Insights   |   May 29, 2019

Growth and Income Investing in Emerging Markets – The Trend Continues

Since the start of the millennium, emerging market companies paying high and growing dividends have significantly outperformed the asset class. Over this time, almost half of the total return from Emerging Market equities (EM equities) has come from dividends. The MSCI EM price index has risen by around 60% in USD, while the total return index has risen by about 115%.

Investing in an Emerging Markets income and growth portfolio gives investors the opportunity to benefit from both the higher long-term growth in the underlying economies as well as a superior dividend. This may come as a surprise to some, who associate emerging markets with high growth but – rather than distribution of income – high investment spend, poor capital allocation and in some cases disregard for the interests of minority shareholders.

As bottom up investors in quality, growing companies, we have a natural bias in favour of companies run by managers that treat their shareholders well. We look for companies that generate sufficient cash flows both to invest in their future growth as well as to pay out what is not required for investments in the form of regular and growing dividends. Our portfolio has similar earnings growth than that of the market as a whole, with much higher return on equity and dividend yield. The portfolio is heavily weighted in parts of the economies which benefit from the long term growth  in domestic demand. These include the consumer sectors as well as financials, especially non-bank financials such as insurance and stock exchanges. Our focus on long term growth contrasts with perceptions of an equity income portfolio as being made up of defensive, low-growth stocks (e.g. utilities and telecoms), and cyclicals such as commodities and real estate, where  dividends may be high in a given year but are unlikely to be sustainable.

The average emerging markets company pays 35-40% of its earnings to shareholders. By comparison, the average for developed markets is around 50%. However, EM dividends are funded by  genuine cash earnings, demonstrating organic  growth, rather than being boosted by high debt and tax cuts. For companies in EM, a prudent response to earlier crises means that debt is low as a share of their capital base – indeed it has been falling – whilst for US and European companies, the opposite is the case. Additionally, for many companies in the US, dividends also compete with share buybacks.

Emerging Markets Income and Growth Strategy

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