William Blair, the US-based multi-asset class manager which opened an Australian office this year, will do the same in China soon to help better understand the way emerging markets are changing and how to capitalize on long-term investment opportunities there and elsewhere.
Jeff Urbina, one of William Blair’s founders in international investing, who runs the firm’s three emerging markets strategies plus the global small-caps strategy, was in Australia last week to talk emerging markets, ESG, international small caps and capacity. Capacity, of which William Blair now has a limited amount in some areas, was the only thing he was downbeat about.
“There’s the good, the bad, and the ugly in emerging markets, but the long-term outlook is favorable,” he says. “Frontier markets are probably the emerging markets of the future. Emerging markets are changing. It used to be about exploiting cheap labour, energy and so on as well as a massive infrastructure spend in China. Will these trends be the same for the next 10 years? Probably not.”
Meanwhile, the firm closed its emerging markets growth fund at about US$4 billion and will probably close its emerging markets small cap fund soon at about US$750 million. The international small-cap fund is also closed. The more concentrated emerging leaders fund, which tends towards large-cap stocks, is still open, for now.
Urbina says: “We don’t hard close our funds. We try to let existing clients have a bit more if they want, but not new clients. We are very much investment centric. The marketing people don’t get a vote in when we close.”
Urbina was a senior v.p.and portfolio manager at Van Kampen, the US mutual fund company acquired by Morgan Stanley and later Invesco, when, in 1996, he joined William Blair & Co with two others to start an international equities management division. Prior to joining Van Kampen in 1991, he spent 15 years in the commercial banking business of Citibank in Chicago.
“Because we had a small team at the start (at William Blair) we developed screens to narrow down our universe,” Urbina says. “Our focus was always on finding high quality growth companies. We screened for all the financial metrics and, over the years, we made our quant tools more sophisticated. After 2008-2009 we looked to better utilize our models so they could not only help us to find companies but also to better manage the risk in our portfolios.”
William Blair, represented by Alex Francois in Sydney, an experienced funds management marketer, blends quant analysis with fundamental research, including many company visits in all parts of the world – another reason for the proposed China office.
ESG is also an important part of William Blair’s investment culture. Urbina says that he and his colleagues have been talking a lot about ESG. The firm is a signatory to UNPRI, for instance.
“To understand what is a good investment gets to the heart of ESG issues,” he says. “Certainly there is an immediate return in the ‘G’ part. Value creation for shareholders is all about creating free cashflow. Governance is very important because without it, shareholders may miss out on the cash… You sometimes see that in Russia where the money can get frittered away. Also in Japan. It’s not just an emerging markets problem.”
William Blair uses the same international portfolio management teams for developed and emerging markets, which raises a perennial question about how an investor should treat emerging markets.
Urbina says: “We view companies the same way, no matter where they are domiciled. It all depends more on the industry they’re in than whether they’re based in an emerging market.”
GMI Inc, a consulting firm, assists William Blair on governance issues with its investments, modeling risks and a range of factors, mostly to do with governance, reporting on matters such as board independence and management compensation.
Urbina says that the ‘E’ and ‘S’ are also important, in a longer-term setting, and should not be ignored. “We don’t run an SRI (socially responsible investment) portfolio,” he says. “But we consider all the issues over the various time frames.”