Industry Voice: MAF and EM small caps: gaining exposure to the emerging markets' profit machine

The term ‘emerging' market may seem something of a misnomer to many investors; developments in China and Brazil after all are front page news. With an average of seventeen analysts scrutinising each stock, little remains hidden at the emerging market large cap level. Certainly, the likes of Samsung, LG and Alibaba are becoming household names.

This partly explains why we chose to gain exposure to this asset class via the small cap sector. As Bryony Deuchars, Portfolio Manager - Emerging Market & Asia Pacific Equities, points out: "The sector is massively under-researched. Around one quarter of emerging market small-caps are not covered by analysts and many more are barely scrutinised."

An active approach

Our decision to implement this investment idea through our active fund was easy given the obvious limitations of ETFs within this space. Being under-researched and with mixed corporate governance standards, EM small cap is an inefficient market where ETFs have struggled to match the performance of active funds.

By buying an active fund, we aim to ensure that we only invest in high-quality companies with sustainable returns, bright prospects and a proven track record.

Small caps focus on rapid growth

We believe that small caps provide the best means of profiting from the emerging markets long-term growth story. These economies continue to play catch up with the developed world and look to be expanding at a much faster pace over the long term.

Fast-rising disposable incomes and a burgeoning middle class are driving demand for consumer goods and services such as healthcare and education, areas where small companies have a particularly heavy presence.

For example, companies that Bryony likes include Bumrungrad, a Thai hospital operator, which is benefitting from rapidly-growing demand for healthcare services not just in Thailand but from other parts of Southeast Asia.

Incomes are rising fast across the region so people can increasingly afford private healthcare, while public health provision is under strain. Bumrungrad offers world-class services that are attracting health tourists from around the world and is generating long-term, sustainable growth.

Moreover, Bryony argues that emerging market small caps continue to offer particularly good value: "In the developed world, small caps trade at a premium to their large-cap peers, while emerging markets small- caps trade at a discount to their large cap brethren."

Investor misconceptions

Finally, Bryony believes that emerging market small caps are also less risky than is generally thought: "There is a perception that this is a volatile asset class. Yet the index is significantly less volatile than its large- cap counterpart and exhibits similar levels of volatility to that of developed markets."

The Aviva Investors Multi-asset Funds' investment in emerging small cap stocks provides just another example of the way in which we leverage the expertise of our colleagues across Aviva Investors to deliver the best possible outcomes for our clients.