Contemplating Value in Emerging Markets Intelligently, with a Little Help from Ben Graham

Executive Summary
In this paper, we revisit Ben Graham’s principles of value investing and extrapolate them further to the implications of investing in emerging markets. Graham reminds us that a disciplined approach to good investing requires us to be cognizant of changes in intrinsic value and be open to re-examining previously established conclusions. This holds true particularly in emerging markets where multiple risks abound and an economically diversified portfolio is critical to tackle uncertain outcomes.

It was a typical Wednesday afternoon meeting with a client. As we reviewed the portfolio characteristics and valuation metrics of our Emerging Domestic Opportunities portfolio, the client, somewhat surprised, asked why the portfolio did not have stronger “value” characteristics. This was neither the first time we had been asked this question, nor was it the first time we had contemplated the notion of value.

Undoubtedly, the client was in the textbook, or conventional, sense correct. Yet, for us, the dichotomy was evident: We consider our emerging markets fundamental equity portfolio to be representative of value. In fact, much of our understanding of value is influenced by the work of Ben Graham. That said, our client’s question as to what constitutes “value” is important in and of itself, but is especially so in the context of emerging market equities.

We use a variety of approaches to assess value, ranging from data-driven macroeconomic countrylevel drivers to behavioral indicators at the country, sector, and security level. Contrary to popular belief, using a variety of approaches does not mean we are deflecting or diluting the essence of value. We would argue, in fact, that our approach increases the odds of putting together a true value portfolio.

Back to Basics: Revisiting Graham’s The Intelligent Investor2
In the introduction to Graham’s classic book on value investing, he spells out that his primary objective in writing the book was to help the lay investor develop and execute sound investment policy. In doing so, Graham introduced something rare in the realm of investing and economics: first principles.