Emerging Markets Small-Cap

Transcription

1 Emerging Markets Small-Cap October 2017 THIS MATERIAL IS FOR USE OF PROFESSIONAL CLIENTS ONLY, EXCEPT IN THE U.S. WHERE THE MATERIAL IS FOR INSTITUTIONAL INVESTOR USE ONLY AND MAY NOT BE USED WITH THE GENERAL PUBLIC.

2 Why Emerging Markets Now?

3 EM Growth Improving Relative To US EM-US GDP growth and EM/US Stock market performance EM Real GDP minus US Real GDP (LHS) MSCI EM vs. S&P 500 (RHS) 3

4 Egypt Philippines Mexico India Malaysia Peru Indonesia United Arab Emirates Turkey Brazil Colombia South Africa Chile Thailand China Korea Czech Republic Hungary Russia Poland Kenya Nigeria Pakistan Saudi Arabia Bangladesh Kuwait Argentina Morocco Vietnam Romania Australia Singapore U.K. USA Canada France Spain Italy Germany Japan EM Demographics More Favorable Than Developed Markets Projected Average Annual Growth Rate in the Working Age Population (%) (0.5) (1.0) (1.5) Emerging Frontier Developed Source: UN Forecasts, MSIM EM research, Data as of October

5 1/1/1973 2/1/1974 3/1/1975 4/1/1976 5/1/1977 6/1/1978 7/1/1979 8/1/1980 9/1/ /1/ /1/ /1/1984 1/1/1986 2/1/1987 3/1/1988 4/1/1989 5/1/1990 6/1/1991 7/1/1992 8/1/1993 9/1/ /1/ /1/ /1/1997 1/1/1999 2/1/2000 3/1/2001 4/1/2002 5/1/2003 6/1/2004 7/1/2005 8/1/2006 9/1/ /1/ /1/ /1/2010 1/1/2012 2/1/2013 3/1/2014 4/1/2015 5/1/2016 6/1/2017 A Weak USD Favors EM US Dollar REER vs. Major Currencies Deviation from trend 50% 40% 30% Current Level 20% 10% 0% -10% -20% Source: Morgan Stanley Investment Management. REER shown vs. major currencies. As of Q

6 EM Current Account is in Surplus % of GDP, GDP weighted Source: MSIM Emerging Markets calculations using data from Haver/national sources 6

7 Dec-99 May-00 Oct-00 Mar-01 Aug-01 Jan-02 Jun-02 Nov-02 Apr-03 Sep-03 Feb-04 Jul-04 Dec-04 May-05 Oct-05 Mar-06 Aug-06 Jan-07 Jun-07 Nov-07 Apr-08 Sep-08 Feb-09 Jul-09 Dec-09 May-10 Oct-10 Mar-11 Aug-11 Jan-12 Jun-12 Nov-12 Apr-13 Sep-13 Feb-14 Jul-14 Dec-14 May-15 Oct-15 Mar-16 Aug-16 Jan-17 Jun-17 EM Valuations Still Look Attractive EM Trailing PE Relative To MSCI ACWI PE 1.2 EM at 10% premium EM at nearly 25% discount Source: Fact Set, MSIM Emerging Markets Internal Research. Data as of June Past performance is not indicative of future results. Provided for informational purposes only 7

8 Why EM Small Cap?

9 Domestic SC International SC EM SC Domestic SC International SC EM SC Domestic LC & MC International LC & MC Emerging Markets LC & MC Globalization of Portfolio Allocation HOME AND SIZE BIASES REMOVAL OF HOME BIAS REMOVAL OF HOME AND SIZE BIASES MSCI ACWI MSCI ACWI IMI (45 Countries) 99% Coverage No GAPS & OVERLAPS Source: MSCI,

10 Annualized Return Diversifying with Better Risk-adjusted Returns Risk / Return Profile of MSCI EM Index vs. MSCI EM Small-cap Index On a 5-Year Basis Ending July 31, More Return, Less Risk 6 MSCI EM Small Cap MSCI EM 4.5 Less Return, More Risk Standard Deviation Diversification does not eliminate the risk of loss. Past performance is not indicative of future results. The index performance is provided for informational purposes only and is not intended to predict or represent the performance of any Morgan Stanley investment or strategy. Source: Morgan Stanley Investment Management. 10

11 Small Caps Outperform over time MSCI EM Small Cap versus MSCI EM Index Performance, January 2009 July MSCI EM Small Cap / MSCI EM Source: FactSet, as of July 31, Performance indexed to

12 Average Weighted Avg Market Cap ($mm) Average Product AUM ($mm) All Cap EM Managers Can t Buy Enough Small Cap All Cap Global EM Managers Weighted Avg Market Cap (left side, $mm) Average Fund AUM (right side, $mm) $60,000 $7,000 $50,000 $40,000 $6,500 $6,000 $5,500 $30,000 $20,000 $5,000 $4,500 $4,000 $10,000 $3,500 $3,000 $ $2,500 Source: evestment as of June 30, 2017 using the All Cap Emerging Markets universe. 12

13 The Postwar Trade Boom Is in Retreat Global Trade to GDP Is Falling (% of global GDP) Source: Klasing and Milionis (2014), Estavadeordal, Frantz and Taylor (2003), Penn World tables, MSIM calculations. 13

14 EM Small Caps More Domestic Demand Oriented % of Index MSCI EM Small Cap MSCI EM

15 How to Invest in EM Small Cap

16 Dec 97 Dec 99 Dec 01 Dec 03 Dec 05 Dec 07 Dec 09 Dec 11 Dec 13 Dec 15 Picking High Growth Countries is Critical in EM 3-Year Annualized Market Returns Relative to MSCI EM Index (%) 5.0% Contribution of Risk Factors in MSCI EM Index 100% 90% 4.0% 4.1% 80% 70% Country 3.0% 60% 50% 2.0% 40% 1.0% 30% 20% Industry 0.0% 10% 0% Style -1.0% High growth -0.7% Low growth Source: Methodology: spread between highest quintile and lowest quintile = +480 bps/yr on average. High refers to the top 20% of countries in terms of GDP growth, low refers to the bottom 20%. MSIM Emerging Internal Markets Research, Factset. Data as of December Source: Contribution of Risk Factors to Explained Cross Sectional Volatility (BARRA, GEM2). MSCI, data as of December Performance data quoted represents past performance which is no guarantee of future results. The is for illustrative purposes only and are not meant to depict the performance of a specific investment. 16

17 EM Small Caps is an Actively Managed Asset Class TOTAL FUND AUM (USD MM) % AUM IN ACTIVE CUMULATIVE FLOWS SINCE GFC (MM) All Global Equity $14,756,109 61% $262,826 All Emerging Markets $1,392,089 67% $111,808 Emerging Markets Small-cap $12,835 79% $6,586 Source: EPFR Global, data as of March 31, Only fund information is included. Separate account and composite assets not included. 17

18 EM Small Cap Managers Outperform All-Cap Managers Median Active Manager Annualized Excess Returns (%) EM Small Cap EM Year 5 Year 10 Year Source: MSIM calculations, evestment. Calculations as absolute returns which are net of fees. Calculated annualized returns for any fund with data from specified time period ending June 30, 2017 and calculated the median fund annualized returns. Data shown represents the universe s median fund s annualized return. Number of funds listed above. Data as of June 30, We included only the funds that with performance over the entire period. 18

19 Larger Universe of Small-Cap Stocks... which are under-covered by the sell side Universe of Small-Cap Stocks vs. Large and Mid-Cap Stocks 2,000 1,825 1,500 1, MSCI EM Standard MSCI EM Small-Cap Source: FactSet, data as of April 30,

20 High Quality Matters Performance by Quality As of December 2016 (%) 15.00% 14.06% 10.00% 7.04% 5.00% 0.00% 1.34% 0.27% 3.08% -5.00% -1.57% -3.89% -4.13% % -9.51% 1 Year 3 Year 5 Year High Quality Low Quality MSCI EM Small Cap Source: Factset, As of December 31, 2016 (due to company reporting). Performance was calculated on stocks in the MSCI EM Small Cap Index. High quality was defined as a return on equity (ROE) of 10% or greater and a net debt to EBITDA ratio of less than 2.5x. Low quality was defined as ROE of less than 5% and a net debt to EBITDA ratio of greater than or equal to 4x. The composites were rebalanced each calendar year and scaled up to a 100% portfolio based on the original weight in the index. Returns were geometrically linked. 20

21 China on the Rules of the Road Country Allocation Stock Selection Circle of Life (Politics): Is the country ready to back a reformer? Perils of the State (Public Sector): Is the government spending and meddling too much? Factories First (Investment): Is investment rising or falling as a share of the economy? The Price of Onions (Inflation and Growth) : Is inflation rising or falling? Cheap is Good (Currency Valuations) : Does the nation feel cheap or expensive? The Kiss of Debt (Debt Bombs): Is credit growing faster or slower than the economy? Underweight Allocation Good Billionaires, Bad Billionaires (Inequality): Is inequality threatening growth? The Geographic Sweet Spot (Location): Is the nation making the most of its location? People Matter (Demographics): Is the talent pool growing? Love, Hate or Indifference (Sentiment): How is the country portrayed in the global media? This represents how the portfolio management team generally implements its investment process under normal market conditions. 21

22 China Education Unemployment rate by education level Ages 21 25, 2016 China s average wage by sector Private enterprises, % 11.3% 8.1% 8.2% 4.2% Primary Education Junior High School Senior High School and Vocational Junior College University & Graduate School Source: Daiwa Securities, China Household Finance Survey, China National Bureau of Statistics Source: CLSA, CEIC 22

23 Stock Example: Tarena China s leading provider of IT professional training Country Allocation Stock Selection IDEA GENERATION FUNDAMENTAL ANALYSIS VALUATION & INVESTMENT DECISION With China s economy slowing, job seeking is much more challenging College education focuses on knowledge not skills; most graduates don t have IT skills COMPETITIVE LANDSCAPE MEET MANAGEMENT BUSINESS ANALYSIS IT professional education services market remains fragmented Tarena has nearly 10% market share, more than double the next largest provider The company has a very high 90% placement rate Quality management with strong execution background Hybrid business model classroom, online and live distance. 20% growth in students YoY estimated Operating leverage strong due to business structure $806mn market cap Stock trading at 14x 2018 earnings 2.6 p/bv with earnings CAGR of 30% ROE 25% with net cash position which is 10% of market cap 23

24 Appendix

25 MSIF Emerging Markets Small-Cap Performance Performance Returns (1) as of September 30, 2017 The Inception Date of the MSIF EM Small Cap is December 15, 2015 (%) QTD YTD 1 Year Since Inception MSIF EM Small Cap (Gross) MSCI EMSC Index MSCI EMSC Growth Index EXCESS RETURNS (%) QTD YTD 1 YEAR SINCE INCEPTION vs. MSCI EM Small-cap Index (0.2) 2.3 (3.7) (2.3) vs. MSCI EM Small-cap Growth Index Source: Morgan Stanley Investment Management. Past performance should not be construed as a guarantee of future performance. Performance returns reflect the average annual rates of return. The rep account results shown are NET of investment advisory/management fees, are quoted in U.S.$ and include the reinvestment of dividends and income. Performance returns are compared to those of the MSCI EM Small-Cap index, which is an unmanaged index and is considered to be a relevant comparison to the portfolio. Each portfolio may differ due to specific investment restrictions an guidelines. Individual results will vary. The information shown herein represents supplemental information. 25

26 MSCI EM Small-cap: Value Continues to Outperform Growth % % % Jan-2016 Jun-2016 Nov-2016 Apr-2017 Sep-2017 MSCI EM Small Cap MSCI EM Small Cap Value MSCI EM Small Cap Growth Source: FactSet, Performance in USD from 1/1/2016 to 9/30/2017 and is based on Indexed Total Returns 26

27 EM Has Outperformed Small Caps Since Fund Inception MSCI EM Small Cap versus MSCI EM Index Performance, December 2015 September Dec-2015 May-2016 Oct-2016 Mar-2017 Aug-2017 MSCI EM Index MSCI EM Small Cap Index Source: FactSet, as of September 30, Performance indexed to

28 EM Rally Led by Tech MSCI Emerging Markets Indexed Performance by Sector, January 2016 September IT Materials Energy Financials Real Estate Discretionary Utilities Industrials Telecoms Health Care Jan-2016 Jul-2016 Jan-2017 Jul-2017 Source: FactSet, as of September 30,

29 .Which is Underrepresented in EM Small Cap Weights by Sector in MSCI EM Small Cap Versus MSCI EM Financials IT Energy Telecoms Staples Real Estate Utilities Materials Health Care Discretionary Industrials Source: FactSet, Morgan Stanley Investment Management, as of August 31, Provided for informational purposes only and should not be deemed as a recommendation to buy or sell securities in the sectors shown above. 29

30 Korea Large Caps Have Significantly Outperformed Small Caps MSCI Korea versus MSCI Korea Small Cap Index Performance, January 2016 August % (4.1)% Jan-2016 Jun-2016 Nov-2016 Apr-2017 Sep-2017 MSCI Korea MSCI Korea Small Cap Source: FactSet, as of September 30, Performance indexed to

31 Emerging Markets Small-Cap Country Allocation Portfolio Weights as of September 30, MSCI EM SC Relative (%) Cash as of 9/30/ %. Source: Morgan Stanley Investment Management. Representative Account Provided for informational purposes only, is subject to change, and should not be deemed as a recommendation to buy or sell the securities in the countries shown. Each portfolio may differ due to specific investment restrictions and guidelines. Thus, individual results may vary. The information shown herein represents supplemental information. 31

32 Emerging Markets Small-Cap Sector Allocation Portfolio Weights as of 3Q MSCI EM Small Cap Relative Weights Data as of October 2, Excludes Cash and equivalents at 3%. Source: Morgan Stanley Investment Management. Representative Account. Provided for informational purposes only, is subject to change, and should not be deemed as a recommendation to buy or sell the securities in the countries shown. Each portfolio may differ due to specific investment restrictions and guidelines. Thus, individual results may vary. The information shown herein represents supplemental information. 32

33 Important Disclosures The information in this presentation (the Presentation ) is provided solely for informational and educational purposes. This Presentation may not be reproduced or distributed to any other persons. The information herein does not contend to address the financial objectives, situation or specific needs of any individual investor. In addition, this Presentation is not an offer, or a solicitation of an offer, to buy or sell any security or instrument or to participate in any trading strategy. Any views expressed are those of the presenter as of the date of the presentation and are subject to change at any time due to changes in market or economic conditions. The views expressed do not reflect the opinions of all portfolio managers at MSIM or the views of the firm as a whole and may not be reflected in the strategies and products that the Firm offers. Charts and graphs provided herein are for illustrative purposes only. Forecasts/estimates are based on current market conditions, subject to change, and may not necessarily come to pass. Past performance is not indicative of future results. Indexes do not include any expenses, fees or sales charges, which would lower performance. Indexes are unmanaged and should not be considered an investment. It is not possible to invest directly in an index. Any information regarding expected market returns and market outlook is based on the research, analysis, and opinions of the presenter. They are based on current market conditions and subject to change. In addition, these conclusions are speculative in nature, may not come to pass, and are not intended to predict the future of any specific Morgan Stanley investment. No representation or warranty can be given with respect to the accuracy or completeness of the information. This communication is a marketing communication. It is not a product of Morgan Stanley s Research Department and should not be regarded as a research recommendation. The information contained herein has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research. 33

34 Compliance Disclaimer All performance quoted here refers to the Global Emerging Markets and Frontier Emerging Markets, (the Composite ) and allocation and characteristics are based on the respective strategy's representative account. Portfolio management decisions made for such rep account may differ (i.e., with respect to liquidity or diversification) from the decisions the portfolio management team would make for other SMAs and investment vehicles. In addition, the holdings and portfolio activity in the rep account may not be representative of some SMAs managed under this strategy due to differing investment guidelines or client restrictions. Actual fees and expenses for other SMAs and investment vehicles may differ from those of the rep account, which would cause their performance to differ. All performance is quoted in USD. Risk Considerations: There is no assurance that a portfolio will achieve its investment objective. Portfolios are subject to market risk, which is the possibility that the market values of securities owned by the portfolio will decline. Accordingly, you can lose money investing in this portfolio. Please be aware that each of these portfolios may be subject to certain additional risks. Global Emerging Markets: There is no assurance that a portfolio will achieve its investment objective. Portfolios are subject to market risk, which is the possibility that the market values of securities owned by the portfolio will decline. Accordingly, you can lose money investing in this portfolio. Please be aware that this portfolio may be subject to certain additional risks. In general, equity securities values also fluctuate in response to activities specific to a company. Investments in foreign markets entail special risks such as currency, political, economic, and market risks. The risks of investing in emerging market countries are greater than the risks generally associated with investments in foreign developed countries. Derivative instruments can be illiquid, may disproportionately increase losses and may have a potentially large negative impact on the portfolio s performance. Frontier Emerging Markets: There is no assurance that a strategy will achieve its investment objective. Portfolios are subject to market risk, which is the possibility that the market value of securities owned by the portfolio will decline. Accordingly, an investor can lose money investing in this strategy. Please be aware that this strategy may be subject to certain additional risks. Equity and foreign securities are generally more volatile than fixed income securities and are subject to currency, political, economic and market risks. The risks associated with emerging markets are magnified when investing in frontier emerging market securities. Accordingly, investments in the Portfolio must be viewed as highly speculative in nature and may not be suitable for an investor who is not able to afford the loss of the entire investment. Investment opportunities in many frontier emerging markets may be concentrated in the banking industry, which could have a disproportionate impact on the portfolio s performance. Stocks of small- and medium capitalization companies entail special risks, such as limited product lines, markets and financial resources, and greater market volatility than securities of larger, more established companies. By investing in investment company securities, the portfolio absorbs both its own advisory and administrative fees and those of the investment companies it invests in. Derivative instruments can be illiquid, may disproportionately increase losses and may have a potentially large negative impact on the portfolio s performance. Illiquid securities may be more difficult to sell and value than publicly traded securities (liquidity risk). There is no guarantee that any investment strategy will work under all market conditions, and each investor should evaluate their ability to invest for the long-term, especially during periods of downturn in the market. In addition, there are important differences in how a strategy is carried out in each of the investment vehicles. Separate accounts managed according to the Strategy include a number of securities and will not necessarily track the performance of any index. A separately managed account may not be suitable for all investors. Please consider the investment objectives, risks and fees of the strategy carefully before investing. A minimum asset level is required. For important information about the investment manager, please refer to Form ADV Part 2. Representative Account: The rep account has employed the investment strategy in a similar manner to that employed in the team s separately managed accounts ( SMAs ) and other investment vehicles, i.e., they were generally operated in a consistent manner. However, portfolio management decisions made for such rep account may differ (i.e., with respect to liquidity or diversification) from the decisions the portfolio management team would make for SMAs and other investment vehicles. In addition, the holdings and portfolio activity in the rep account may not be representative of some SMAs managed under this strategy due to differing investment guidelines or client restrictions. Actual fees and expenses for SMAs and other investment vehicles will differ from those of the rep account, which would cause their performance to differ. 34