Lipper's Detlef Glow, head of EMEA research, reviews a one-on-one meeting on September 16, 2014, with Tassos Stassopoulos, Portfolio Manager for AllianceBernstein's Global Growth and Thematic team at AB in London and manager of AB Emerging Consumer Portfolio, which was launched on December 19, 2013. He joined AB in 2007 as a research analyst covering European consumer stocks and has served as portfolio manager for the international healthcare portfolio and as sector head for the consumer sector on the international growth research and global growth research teams. Prior to joining the firm, Stassopoulos was a managing director at Credit Suisse.
Even though the trend toward emerging-market investments has been ongoing for two decades, investors try to find alternative solutions for monetizing developments in these markets in their portfolios. In this regard one question that arises is how investors can capture the local demand of consumers in emerging markets, since the increasing wealth in these countries should drive up overall consumption. This theme is rather more consensual than revolutionary, but there is a controversy on how investors can access the opportunity.
AB Emerging Consumer Portfolio is one mutual fund investors can use to participate from the emerging middle class in emerging markets. In this regard Tassos Stassopoulos explained that AB Emerging Consumer Portfolio is a fund that can be used to diversify emerging-market exposure, since its investment approach is a way to harness emerging-market growth and because its "grassroot" research is a source of alpha in emerging markets.
During his presentation Tassos explained that the asset selection for AB Emerging Consumer Portfolio is based on a combination of three different sources: a top-down analysis to identify areas of growth, a bottom-up analysis to find appropriate companies, and grassroots research to identify the themes of tomorrow. The grassroots research adds a new dimension to the research process, since the fund manager and researcher do not use telephone or online questionnaires or interviews to supplement their data analysis. The team conducts onsite one-on-one meetings with consumers from high-/mid- and low-income families in their homes and has visited 13 developing countries so far to identify changes in consumer behavior that result from increasing income and to understand differences in the development of consumer dynamics in different countries.
In addition to grassroots research, AB uses a "pre-mortem analysis," another rare research approach that is used for securities selection. While traditional risk evaluation focuses on the likelihood of a company's failure to reach a price target, the AB analysts assume in the pre-mortem analysis that a company has failed, which allows them to work backward to identify the likeliest causes of the hypothetical failure. As a first step the analysts think of plausible reasons a stock has failed to reach its price target, grouping the reasons under four general headings: compliance, financial, operational, and strategic. Then AB quantifies the importance of each by looking at its likely impact on a stock's future beta. The resulting score takes account of both the likelihood and size of any effect. This can then be used to calculate the company's true cost of equity and hence a risk-adjusted internal rate of return for an investment.
The combination of the three research pillars leads to a portfolio construction that is uncorrelated to any index.
Figure 1 Performance, AB Emerging Consumer Portfolio Versus Peer Group Average, December 31, 2013–August 31, 2014 (in Euros)
Source: Lipper, a Thomson Reuters company
According to Tassos Stassopoulos, the emerging-consumer theme is different from emerging-market investing. That said, he admitted that AB Emerging Consumer Portfolio is benchmark agnostic and therefore uncorrelated to typical emerging-market portfolios/benchmarks. He thinks emerging-market investing needs a new research approach, such as AB's grassroots research, since the traditional approaches look at markets and themes in hindsight and therefore lead to yesterday's success stories. He also admitted that a pure sector-based approach could be narrowed to capture the full potential of the emerging-consumer theme. Nevertheless, the fund does not invest in companies from the utility, energy, and materials sectors. From his point of view fundamental company research is still key to identifying the right companies, such as leaders in governance, since these characteristics of a company can't be found with macro research. With regard to his investment philosophy Tassos confessed that his aim is to invest in companies that have the highest exposure to the transformation of consumer behavior. He also stated that the scale of the theme means that today's small players could become the global leaders of tomorrow. Mr. Stassopoulos said he sees emerging consumers as a long-term trend that should have a tailwind for a number of years.
The author acknowledges that he has no holdings in the fund mentioned in the article above.