Manager of second-largest emerging market fund says sell-off could be an opportunity

  • Emerging-market stocks are down more than 8 percent this year, but Justin Leverenz, manager of the second-largest EM fund in the world, sees this as a buying opportunity.
  • "When the world is looking at the headlines, we look at the companies we own or want to invest in and try to understand them better," says Leverenz.
  • He and his team like companies in the health care, luxury goods and internet sectors.
Justin Leverenz, Director of Emerging Market Equities and portfolio manager of Oppenheimer Developing Markets Equity UCITS Fund.
OppenheimerFunds
Justin Leverenz, Director of Emerging Market Equities and portfolio manager of Oppenheimer Developing Markets Equity UCITS Fund.

A firestorm is engulfing emerging market stocks but Justin Leverenz, manager of the world's second-largest EM fund, is not alarmed.

Instead, Leverenz — who manages the $38.2 billion-asset Oppenheimer Developing Markets fund — is calmly plotting what his next stock purchase will be.

"When the world is looking at the headlines, we look at the companies we own or want to invest in and try to understand them better," Leverenz in a phone interview. "So when there is trouble in the world, we tend to do well because we can find good companies" at a more reasonable price.

Over the past 10 years, the fund has been one of the best performers in its category, according to Morningstar, which rates it four stars. Leverenz says his approach will guide him through the latest volatility.

It could be a bumpy ride. Stocks in emerging markets have been reeling this year. After rising more than 30 percent in 2017, the iShares MSCI Emerging Markets exchange-traded fund (EEM) is down more than 8 percent in 2018 as investors face several challenges.

Political uncertainty in countries like Mexico and Brazil, tighter monetary policy from the U.S. Federal Reserve and, most recently, a sharp drop in the Turkish lira are just come of these challenges.

Turkey's currency fell to a record low earlier in August after President Donald Trump approved a doubling of U.S. steel and aluminum tariffs on Turkish imports unless detained American pastor Andrew Brunson is released.

Exchange-traded funds that track Turkish, Brazilian and Chinese stocks are down 14.9 percent, 9.3 percent and 2.7 percent, respectively, since Aug. 9.

Between that day and Aug. 16, emerging market funds have registered outflows of $1.3 billion, according to data from the Institute of International Finance.

"Much of this comes from forces beyond our control," Leverenz said. That is why "we have a north star when it comes to investing and that is our approach."

Leverenz's approach has made the fund one of the best performers of the "Diversified Emerging Markets" category. The fund has outperformed 91 percent of its peers over the past 10 years, gaining 5.5 percent in that time period, Morningstar data show. This year, the fund is down 4.4 percent but still ranks in the eighth percentile in its category.

The manager, who has been running the Oppenheimer Developing Markets fund since 2007, said "there are some good companies out there" in emerging markets even in the midst of the broad sell-off. He and his team like companies in the health-care, luxury goods and internet sectors.

"What we do is focus on companies that have extraordinary growth, great competitive advantage and have opportunities to build businesses we have never seen before," he added.

Leverenz said an example of such a company is Amazon, as it started out as an online bookseller and eventually turned into one of the biggest online retailers. But companies like these can be found outside of tech as well, he said.

The fund holds shares in Fomento Economico Mexicano, better known as Femsa, a Monterrey, Mexico-based multinational that owns about half of Coca-Cola Femsa, one of the largest Coke bottlers in the world. It is also the parent company Oxxo, the largest convenience store chain in Mexico. Leverenz described Oxxo as the "CVS or Walgreens of Mexico."

But the company was originally best known as the parent company of Cerveceria Cuauhtemoc Moctezuma, the maker of beers such as Dos Equis, Tecate and Sol. In 2010, Femsa sold Cuauhtemoc to Heineken in exchange for a 20 percent stake in the beer giant.

"What happened was the core of the business went from being beer to Coke bottling," said Leverenz. "I don't know if you spend a lot of time in Latin America, but soda consumption there is much higher than it is in the U.S."

Leverenz's fund first invested in Femsa shares on Feb. 28, 2011, according to Morningstar. Since then, the stock has surged nearly 170 percent.

Another company Leverenz says fits his criteria is Novatek, a Russian natural gas producer. The company started out as an exploration and production company but was quickly able to grow and diversify its business, Leverenz said.

Now, Novatek is Russia's largest independent natural gas producer. The fund first bought Novatek's stock on Feb. 28, 2011. The stock has nearly tripled since then.

The fund is also heavily invested in China's Alibaba and Tencent Holdings, which make up 10.7 percent of the overall portfolio. Alibaba shares are up 94 percent since Leverenz first bought them in September 2014. Meanwhile, Tencent's stock has skyrocketed more than 1,900 percent since he first bought it in May 2009.

"He likes to see companies grow," Gregg Wolper, senior analyst at Morningstar Manager Research, said about Leverenz and the companies he chooses to invest in. "He's willing to pay more for stocks but not excessively."