Marc Girault, Portfolio Manager, HMG Finance
For equity investors keen to tap into long-term Emerging Market economic growth, but wary of the increased risks, we offer a possible solution: ‘The Subsidaries Concept’ – investing solely in listed ‘subsidiaries’ of developed market companies operating in Emerging Markets.
How do we define a subsidiary? We do not apply the strict accounting definition of a subsidiary to our concept, although most of the companies we invest in do adhere to this. The concept includes companies with a licensing or distribution agreement with a Developed Market company, or a company listed on a Developed Market that operates predominantly in the Emerging World. What is important to us is whether the company receives Developed Market oversight, and benefits materially from its relationship.
How big is this investment universe? We have discovered over 800 subsidiaries, well diversified by region and sector, with a combined market cap of over USD 2,000 billion – as big as many stock markets throughout the world.
Why invest in subsidiaries?
- Developed market levels of governance: this reduces risks and provides huge ESG benefits.
- Commercial advantages: these are world-renowned companies with a history of profitable overseas expansion – their subsidiaries benefit from the technology, brand and experience that made their parents a household name.
- Focused on their local market: parents will set their subsidiaries up to sell goods and services domestically, typically only focused on one industry – this allows us to gain exposure to individual sectors within the economies that interest us.
- Income: without specifically targeting income, our Global Emerging Markets Fund has consistently yielded over 4% - a natural side-effect of the subsidiaries concept.
- When adding all of these factors together we are able to take a long-term view, accessing the fast-growing economies of the Emerging World in a long-term, sustainable, risk-averse way.