Normalized Earnings
Pzena measures value by using normalized earnings to paint what it says is a more comprehensive picture of a company ’ s long-term earnings potential . Normalized earnings are what a company is expected to earn across a business cycle .
“ If a company is cheap relative to its normalized earnings power which they should earn in a mid-cycle benign environment , it means something bad is happening and the market is treating the company as if it ’ s a permanent impairment to that business ,” says Allison Fisch , a portfolio manager at the Emerging Markets Value Fund .
“ The job of our research team is to figure out if that ’ s the case , because if it ’ s only a temporary impairment then the market has it wrong and the earnings will improve and so will the stock price . That ’ s the philosophy we follow across the globe .”
Many people equate emerging markets with growth investing , but Fisch posits that value investing has been a path to outperformance in emerging market investing .
Perhaps , but emerging markets as a whole have been a chronic underachiever in recent years . According to index provider MSCI , the MSCI Emerging Markets Index has greatly underperformed both the MSCI All Country World Index ( a measure of broad global equity-market performance ) and the MSCI World Index ( which is focused on equities in developed markets ) during the
Manager Allison Fisch Age 45
past three- , five- and 10-year periods .
This , despite the sector ’ s oft-mentioned selling points that include a largely youthful demographic profile striving for middle-class status , coupled with its potential for faster economic growth than that of the developed markets . Meanwhile , one of the constant storylines about emerging markets stocks is that they ’ re cheaper than U . S . and other developed market equities .
“ Emerging markets clearly have higher GDP growth potential ,” Fisch says . “ The valuation discount largely comes from the perception of increased risk that comes with investing in these emerging economies . You don ’ t have the same level of regulatory oversight or legal structures around corporations and investments , and you tend to have more currency and political volatility .”
She acknowledges that the sector as a whole has been an underperformer in recent years , but notes that much of the disappointment is due to slower economic growth in China , which is a huge part of emerging markets indexes . “ But other [ emerging ] markets have performed quite strongly ,” she says .
One Size Doesn ’ t Fit All
Indeed , emerging markets aren ’ t a monolithic sector , and that ’ s where Pzena ’ s research chops come into play . Fisch is one of four portfolio managers on the Emerging Markets Value Fund . She and Caroline Cai have been at the
Professional Background She is a managing principal , president , and portfolio manager at Pzena Investment Management . Fisch has been with the firm since 2001 , when she joined as a research analyst . She serves as a co-portfolio manager for the international and emerging markets value strategies . She is credited as the architect behind the firm ’ s emerging markets strategies , having done the original research to prove the efficacy of a value approach in emerging markets . Previously , she was a business analyst at McKinsey & Company .
Outside Interests She loves spending time with her family and friends . She is an avid runner whose other favorite pursuits are travel and reading novels . helm since the product launched nine years ago . ( In addition to her portfolio manager duties , Cai became Pzena Investment Management ’ s CEO this past January .) Rakesh Bordia joined the PM team in 2015 , and Akhil Subramanian came on board at the start of this year .
They ’ re backed by a sizable research team of analysts divided by industry coverage globally . The way it works is that portfolio managers screen for new investment ideas within the fund ’ s investment universe of the 1,500 largest emerging market companies . Their proprietary model zooms in on those stocks trading in the lowest quintile based on price relative to normalized earnings , and companies that look interesting and merit further research get assigned to the analyst who covers that industry for the firm .
What happens next is a two-part process . The first is an initial review period where the analyst gets a basic understanding of the company — what it does , how it creates value and what ’ s the negative event that caused its stock to head south . Once the analyst reaches a preliminary hypothesis on that , he or she will bring a research model packet into the research review meeting and discuss it with the investment team . At that stage most ideas get rejected , Fisch says .
For the few that make it past the initial screen , the next step is doing a deep-dive research project . That includes visiting the companies and analyzing every potential issue to arrive at a fully researched view on the normalized earnings power of the business .
“ After all of that work is done we bring the company back into our research re-
Portfolio Statistics
# Of Equity Positions 63 Weighted Avg . Mkt . Cap
$ 59.2 billion P / E Ratio 8.7x Std . Dev Fund / Benchmark 18.72 / 16.89 Turnover Ratio 15 % Net Expense Ratio 1.09 %
Portfolio stats as of 6 / 30 / 23 . Standard deviation ( three-year period ) versus the Morningstar EM TME NR USD Index as of 7 / 31 / 23 . Fund turnover as of 2 / 28 / 23 . Expense ratio figures are for the institutional share class . Sources : Pzena Investment Management and Morningstar .
PHOTOGRAPHY COURTESY OF PZENA INVESTMENT MANAGEMENT , LLC SEPTEMBER 2023 | FINANCIAL ADVISOR MAGAZINE | 49