Thematic plays, focused on sustainable companies, mark the investment strategy of Laurence Bensafi, deputy head of emerging markets equities at RBC Global Asset Management (UK) Ltd.
"Sustainability over the next five to 10 to 15 years is really key," says Bensafi. "So we really like management that we can trust, a business with a strong franchise, a strong market share, a company that plans for the future." That long-term approach favours environmentally-sensitive companies with social and corporate governance strengths.
Bensafi is one of eight portfolio managers that contribute to RBC Emerging Markets Equity Class A, led by Philippe Langham. Characteristically, a select choice of approximately 50 quality businesses with growth opportunities drives the Morningstar 5-star rated fund.
Combining thematic research with fundamental analysis, the team makes use of in-house screenings as one way of finding ideas. "We invest in such a large universe of thousands of companies," says Bensafi, "that no one can cover all those companies all the time."
The team looks for themes that are global, that will impact all countries around the world, and for the company to be investible. Therefore, some themes are seen as interesting but they don't fit the investment criteria. During the stock-specific part of the process, the emphasis is on companies with high cash flow return on investment and a sustainable competitive advantage.
Sector positions are a result of this focus, such as the approximately 24% weight in technology. Under that umbrella, digitalization has been a prevalent theme for quite a few years and encompasses a number of different sub-themes. For example, Bensafi says there was a rise in demand for smart phones starting in 2011, and that theme played out very well in the portfolio.
As digitalization expanded, "we introduced e-commerce, such as 
Alibaba Group Holding Ltd (BABA), an online commerce provider in the portfolio," based in Hong Kong, says Bensafi. "Then two years ago, we began adding electric vehicles and driverless cars, so there are a variety of companies that are involved in digitalization."
South Korea's Samsung Electronics Co. Ltd., a top holding, is favoured among the IT companies. "Samsung is doing so much more than smart phones," says Bensafi. "It's got a massive semi-conductor division and this segment has been constantly upgrading over the years. We're in a world where there are three players pretty much in the semi-conductor industry and Samsung is one of them."
Financial services, with a 23% weighting in the fund, is an ongoing theme, where the team focuses on deposit franchises. "We love the countries where the banking penetration is very low," says Bensafi, citing Indonesia, India and Peru as examples, where "we focus on the best banks in those countries." With a country's growth, more and more deposits are attracted to those banks and then you've got a healthy cycle of credit creation, adds Bensafi.
The consumer, one of the longest-running themes in the portfolio, "is one of the main themes you want to play in emerging markets," says Bensafi. The rise of the middle class is really relevant for every single region, every single country. "So we're going to find consumer companies in Latin America, Eastern Europe, in South America and others. It's really completely global, as all the themes we invest in."
Another ongoing theme is health and wellness. Aging demographics continues to drive the health theme, but it spans many other areas. "We've got healthy food companies," says Bensafi, "bicycle companies and cosmetics companies, for example. There's a variety of ways companies can invest in the theme."
Over the past two years, infrastructure as a theme was introduced to the portfolio. The team sensed about five years ago, and especially after the global financial crisis, that there was a need for infrastructure spending in emerging markets, but there was no money or willingness to invest. Then about three years ago, they sensed a shift. "Governments in many emerging markets countries were really willing to push the infrastructure agenda," says Bensafi. "For example, the new Prime Minister in India, Narendra Modi, among others. So it's not necessarily a theme you play all the time even though the need is there. You really need willingness from governments to spend."
Among the top holdings, Antofagasta PLC, a Chilean copper mining company, illustrates an infrastructure position. "Antofagasta is one of the best corporate governance companies in the mining space in terms of conservation of the environment and social issues," says Bensafi. "We're very careful when we invest in the materials sector because some of the miners unfortunately have a low rating when it comes to sustainability factors. It's also a play on infrastructure of course, because copper is used for construction and infrastructure in general." The managers think the use of copper is going to increase in the coming years.
The past few years since 2012 were not great for emerging markets, says Bensafi. "We had a really tough time. So we're just starting to see a rebound over the past two years." Currently, the valuations still look quite attractive and are still very cheap compared to developed markets. "We expect good earnings growth for this year and probably for next year. I think there are always risks when you invest in emerging markets, but I think we are more at the beginning of a better time for emerging markets than a tough time."
