Remerga, a specialist emerging markets asset manager, has launched its first Emerging Markets Sustainable Leaders Fund, which would offer Australian investors exposure to a range of diverse emerging markets thanks to its concentrated portfolio of stocks from South Africa, India, Poland, Egypt and Brazil.
The manager said it would apply an approach based on deep due diligence on sustainability as well as environmental, social and governance (ESG) factors, which were often overlooked in the emerging economies.
According to Remerga’s chief investment officer and director, Craig Mercer, ESG factors were grossly under-researched and the companies with poor ESG practices would effectively add additional cost into their businesses.
“ESG as a whole is vastly under-researched in the emerging economies so spending time trying to understand the operational integrity of the company from this perspective allows us the add value that others are not looking for,” he said.
He said that typically the problems of investing in emerging markets would include high fees and capacity constraints, a large proportion of state-owned enterprises included in the index leading to eroding returns and lack of success on average active management due to the industry’s focus on the short-term.
He also stressed the lack of emphasis on ESG factors, particularly in corporate governance, and the importance of concentrating on finding the right family-owned companies with sound ESG practices in place.
According to Mercer, there were three drivers that could help outperform in the emerging markets.
“And these are the focus on alignment of interests, sustainability factors and fundamental analysis. But the order in which we do this is very important and the very clear differentiation to the way most other people think about investing in emerging markets”
Mercer stressed that analysing the company’s financial characteristics was only the last step of the process because, according to him, investors who considered the financial characteristics of the company in the first place, would often open themselves up to “a lot of behavioural bias”.
According to Remerga, focus on sustainability was the only way to achieve superior risk-adjusted returns in the emerging markets.
