WCM Sees Growing Opportunity in Emerging Markets

Ise: One important thing to note about our approach at WCM: It is a global generalist model, which is probably an unfamiliar idea to a lot of people in the investment world. Many of our peers believe in sector specialists and different teams for emerging markets versus global or international. By contrast, WCM uses the same team, using the exact same framework, across all investment areas.

Trigg: For us, it’s about finding structural inefficiencies. First, we look for companies that aren’t just competing right now, but those with a strong potential to grow their competitive advantage over time. Secondly, we look for companies with cultures that are well-aligned with their long-term growth strategy. Most fundamental, bottom-up investors talk about a company’s estimated intrinsic value and buying at a discount to that estimate. You have to ask yourself, if everybody is talking about those same attributes and doing the same thing – how can you be different? How are you going to produce different results than everybody else?

Ise: We use the term “pattern recognition” to refer to how businesses all over the world are taking advantage of the high speed of information and the fast pace of technological change. In other words, if something is happening in any part of the world, and it’s successful, it’s very quickly replicated somewhere else, and the best companies recognize this. Now, more than ever, there are entrepreneurs everywhere in the world. There is access to capital and technology. We look for companies that put innovation first, in the sense that they are thoughtful about where the world is going and who they’re working to displace.

Trigg: At a sector level, our approach looks really different from the benchmark. A focus on innovation, long-term moat trajectory, and culture has led us to sectors like technology, healthcare, and consumer. I think those sectors are vastly underrepresented in the emerging markets indices, both in terms of their current, and more importantly, future relevance.

Trigg: This is a question we’re asked all the time. There are certainly differences, but generally speaking, our approach to understanding the culture of an emerging markets firm is very similar to what we do for a developed markets firm. One difference is that with emerging markets firms – especially in the sectors on which we focus – we’re often looking at first generation companies that have a strong founder. In the best cases, these businesses tend to be very aware of what’s happening in the world, and what other companies and competitors are doing. But in general, when we look at a company’s culture, we ask, do they have the right behaviors and values to allow them to achieve their strategy and grow their competitive advantage over time? Are they going to evolve and adapt? Are they going to look at their mistakes and learn from them? We believe those things are important in every market, so at this foundational level there are really not huge differences in how we approach emerging markets in terms of cultural analysis.

Ise: I agree. Successful cultures have similarities across all markets – chief among them being how they motivate talented people with the ability to recognize successful patterns and replicate them. And that assumes you can find those talented people, which is not always easy. In technology, for example, we know there is a massive shortage of talent globally – particularly of engineers and software developers. But the challenges around motivating people are the same whether you’re in the US, China, or Brazil. How do you motivate people to stay loyal and drive innovation? These principles are the same across all markets. And the world has changed. The standards of twenty years ago – when we all heard stories of inhumane factories and things like that – those practices aren’t acceptable anymore. Companies have to find new ways to remain relevant, stay ahead of competition, and sustain cost advantages. The moment you become complacent, things change.

Trigg: I’d say it’s less that our approach has evolved than it is that emerging markets have evolved. For example, if you go back two decades, technology represented about 5% of the EM index. Today it’s closer to 25%, and we believe the index still doesn’t represent where things are going. Over those same two decades the WCM framework has essentially been the same – focusing on competitive advantage and culture. Nowadays, with emerging markets being more than just resources and financials, competitive advantages and cultures are much more pertinent factors. That’s what we mean when we say the emerging markets space is essentially coming toward us, and that this ongoing change is incredibly favorable for what we’re doing.

Ise: I’d echo that, and further note that this change in emerging markets also means that we’re seeing many more EM opportunities all over the world. EM consumers and businesses see what works in developed markets and they want these same things. They recognize their time has come. The EM space, at least on a relative basis, hasn’t been in the best position in recent times – negative interest rates, a strong US dollar, geopolitical uncertainty. But I think it’s very well-positioned as an asset class. Most importantly, when you look at emerging markets versus developed markets, there are arguably more high-quality growth opportunities. And WCM approaches the space without complacency. We never assume our top EM choices are going to be the same next year as they are this year.

Trigg: It was pretty simple. A big part of WCM’s culture and DNA is entrepreneurial – we want to keep growing, yet without losing our focus and our culture. When the opportunity to partner with Natixis came along, it was perfect. We see it as a way to sustain our entrepreneurial spirit while growing our distribution potential. For us, it was a no-brainer and we’re thrilled with the partnership.