discretionary spending increased in both of those economies, according to Tanneeru.

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Tanneeru is currently quite optimistic on Legend Biotech as a stock. The stock, which made up 4.1% of MSMLX's top 10 holdings as of January 2023, was the only one with a U.S. listing. A cell therapy business called Legend, which collaborates with Janssen Biotech, is working to develop medicines for the blood cancer multiple myeloma. Legend has facilities in both China and the United States.

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There are various competing items accessible in the United States, but in Tanneeru's opinion, Legend has the greatest product of its kind. After increasing 7% in 2018, the sponsored ADRs are down roughly 5% in 2023.

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2023 and later

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Tanneeru, who joined Matthews after employment at the World Bank, Arthur Andersen, and Pictet Asset Management in London, continues to scout far and wide for superior results. The graduate of the London Business School intends to reduce part of his exposure to India, which was overrepresented in the portfolio. Above and above the 15% allocation for its category, MSMLX had a close to 30% allocation to the nation in September.

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Instead, he claimed he was increasing his stakes in China due to the country's alluring values. He has a particular interest in high-quality industrial equities that have exposure to industries like semiconductors, robotics, and renewable energy.

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"China aspires to have a local supply chain of its own to meet domestic wants and needs. Thus, in general, those are the regions where we discover good chances, according to Tanneeru.

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Reopening plays, which don't just include eateries and travel-related businesses but also medical gadget manufacturers for consumers who put off treatments due to Covid, are other companies in China that might see a rise.

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Tanneeru is also looking at other possibilities. He prefers a conglomerate with exposure to banking, auto manufacturing, and retail in the Philippines, which has been slow to recover from the pandemic. He believes the stock is one that investors have become overly pessimistic about, but he will not name it.

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He remarked, "It's a conglomerate, but it does provide us a very broad exposure to the Filipino economy. So, we believe the stock can perform higher than expected.

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Also, he is looking at a few names in Eastern Europe, where equities, in his opinion, are currently undervalued following the commencement of the Russia-Ukraine war. Tanneeru specifically stated that he is interested in a Polish e-commerce possibility, which he once more chose not to name.

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Tanneeru believes that small caps are a more nimble approach for investors to enter emerging regions and capitalize on local customer preferences.

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The clearest manifestation of what I believe is running this plan, Tanneeru remarked. What presents a substantial chance for alpha production is small- and mid-cap stocks.