GuruFocus had the pleasure of hosting a presentation from James Fletcher, the founder of Ethos Investment Management, a focused emerging markets equities fund. The fund launched in January 2022 with over $100 million in committed capital from some renowned anchor clients.
Previously, Fletcher was director and senior portfolio manager of the EM small and mid-cap equity strategy at APG Asset Management, where he managed a fund with $1.1 billion in assets under management. The fund utilized a long-term, active portfolio approach to invest in high-quality businesses with strong environment, social and governance integration. He previously worked as senior portfolio manager of EM Equities at Kayne Anderson Rudnick, where his EM fund was Morningstar 5-Star rated. Previously, Fletcher was senior analyst at Westwood Global Investments, a top performing EM boutique based in Boston.
Fletcher is a CFA charterholder. He is also the founder of the global non-profit, Young Investors Society, which has risen to become the largest investment program for high school students around the world, reaching over 1,200 schools in 24 countries. Fletcher has an undergraduate degree in finance from Brigham Young University and is fluent in Portuguese and proficient in Spanish and has lived in Brazil and Hong Kong.
Watch the full stream here:
Key takeaways
Fletcher kicked off the presentation with a brief outline for his presentation before jumping into some background on the fund. He explained that by adding in ESG factors to the equation when looking at investments, he has actually seen increased returns thanks to finding high-quality businesses and interacting with management teams to help them improve.
Fletcher continued to explain that he has seen an explosion of companies in emerging markets over the last decade. He has seen the number of investible companies in structural growth sectors expand rapidly, with consumer discretionary, health care and information technology leading the charge. Due to rising education levels and increased entrepreneurship, these sectors have seen upwards of 300% growth since 2009.
The small- and mid-cap companies offer what Fletcher believes to be the last frontier of inefficient markets. He believes that SMID companies in emerging markets have seen significantly less sell-side analyst coverage, which causes significant de-rating. These companies end up trading at attractive prices with better risk and return metrics, in his opinion.
Transitioning to the structure of the fund, Fletcher explained that it expects between 60% and 85% of assets to be invested in the consumer, health care, internet and information technology sectors. Currently there are around 15 different countries that see investment within the portfolio and the portfolio maintains between 30 and 50 well-researched, high-quality positions.
He rounded out the core of his presentation with a brief exploration into some of the different emerging markets the fund is invested in. He explained the fund is overweight in both Taiwan and India, but he has started to pull back some of the India exposure as the market has risen in value. He believes China has traditionally been an underperformer and many people have been scared of regulatory risks. However, those who find investments on the right side of China’s common prosperity initiatives can still find great investments.
Stocks
The first stock example that Fletcher used was Centre Testing International Group Co. Ltd. (SZSE:300012, Financial), which is the largest testing and inspection services company in China. Fletcher dove into every aspect of the company’s financials that he believes make for a great investment and explained the company has an exceptional management team leading them into the future.
The second stock example Fletcher looked at was NICE Information Service Co. Ltd. (XKRX:030190, Financial), which represented an ESG engagement example. Fletcher explained how he was able to work directly with the company to help them improve several ESG factors, which has drastically increased the company’s value.
Questions
The first question Fletcher answered asked him to discuss his thoughts on investing in South Africa alongside some of the financial challenges that the country has seen. He started off his response by explaining that South Africa has been a long-term focus throughout his 17-year career, during which he has traveled to the country almost every year.
He explained that many of the companies he meets with maintain excellent management teams and highly educated leaders that have set their companies up for success. The companies maintain great cultures and focus on high returns on invested capital, but South Africa struggles on the macro side of things. The market and currency have remained at low levels, which causes devaluation compared to U.S. currency. This means investments have to overcome a massive hurdle and Fletcher only maintains one position in the country.
Another question asked Fletcher if he sees any value in Russia and if he has explored any investments there. Similar to South Africa, Fletcher remains cautious with any investments into Russia and only maintains one position.
He explained that the regulatory risk in investing in Russia makes the majority of companies there uninvestable. However, there are still “pockets” of great businesses that can offer investors good opportunities. Fletcher remains conscious of geopolitical risk and has seen stocks get beaten down in Russia recently due to risk involving headlines. These risks offer low levels of impact on the one investment he maintains, so he still believes it will show profit over a long investment horizon.
