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Deep Dive

Philip van Doorn

March 24, 2018, 9:51 a.m. EDT

These emerging-market fund managers focus on the explosive growth of consumer spending

Tom Masi and Nuno Fernandes of Trilogy Global Advisors scored a 42% gain last year

By Philip van Doorn, MarketWatch

Eicher Motors, which makes Royal Enfield motorcycles, is among the emerging-market consumer-oriented stocks favored by the managers of the AMG Trilogy Emerging Wealth Equity Fund.

Tom Masi and Nuno Fernandes, managers of the AMG Trilogy Emerging Wealth Equity Fund, focus on consumer consumption in emerging markets. That has led them to varied investments such as a retro-motorcycle company, a high-alcohol liquor producer and a digital-payment firm.

The AMG Trilogy Emerging Wealth Equity Fund (NAS:TYWVX)  is sub-advised by Trilogy Global Advisors, an affiliate of AMG Funds. The fund is relatively small, with assets of about $68 million. However, Masi and Fernandes run a total of $2.6 billion in client money following the same strategy.


We recently looked at the Emerging Markets Internet & Ecommerce ETF (PSE:EMQQ) , which contrasts itself with the largest emerging-markets index funds — the Vanguard Emerging Markets Stock Index Fund (NAS:VEIEX) , the Vanguard FTSE Emerging Markets ETF (PSE:VWO)  and the iShares Emerging Markets ETF (PSE:EEM)  — by not holding shares of state-controlled companies and, as its name implies, focusing on web-based businesses.

Rather than tracking a custom-designed index that focuses on internet commerce, the AMG Trilogy Emerging Wealth Equity Fund is actively managed to take advantage of a shift in emerging markets “toward consumption, as opposed to being driven by exports to developed countries,” Masi said in an interview on March 19.

In the same interview, Fernandes followed one of the themes discussed by Kevin Carter, the founder of EMQQ, spelling out what he and Masi believe is a major problem with the largest emerging-market index funds that track the broad EM indexes:

“The MSCI Emerging Markets Index is about 57% weighted between state-owned companies and family-controlled companies. These tend to be companies with poor corporate governance.”

The FTSE Emerging Markets All Cap China A Inclusion Index is also heavily weighted toward state-owned and family-controlled companies, but Fernandes didn’t mention this index specifically.

This does not mean the AMG Trilogy Emerging Wealth Equity Fund excludes state- or family-controlled businesses, only that it is much more selective than the market-cap-weighted index.

Trilogy Global Advisors
Tom Masi, senior portfolio manager, Trilogy Global Advisors.

The main point of the Trilogy EM strategy, according to Masi, is its focus on consumer-driven businesses.

“You are going to have more than 3 billion people enter the middle class [in emerging markets] by 2030,” he said, while predicting that “by 2050, as much as 50% to 60% of global consumption will come from emerging markets.”

Fernandes said only about 20% of the MSCI Emerging Markets Index is weighted toward the sectors that the AMG Trilogy Emerging Wealth Equity Fund is concentrated in: consumer staples, consumer discretionary and health care.

Companies that fit the bill

Masi and Fernandes discussed companies in India, China and developed markets held by the fund that provide consumer products and services that are increasingly popular with emerging-market consumers.


Masi and Fernandes said that when it comes to economic reform, “India is about 10 years behind China,” but Masi said the Indian government’s new biometric ID system covers about 1 billion people and about 300 million new bank accounts have been opened over the past five years.

“So government payments can go to people while cutting out the local corruption levels,” he said.

Masi called HDFC Bank Ltd. (NYS:HDB)  “a leading franchise” benefitting from the transition to digital payments in India.

He also went in a different direction, highlighting Eicher Motors Ltd. (BOM:IN:505200) , which makes Royal Enfield motorcycles. Most of the Royal Enfield bikes are relatively light and easy to maintain because of their retro design. Masi called Eicher Motors an “excellent franchise” and said Royal Enfield motorcycles were “within reach of aspirational buyers in India.” He said consumers in India were drawn to the bikes’ “old-world feel,” and that the level of excitement at a Royal Enfield dealership is similar to what one might find at an Apple (NAS:AAPL)  store.

China — consumer products

One of the weaknesses in the MSCI Emerging Markets Index cited by various investors over the past few years was that it has traditionally excluded “A-shares,” which are those traded in mainland China, rather than in Hong Kong. That is changing this year as MSCI slowly phases them in. Masi and Fernandes named two of the A-shares held by the fund — companies that make baijiu, which is a traditional premium liquor that is very high in alcohol content: Kweichow Moutai Co. (SHG:CN:600519)  and Wuliangye Yibin Co. (SHE:CN:000858)

“The Chinese consume the same amount of alcohol as we do, but the premium products represent about 2% of the market,” Fernandes said. As the middle class grows in China, he expects annual sales growth in the category of about 20% over the next 10 years.

Moutai is the more venerable of the two brands. Masi described the process by which the company makes baijiu, aging the liquor in pits “that are hundreds of years old,” which means a limited supply of the highest-end product.

China — consumer credit

Masi estimated that market penetration for digital payments by consumers in China is about 50 times what it is in the U.S. Ant Finanical, an affiliate of Alibaba Group Holding Inc. (NYS:BABA) , is the biggest corporate beneficiary of this phenomenon, with “a 54% market share,” he said. Ant Financial is expected eventually to float its own shares, which could mean tremendous gains for Alibaba and its shareholders. Alibaba was the fourth-largest holding of the AMG Trilogy Emerging Wealth Equity Fund as of Feb. 28.

Trilogy Global Advisors
Nuno Fernandes, senior portfolio manager, Trilogy Global Advisors.

While digital payments in China generally mean cash payments, Fernandes said “more and more Chinese consumers are borrowing.” The biggest bank in the country by credit-card issuance is China Merchants Bank (HKG:HK:3968) , which is owned by the fund and controlled by the Chinese government.

Ant Financial has been growing its unsecured consumer-lending business much more rapidly than China Merchants Bank has, but Fernandes explained that the fund holds China Merchants Bank stock because “the retail market is underpenetrated” and Ant Financial isn’t yet publicly traded.

Developed markets

Some products craved by consumers in emerging markets are only provided by companies in developed markets. Fernandes named two examples held by the fund: Novo Nordisk (NYS:NVO)  and LVMH Moet Hennessy Louis Vuitton SE (MIL:IT:LVMH)

“If you go with a pure emerging manager, you are not going to be able to invest in those,” Fernandes said.

Biggest holdings

Here are the top 10 holdings of the fund as of Feb. 28:

Company Ticker Share of fund Country Industry Total return - 2018 through March 19 Total return - 3 years
Baidu Inc. ADR Class A (NAS:BIDU) 6.0% China Internet Software/ Services 8% 18%
Sberbank Russia OJSC ADR (LON:UK:SBER) 5.7% Russia Regional Banks 7% 327%
Sands China Ltd. (HKG:HK:1928) 5.0% China Casinos/ Gaming 14% 75%
Alibaba Group Holding Ltd. ADR (NYS:BABA) 4.7% China Internet Retail 13% 127%
China Construction Bank Corp. Class H (HKG:HK:939) 4.5% China Major Banks 18% 55%
Naspers Ltd. Class N (JSE:ZA:NPN) 4.4% South Korea Cable/ Satellite TV -1% 90%
Yum China Holdings Inc. (NYS:YUMC) 3.9% China Restaurants 2% N/A
LG Household & Health Care Ltd. (KRX:KR:051900) 3.4% South Korea Household/ Personal Care -3% 56%
Turkiye Garanti Bankasi Anonim Sirketi 3.4% Turkey Regional Banks 1% 27%
PICC Property & Casualty Co. Class H (HKG:HK:2328) 3.3% China Property/ Casualty Insurance 8% 7%
Sources: Morningstar Direct, FactSet

Fund performance

The AMG Trilogy Emerging Wealth Equity Fund was established in March 2015. Here’s how the fund’s three share classes have performed against their Morningstar category and the MSCI Emerging Markets Index in U.S. dollars:

Ticker Total return - 2018 through March 19 Total return - 2017 Average annual return - 3 years
AMG Trilogy Emerging Wealth Equity Fund - class N (NAS:TYWVX) 3.2% 42.1% 12.2%
AMG Trilogy Emerging Wealth Equity Fund - class I (NAS:TYWSX) 3.3% 42.6% 12.5%
AMG Trilogy Emerging Wealth Equity Fund - class Z (NAS:TYWIX) 3.3% 42.7% 12.7%
Morningstar Diversified Emerging Markets category 3.3% 34.2% 9.0%
MSCI Emerging Markets Index - U.S. dollars 4.2% 37.8% 10.6%
Sources: Morningstar Direct, FactSet

Performance for all three share classes measures up quite well, but you can see that the share class makes a difference.

• The class N shares have a $2,000 initial investment minimum, with annual expenses of 1.45% of assets, according to Morningstar, which considers the expenses for this class “above average.”

• The class I shares have a $100,000 minimum and annual expenses of 1.16%, which Morningstar considers “average.”

• The class Z shares have a $5 million investment minimum and annual expenses of 1.05%, which Morningstar considers “below average.”

For all three share classes there is a 2% fee for shares sold within 60 days of purchase.

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