“In my experience, looking under $500m (£384m) market cap introduces a level of risk both in terms of management’s ability to deliver and also underlying liquidity that we think isn’t worth it,” says Langridge.
“But there are smaller companies in that space which are on our peripheral radar because when those companies do become successful, we need to be aware of them for when they reach the appropriate size.”
Sharp recovery
The best-performing market year to date, Brazil, is a huge talking point for emerging market investors having undergone a massive revaluation this year. Home to a wealth of quality firms, which fit the bill for investment, the big question is to what extent the long-term value creation potential is now fully priced in.
Once dominated by the likes of Vale and Petrobras, a downturn in commodities has meant these are now relatively smaller in terms of the composition of the Brazilian market. So why has Brazil recovered so much this year?
“It is not so much that commodity prices have recovered but because of changes in political risk. There has also been a reassessment of the extent to which the Brazilian administration can manage the massive adjustment that is taking place in the economy,” says Langridge.
“That more favourable view means a great deal of outperformance has been derived from the deep-cyclical, deep-value end of the spectrum.
“These are companies, typically in the commodity space, with stretched balance sheets that had over-invested through the last cycle and faced an urgent need to restructure.”
Exciting proposition
As interest rates and bond yields have fallen this year, the increasing global liquidity and recovery in commodity prices has meant that those companies that were facing “extinction” at the end of last year have had a major lifeline extended to them and they have been the big outperformers.
“That rotation from quality to deep value has been one of the defining characteristics of this year in emerging markets,” says Langridge. “That is behind the sharp recovery in asset prices in Brazil, but commodities are only one part of the story.”
Another major market the team have been constructive on is India, where the portfolio has a broad spectrum of investments in the consumer space and in more cyclical industries, such as cement making.
Across Asia, the increasing affluence among the growing middle classes is an exciting proposition, with younger consumers adopting very different spending habits.
“There is a proliferation of e-commerce, which is a function of the fact that young populations with access to cheap smartphones and data are reshaping the retail landscape across emerging markets much more rapidly than in the developed world,” Langridge says.
Another sector of interest is financials, particularly the developing mortgage industry in India, while the managers have also made a play on the propensity of the emerging consumer to buy insurance.
Langridge adds: “The big names are well positioned in their space and have demonstrable track records. They understand the growth potential of their businesses, as well having a powerful distribution network to support future growth.”
