Paul Korngiebel is the portfolio manager for the Boston Partners Emerging Markets Long/Short Fund. We recently caught up with Paul, who will be speaking at our 4th Annual Liquid Alternative Strategies Summit (May 1 – NYC), to hear his thoughts on what opportunities he sees in the Emerging Markets space.
JV Events Group: Why should investors consider investing in Emerging Market Long/Short?
Paul Korngiebel: For the past 15 years emerging market economies have experienced substantially higher growth than developed economies. This trend is expected to continue for the foreseeable future. Despite the attractive growth, volatility of returns keeps many investors away or under allocated to emerging markets. Boston Partners offers the Boston Partners Emerging Markets Long/Short Fund with the goal of allowing investors access to active, emerging markets returns with meaningfully reduced volatility. We do this by running a fully invested long portfolio with gross exposure of 90-100% and variable short exposure of 30-60%. This portfolio construct allows for two important things. One, it provides a framework that affords investors the prospect of matching emerging markets equity returns with less risk. Secondly, a long short portfolio allows for the full expression of active management in the most inefficient equity markets. Boston Partners seeks to maximize that expression by adding value on both the long and short side of the portfolio.
JV Events Group: Where is your portfolio currently allocated?
Paul Korngiebel: The Fund maintains approximately 150 long positions and 80 short positions with net exposure of approximately 65%, which is on the higher end of our expected net exposure range given what we view as very attractive valuations across emerging markets. On the long side, new names have come from the Technology, Consumer Discretionary, and Financials sectors. On the short side, new names have come from the Consumer Discretionary, Industrials, and Consumer Staples sectors. From a regional perspective, net exposure to India and South Korea has been on the rise while we decreased net exposure in South Africa and China.
The bulk of our long book continues to be down-in-the-mouth value stocks with improving momentum; the long book trades at 10X FY1 eps, roughly one turn lower than the MSCI EM Index, despite better growth prospects. South Korea has been overweight and particularly strong, especially after the election of a pro-reform, pro-minority shareholder government, an unusual and very positive turn of events in over twenty years of investing in South Korea. In markets experiencing dislocations – in the following examples, all driven by political upheaval – we were able to buy high-quality businesses with barriers to entry in Brazil (after bribery scandal number two), South Africa (post the sacking of the well-regarded, pro-m market finance minister) and, to a lesser extent, Turkey, (where authoritarian rule was extended after a national vote.) The valuations for the excellent businesses we track were – and some still are — unusually depressed. We are also overweight a number of Chinese and Korean technological leaders whose platforms are expanding their lead over competitors, both in hardware and in internet, because they exhibit excellent fundamentals and momentum and, we believe, still have reasonable valuations relative to their total addressable markets. Perversely, in the case of the Chinese names, regulatory restrictions on monopoly positions seem limited because of the desire for state-control of the internet and the rule of law is limited. In Korea, certain listings of the Samsung empire remain very cheap.
We are underweight a raft of Chinese, Hong Kong and Taiwanese companies with questionable accounting and capital allocation practices (bad fundamentals and usually bad momentum, as well). We are also short many companies globally whose businesses are likely unsustainable as technology advances, infrastructure improves and regulators evolve, with particular examples in retail, consumer discretionary and industrials, as these tend to exhibit poor momentum and still have excessive valuations.
JV Events Group: How do you think about and manage risk in your portfolio?
Paul Korngiebel: Boston Partners defines risk as permanent loss of principal. The most effective ways to manage this risk is by having a diversified portfolio, a value oriented process which builds in a margin of safety, and a well-defined sell/cover discipline. Additionally, we use small position sizing and diversification to help manage the asymmetrical risk of the short portfolio.
JV Events Group: How does your fund fit into a broad-based portfolio?
Paul Korngiebel: Boston Partners Emerging Market Long/Short fits well within in a diversified portfolio that seeks growth. The improved volatility profile of EM Long/Short versus EM long-only exposure makes the strategy suitable as standalone EM exposure for investors concerned about EM volatility or ideal as a complement to EM long only exposure.
JV Events Group: Thanks Paul. We look forward to hearing more of your thoughts at the 4th Annual Liquid Alternative Strategies Summit May 1st in NYC.