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Seeking Innovation Through the Lens of ESG
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Position Size is Key to Managing EM Risk
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Evaluating Governance at EM Companies

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Among the most important considerations for a growing number of investors who may be considering small- and mid-cap emerging market stocks are those companies’ environmental, social and governance practices. That’s why we evaluate investment opportunities partially through an ESG lens.

In my view, it’s not enough for a company to comply with ESG standards; all the companies in its supply chain also must follow accepted ESG principles. By largely avoiding commodities stocks, we are able to bypass most environmental concerns. For us, however, the social principles are the true focus. We won’t invest in companies that exploit people or whose profits are bolstered by cheaper labor costs than its competitors.

Evaluating Corporate Governance Standards

Our view is that there is no substitute for in-person, on-the-ground research of small- and mid- cap emerging market companies. This carries over in our approach to evaluating an investment candidate’s corporate governance standards. Our focus on investing in companies with strong governance requires meeting with the management teams of those companies to ensure that the interests of investors and management are aligned.

In my opinion, one of the advantages of investing in small- and mid-cap companies is that their business models tend to be simple and straightforward, which makes it more difficult to hide any potential irregularities.

Managing Portfolio Risk

Small- and mid-cap emerging market companies have much in common with their developed markets counterparts when it comes to risk and volatility profiles: Both are historically riskier than larger-cap companies.

It is our belief that, while each company has a certain amount of “idiosyncratic risk,” the risk correlation among emerging market small- and mid-cap companies is fairly low. That’s because in a portfolio that includes companies located in Asia, South America and Africa, each is focused on its own local and regional markets. The connections among those businesses are minimal and that results in a low covariance of risk and a fairly stable portfolio.

For us, one of the keys to managing risk when investing in small- and mid-cap emerging market companies is controlling position size. That means not having outsized positions in any company that has the potential for high volatility.

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