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Deep Dive: These emerging-market fund managers focus on the explosive growth of consumer spending

Tom Masi and Nuno Fernandes, managers of the Trilogy Emerging Wealth Equity Fund, focus on consumer intake in rising markets. That has led them to varied investments comparable to a retro-motorcycle corporate, a high-alcohol liquor producer and a digital-payment firm.

The Trilogy Emerging Wealth Equity Fund TYWVX, -1.76%  is sub-advised by means of Trilogy Global Advisors, an associate of AMG Funds. The fund is slightly small, with belongings of about $68 million. However, Masi and Fernandes run a complete of $2.6 billion in shopper money following the same strategy.

Strategy

We just lately appeared on the Emerging Markets Internet & Ecommerce ETF EMQQ, -2.00% which contrasts itself with the largest emerging-markets index finances — the Vanguard Emerging Markets Stock Index Fund VEIEX, -1.62% the Vanguard FTSE Emerging Markets ETF VWO, -1.46%  and the iShares Emerging Markets ETF EEM, -2.03%  — by means of not maintaining stocks of state-controlled companies and, as its title implies, specializing in web-based companies.

Rather than tracking a custom-designed index that specializes in web trade, the Trilogy Emerging Wealth Equity Fund is actively managed to make the most of a shift in rising markets “toward intake, versus being pushed by means of exports to developed nations,” Masi mentioned in an interview on March 19.

In the same interview, Fernandes adopted one of the themes discussed by means of Kevin Carter, the founder of EMQQ, spelling out what he and Masi believe is a major problem with the largest emerging-market index finances that track the extensive EM indexes:

“The MSCI Emerging Markets Index is about 57% weighted between state-owned companies and family-controlled companies. These tend to be companies with poor corporate governance.”

The FTSE Emerging Markets All Cap China A Inclusion Index may be heavily weighted toward state-owned and family-controlled companies, however Fernandes didn’t point out this index particularly.

This does not mean the Trilogy Emerging Wealth Equity Fund excludes state- or family-controlled companies, handiest that it's much more selective than the market-cap-weighted index.

Trilogy Global Advisors
Tom Masi, senior portfolio supervisor, Trilogy Global Advisors.

The primary point of the Trilogy EM strategy, in keeping with Masi, is its focus on consumer-driven companies.

“You are going to have more than Three billion people input the middle magnificence [in emerging markets] by means of 2030,” he mentioned, whilst predicting that “by means of 2050, up to 50% to 60% of worldwide intake will come from rising markets.”

Fernandes mentioned handiest about 20% of the MSCI Emerging Markets Index is weighted toward the sectors that the Trilogy Emerging Wealth Equity Fund is focused in: consumer staples, consumer discretionary and well being care.

Companies that are compatible the invoice

Masi and Fernandes discussed companies in India, China and developed markets held by means of the fund that provide consumer services and products that are increasingly well liked by emerging-market consumers.

India

Masi and Fernandes mentioned that on the subject of economic reform, “India is about 10 years behind China,” however Masi mentioned the Indian executive’s new biometric ID device covers about 1 billion people and about 300 million new bank accounts had been opened over the past five years.

“So executive payments can move to people whilst slicing out the local corruption ranges,” he mentioned.

Masi known as HDFC Bank Ltd. HDB, -Zero.90%  “a number one franchise” benefitting from the transition to electronic payments in India.

He additionally went in a special course, highlighting Eicher Motors Ltd. 505200, -Zero.52% EQEICHERMOT, -1.21% which makes Royal Enfield motorcycles. Most of the Royal Enfield motorcycles are slightly light and easy to maintain on account of their unfashionable design. Masi known as Eicher Motors an “superb franchise” and mentioned Royal Enfield motorcycles have been “within achieve of aspirational buyers in India.” He mentioned consumers in India have been interested in the motorcycles’ “old-world feel,” and that the extent of pleasure at a Royal Enfield dealership is very similar to what one would possibly to find at an Apple AAPL, -2.32%  retailer.

China — consumer products

One of the weaknesses in the MSCI Emerging Markets Index cited by means of quite a lot of buyers over the past few years was that it has traditionally excluded “A-shares,” which are the ones traded in mainland China, moderately than in Hong Kong. That is changing this yr as MSCI slowly stages them in. Masi and Fernandes named two of the A-shares held by means of the fund — companies that make baijiu, which is a standard top class liquor that is very excessive in alcohol content material: Kweichow Moutai Co. 600519, -2.13%  and Wuliangye Yibin Co. 000858, -1.05%  

“The Chinese consume the same quantity of alcohol as we do, however the top class products constitute about 2% of the marketplace,” Fernandes mentioned. As the middle magnificence grows in China, he expects annual sales enlargement in the category of about 20% over the next 10 years.

Moutai is the extra venerable of the two manufacturers. Masi described the method by which the corporate makes baijiu, aging the liquor in pits “that are hundreds of years previous,” this means that a restricted provide of the highest-end product.

China — consumer credit

Masi estimated that marketplace penetration for electronic payments by means of consumers in China is about 50 occasions what it's in the U.S. Ant Finanical, an associate of Alibaba Group Holding Inc. BABA, -1.87%  is the largest corporate beneficiary of this phenomenon, with “a 54% marketplace share,” he mentioned. Ant Financial is expected eventually to go with the flow its personal stocks, which could mean tremendous positive factors for Alibaba and its shareholders. Alibaba was the fourth-largest maintaining of the Trilogy Emerging Wealth Equity Fund as of Feb. 28.

Trilogy Global Advisors
Nuno Fernandes, senior portfolio supervisor, Trilogy Global Advisors.

While electronic payments in China most often mean cash payments, Fernandes mentioned “increasingly more Chinese consumers are borrowing.” The largest bank in the country by means of credit-card issuance is China Merchants Bank 3968, -Three.57% which is owned by means of the fund and controlled by means of the Chinese executive.

Ant Financial has been rising its unsecured consumer-lending industry much more abruptly than China Merchants Bank has, however Fernandes explained that the fund holds China Merchants Bank stock because “the retail marketplace is underpenetrated” and Ant Financial isn’t but publicly traded.

Developed markets

Some products craved by means of consumers in rising markets are handiest equipped by means of companies in developed markets. Fernandes named two examples held by means of the fund: Novo Nordisk NVO, +Zero.19%  and LVMH Moet Hennessy Louis Vuitton SE LVMH, -1.52%  

“If you move with a natural rising supervisor, you don't seem to be going with the intention to invest in the ones,” Fernandes mentioned.

Biggest holdings

Here are the highest 10 holdings of the fund as of Feb. 28:

Company Ticker Share of fund Country Industry Total return - 2018 thru March 19 Total return - Three years
Baidu Inc. ADR Class A BIDU, -2.55% 6.Zero% China Internet Software/ Services eight% 18%
Sberbank Russia OJSC ADR SBER, -1.17% five.7% Russia Regional Banks 7% 327%
Sands China Ltd. 1928, -4.01% five.Zero% China Casinos/ Gaming 14% 75%
Alibaba Group Holding Ltd. ADR BABA, -1.87% 4.7% China Internet Retail 13% 127%
China Construction Bank Corp. Class H 0939, -2.18% 4.five% China Major Banks 18% 55%
Naspers Ltd. Class N NPN, -Zero.44% 4.4% South Korea Cable/ Satellite TV -1% 90%
Yum China Holdings Inc. YUMC, +Zero.25% Three.nine% China Restaurants 2% N/A
LG Household & Health Care Ltd. 051900, -1.67% Three.4% South Korea Household/ Personal Care -Three% 56%
Turkiye Garanti Bankasi Anonim Sirketi GARAN, -1.64% Three.4% Turkey Regional Banks 1% 27%
PICC Property & Casualty Co. Class H 2328, -1.14% Three.Three% China Property/ Casualty Insurance eight% 7%
Sources: Morningstar Direct, FactSet
Fund efficiency

The Trilogy Emerging Wealth Equity Fund was established in March 2015. Here’s how the fund’s 3 share classes have performed against their Morningstar category and the MSCI Emerging Markets Index in U.S. dollars:

Ticker Total return - 2018 thru March 19 Total return - 2017 Average annual return - Three years
Trilogy Emerging Wealth Equity Fund - magnificence N TYWVX, -1.76% Three.2% 42.1% 12.2%
Trilogy Emerging Wealth Equity Fund - magnificence I TYWSX, -1.76% Three.Three% 42.6% 12.five%
Trilogy Emerging Wealth Equity Fund - magnificence Z TYWIX, -1.76% Three.Three% 42.7% 12.7%
Morningstar Diversified Emerging Markets category Three.Three% 34.2% nine.Zero%
MSCI Emerging Markets Index - U.S. dollars 4.2% 37.eight% 10.6%
Sources: Morningstar Direct, FactSet

Performance for all 3 share classes measures up moderately smartly, however you can see that the proportion magnificence makes a difference.

• The magnificence N stocks have a $2,000 preliminary funding minimal, with annual bills of one.45% of belongings, in keeping with Morningstar, which considers the bills for this magnificence “above average.”

• The magnificence I stocks have a $100,000 minimal and annual bills of one.16%, which Morningstar considers “average.”

• The magnificence Z stocks have a $five million funding minimal and annual bills of one.05%, which Morningstar considers “below average.”

For all 3 share classes there is a 2% price for stocks sold within 60 days of purchase.