Celebrating 10 years of the RBC Emerging Markets Value Equity Strategy

Sep 11, 2023

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We take a differentiated approach to Value investing.

The RBC Emerging Markets Value Equity Strategy reached 10 years since its inception in July 2013, with a total AUM of USD1.286 billion1.

Over this time, the strategy has outperformed both its primary benchmark, the MSCI EM Index, and the Value index, the MSCI EM Value Index, despite the Value style being out of favour for the majority of this period.

When reflecting on the past 10 years, we believe there are a number of aspects that have enabled us to build a differentiated portfolio and deliver a strong performance track record. In our piece, we discuss:

Quality value approach: we seek to invest in temporarily mispriced securities with strong fundamentals and catalysts for re-rating. We look at traditional valuation measures, such as P/E and P/BV, as well as metrics of value creation over time, such as growth, cash-flow returns on investment and dividends, as well as the quality of a company. The strategy has consistently traded at a significantly cheaper valuation than the MSCI EM Index, without sacrificing quality.

Durability and ESG: a critical part of our investment process, and specifically our bottom-up research, is our focus on ESG which helps us mitigate ESG-related risks and focus on those companies with durable business practices that are able to achieve sustainable, long-term returns. One outcome of our focus on ESG is the carbon intensity of the strategy, which is significantly lower than that of the MSCI EM Index.

Thematic top-down research: we feel that our independent research is a key source of competitive advantage. Our top-down research is based on five structural, long-term themes, all of which have been in place for several years and some since inception. Digitalisation is one of these themes, and within our Value strategy we have maintained consistent exposure to technology, which is unusual for a Value approach.

A diverse team focused on continuous improvement: we feel we have the optimum team in terms of size, structure and skill set. We have built a diverse team in terms of gender, culture, education and experience, while creating a collaborative environment where everybody feels a strong sense of ownership and responsibility. In our piece, we talk about how – at our annual offsite – we review areas that have been successful, as well as those where we can improve.

The case for Value investing

The new economic regime, characterised by higher interest rates, higher inflation, and higher raw material prices, has made quality Value investing more attractive as there is greater emphasis on profitability, strong balance sheets and dividends. On the other hand, growth will be harder to come by as money is no longer free and the economic environment is more challenging.

We have also seen the profitability of Value names improve, evidenced by the spread of RoE between expensive and cheap companies narrowing, while the spread of performance between Growth and Value is still very wide, despite the better performance of Value in recent times.

What we have found is that the elevated valuations of the most expensive Growth stocks aren’t justified by their fundamentals, and we expect to see further weakness in this segment, given the pressured economic backdrop, higher rate environment and rising competition.

1 As at 30 June 2023.

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