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Fund manager's stock-pick focus includes a key Nvidia partner
Arjun Jayaraman, director of quantitative research at Causeway Capital Management, shares his insights on emerging markets investing. His fund, Causeway Emerging Markets, has outperformed the MSCI Emerging Markets Index, with an 18.4% return so far in 2024. Jayaraman emphasizes the importance of quantitative analysis, with 80% of the fund's valuation based on financial data. The fund's portfolio is diversified across 21 countries, with a focus on Asia, particularly China, India, Taiwan, and Korea. Jayaraman highlights three favorite stocks: Ping An Insurance Group of China, Taiwan Semiconductor, a key partner of Nvidia, and Kia, the Korean automaker. He also expresses concerns about potential tariffs and their impact on export-oriented companies in emerging markets.
Investing in emerging markets takes time, and to do it successfully one almost must ignore what's happening in U.S. markets.
The dynamics are just different, and the U.S. market has been on a tear since the presidential election.
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Just ask Arjun Jayaraman, director of quantitative research at Causeway Capital Management in Los Angeles and one of four managers of the firm's Emerging Markets fund.
The fund, which has about $2.1 billion in assets, also has six quantitative-oriented investing specialists to support the managers.
Causeway's goal is to beat the MSCI Emerging Markets Index. The index is just that: It tracks 1,278 large-cap and midcap stocks domiciled in some 24 countries.
The fund has succeeded both in the investor class fund ( CEMVX ) and its institutional class ( CEMIX ) .
The funds are up about 18.4% so far in 2024 and have risen more than 30% over the past 12 months. The MSCI index is up 11.7% this year.
(The difference is the minimum investment required: $5,000 for investor and $1 million for institutions. This article will focus on the investor fund.)
But emerging markets investing can be a volatile business. There are country risks to consider as well as the nuts and bolts of a company's business and those of its competitors.
The investor fund fell 23% in 2022, but that was a terrible year for stocks generally. Another bad year: 2018, a year dominated by U.S.-China trade tensions. The fund fell 18%.
Causeway's Emerging Markets portfolio currently has about 181 stocks domiciled in 21 countries.
TheStreet.com interviewed Jayaraman as part of our Expert Interview series .
TheStreet: What's your outlook for stocks in the U.S.?
Jayaraman: We're mostly in a sweet spot domestically because interest rates generally have been falling. The Federal Reserve is now cutting rates. The dollar is lower, and the yield curve has shifted lower.
TheStreet: How optimistic are you about Emerging Markets?
Jarayaman: We do have concerns about what the incoming Trump administration might do with tariffs. Companies in emerging-market countries are very export-oriented, and high tariffs would hurt their businesses. It's a serious concern.
The Street: Describe how the fund invests.
Jayaraman: We use quantitative analysis with a fundamental layover. That means we emphasize all of the financial data for a company including earnings, price/earnings ratio, cash flow, dividends and whether a company is buying back shares. Then we look at the fundamentals of the country. Is the country stable? Are the laws and regulations applied evenly and predictably. We do that for each individual stock.
TheStreet: Which is more important?
Jayaraman: About 80% of our valuation of a company is based on the quantitative analysis.
TheStreet: The MSCI Emerging Markets Index tracks more than 1,200 stocks. How many stocks are in your fund?
Jayaraman: The holdings range from 120 to 200 stocks. Right now, it's about 180.
The Street: What countries command the most attention?
Jayaraman: Asia except Japan. About 81% of our portfolio comes from companies in that part of the world. About 27% of the fund assets are in China. Indian investments represent about 19%.
The Street: Do you favor any specific sectors?
Jayaraman: No, we make investments across all of the major sectors. We do like financial stocks. [Note: Three of the fund's top 10 holdings are financials: banks, financial services and insurance.]
The Street: What countries do you like the most now?
Jayaraman: Taiwan, Korea and India. The first two have big and growing technology companies and are big exporters. India is in the midst of a secular growth boom and needs lots of infrastructure.
TheStreet: Can you name three favorite stocks right now?
Jayaraman:
TheStreet: On Taiwan Semi: There are reports almost daily of tensions between Taiwanese and Chinese military planes and vessels. China insists Taiwan is part of greater China. Do you have any worries that China might try to forcibly take over the island nation?
Jayaraman: Not really.
TheStreet: Why not?
Jayaraman: Our sense is that they've paid attention to Russia's war with Ukraine and now appreciate the potential costs of an invasion. So, we don't expect much change in the situation for now.
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