A Canadian institution will next month seed AllianceBernstein’s new Emerging Consumer strategy with $10 million. The strategy, which has returned 41 per cent on paper in the two years since its inception, relies on “grassroots research” in addition to traditional top-down and bottom-up analysis to actively invest in stocks that will benefit from consumption trends in emerging markets.
The fund’s London-based portfolio manager, Tassos Stassopoulos, who was in Sydney last week, described grassroots research as “on-the-ground”, which involves using translators and guides to talk to a country’s poorest people in their homes and villages in order to discover consumption habits, needs, aspirations and priorities.
“This approach has helped us to explode several myths that have grown up around emerging-consumer investing,” he said. These include the myths that emerging consumers want cheap goods, luxury goods-consumption is just a China bubble, and emerging markets exposure should be through companies in emerging markets.
“The emerging consumer theme is different from emerging market investing and the challenge is how to capture these opportunities,” he said.
“We want to invest in companies with the highest exposure to this transformation and the scale of the opportunity means that the smaller players of today can be global leaders tomorrow.”
Conquer-chaos theory
Stassopoulos shared other insights from his grassroots research, including his belief that entrepreneurs with “experience conquering chaos” were the most likely to succeed, pointing to the Chinese, Indonesians and Lebanese. He added that countries where the people had no alternative but to stay put and succeed were more likely to outperform, contrasting Thailand, where factory workers often dreamed about moving back to their villages to lie in hammocks and eat fruit, to middle-eastern countries where new migrants and refugees had no alternative but to go forward and advance in life.
Progressive hindsight
Emerging market consumption is forecast to be worth up to US$30 trillion by 2025, according to McKinsey Consulting. However, Stassopoulos warned that investors who take a one-size-fits-all-approach to emerging markets by investing in an index fund, exchange traded fund or pure fundamental bottom-up strategy risk missing out on maximising returns.
“These approaches are likely to lead to stocks that are yesterday’s success stories, when ideally investors want to identify tomorrow’s,” he said.
“To do this, investors need to think like companies that are active in emerging consumer-markets and know where companies will go before they know themselves.”
Part of AllianceBernstein’s investment process includes a company pre-mortem, also referred to as “progressive hindsight”, as opposed to a post-mortem. This involves looking backwards at a hypothetical situation.
“Rather than asking, what are the chances of a specific company failing, we assume that the company has failed in three-years-time and then ask why? We need to work out what went wrong as part of our risk assessment.”
