such as the spread between its return on equity and cost of equity ( or ROE- COE spread ), along with a company ’ s resilience ( which he defines as its ability to prolong the growth and income stage of its life cycle for a long period ) and its global validation ( the company ’ s proven ability to sustain and defend its source of value ). Espinosa also seeks a valuation he believes is consistent with the targeted minimum long-term rate of return .

“ I ’ m not pursuing countries or sectors ; it ’ s really all about the companies ,” Espinosa says , adding that he and his team compile a portfolio of companies that each have their own individual drivers . “ In my opinion , diversifying across drivers of investment return gives you a better chance of performing through the cycle . I don ’ t care what factor is outperforming right now . I have my diversity of companies that will drive the investment return , and I think that adds value .”

Finding Gems

The end result is a multi-capitalization portfolio where mid-caps represented 38 % of the holdings at the end of June , followed by a 32 % weighting in large caps and 22 % in small caps . ( The remaining 9 % was in cash and other assets .) Countries in East and South Asia made up 55 % of the fund ’ s assets , while Latin America and the Middle East / Africa region were the next biggest weightings at 13 % and 12 %, respectively .

Beyond using his valuation screens to find potential portfolio candidates , Espinosa uncovers what he calls investing “ gems ” by traveling quarterly for roughly two weeks at a time to less-trafficked parts of the investment world , attending industry conferences and doing company visits . He sometimes finds well-run companies in unlikely places .

“ There are good companies everywhere ,” he says . “ Many investors consider emerging markets or frontier markets as risky . That can be true in a general sense , but when you get into company specifics there are gems everywhere .” portFolio spotliGht

But not all gems are investable . For example , he notes , there are some brewers in Africa he would ’ ve invested in but didn ’ t because their equities were too illiquid . But beer has universal appeal , and the Overseas Value Fund taps into that industry segment by investing in Anheuser-Busch InBev , a Belgiumbased multinational brewing giant ( the result of InBev ’ s acquisition of Anheuser-Busch in 2008 ), as well as its subsidiary , Brazilian brewer Ambev .

In a white paper from last September , Espinosa explained that his fund took a stake in Ambev after he and his team ascertained that its high ROE-COE spread provided a significant buffer to continue being profitable even if Brazil suffers a recession and the Brazilian real devalues .

In an interview , he explains that AB InBev and Ambev are different companies from a portfolio perspective because they bring different things to the table . AB InBev is levered , pays a low dividend and is a deleveraging story , while Ambev has net cash and pays a high dividend .

“ They offer a diversity of the drivers of return ,” Espinosa says . “ I expect investment returns from both but they ’ ll do it differently — one from lowering debt and increasing the dividend , the other by increasing its volumes and margins due to investments in terms of changing how it operates .”

Espinosa offers that investors typically find value-oriented investments in efficient , developed markets by spotting some sort of trouble ( without which a company likely wouldn ’ t be cheap in the first place ). But in the emerging markets , he says , lots of well-run companies are undervalued simply because investors aren ’ t turning over enough rocks to find those gems .

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september 2022 | financial advisor magazine | 49