TAKE NOTE COVER STORY

Changes in China

Rick de los Reyes, T. Rowe Price mining and metals analyst, Mongolia.

T. Rowe Price has explored opportunities throughout the developing world since the 1980s. Today, the firm has one of the largest and most experienced teams in the businessinvestment professionals with deep knowledge of these regions and a "boots on the ground" approach to research.

he emerging markets team at T. Rowe Price is a diverse group that represents 15 nationalities and collectively speaks 19 languages. Many of these managers and analysts come from the countries or regions they cover, which can help in understanding the local culture as well as corporate and government decisions. While their individual backgrounds are varied, they work closely together, sharing ideas and insights on industries, sectors, regions, and political and economic developments that can shape the investment climate. Their travels have taken them to oil and gas mining operations in Mongolia, the Arctic Circle, a potash plant in the Atacama Desert of Chile, and remote villages in South Africa, among many other places.

Gonzalo Pángaro, head of emerging market equity investing at T. Rowe Price, has descended 12,000 feet to observe a gold mining operation in South Africa. He says there is no substitution for personal visits to the many companies around the world in which T. Rowe Price invests. Indeed, emerging markets equity managers visited 65 countries and met with several thousand companies in the last year. "You learn a lot about the management, the facilities, and the local culture," he says. "You get to understand them better, and they get to know you better. So we visit these countries, and often go to plants and mines to get a closer look at those assets. This commitment to research enables us to uncover opportunities that might not be apparent."

DEVOTING RESOURCES TO EMERGING MARKETS
The significant resources the firm devotes to emerging markets reflect not only the importance that T. Rowe Price places on research, but the growing importance emerging markets have in the global economy and the tremendous strides many have made in bolstering their financial profiles. Emerging markets now account for about half the world's gross domestic product (GDP). JP Morgan estimates that emerging markets, on average, account for 34% of the revenue earned by companies in the MSCI World Index, compared with 24% for U.S. companies. "If you want to bring significant value to investing in these regions, it's important to have people in the local markets," says Bill Stromberg, T. Rowe Price's director of global equity. "Corporate governance and ethics are often different, so you need to have top-notch people who look out for shareholder interests. We need to know which companies have good governance and which we need to be wary of."

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When T. Rowe Price established an early footing in emerging markets, it was "truly pioneer investing," recalls Chris Alderson, who oversaw the firm's global emerging markets business for 12 years prior to being named head of
T. Rowe Price International in 2009. "Back then you had much more volatile economic environments, and you had a much more shallow opportunity set," he says. "In Asia, you could only invest as a foreigner in Hong Kong, Singapore, Malaysia, and Thailand, and the thought that China would open up and become a major investment destination was just pie in the sky."

In the early years of economic and market development in these regions, disclosure and corporate rules were often poor or nonexistent. "I loved all the travel and the uncertainty," Alderson says, "and I loved the fact that sometimes it could be a little bit more dangerous." Problems with disclosure, governance, and corruption still exist in the emerging world. However, the economies are bigger, the markets deeper and broader, and the quality of management often first-rate. Says Alderson, "It's not quite as pioneering as it was—and that's a good development from an investing standpoint."

The Rise of Emerging Markets

The majority of economic activity in the global economy now originates in emerging markets.

The Rise of Emerging Markets

Source: International Monetary Fund, April 2013 WEO estimates.

FACING THE CHALLENGES OF FRONTIER MARKETS
While the BRIC countries—Brazil, Russia, India, and China—and many other emerging markets, including the Philippines and Indonesia, have achieved impressive progress, a new set of "frontier" markets in Africa and the Middle East offer potentially significant opportunities.

These regions have some of the pioneer atmosphere that characterized the early years of emerging markets. Oliver Bell, portfolio manager of the T. Rowe Price Africa & Middle East Fund, travels into areas in Nigeria where having armed guards is necessary. Despite the risks and challenges, he says, "Our efforts are worth the trouble because the analysis of companies through other brokerage firms is very limited. Our research gives us an enormous information advantage. We visit these countries on a regular basis, and the possibility of surprises is greatly reduced."

The potential investment opportunities are significant, according to Bell. "There is a massive perception and reality gap facing Africa," he says. "Multinational companies will tell you how important Africa is to their future growth, and yet the perception of many investors is that it is still a backwater. The reality is that Africa is transforming very quickly. People who don't go to these places would be surprised by how developed they are in some respects. We're seeing a huge movement of very highly educated people going back to their native countries."

KEEPING A FOCUSED EYE ON ESTABLISHED MARKETS
The emerging markets of Asia, Europe, and Latin America are more advanced than those in Africa and the Middle East, but the need for maintaining a local presence is no less important. "The markets have come a long way in Asia," says Anh Lu, portfolio manager of the T. Rowe Price New Asia Fund and a 20-year veteran investor in the region. "Half of these countries are really well-developed nations already. China, for example, has broken all world records in terms of how many people have been lifted out of poverty in the last few decades, though that has created a huge wealth gap."

But, Lu notes, corporate governance standards and reporting requirements and transparency across the region are not necessarily up to the standards of developed economies—and some investment prospects demand personal scrutiny. "Just observing working conditions on site can make all the difference," says Lu, who recounts an experience she had investigating a company with growth potential. She expected the firm to improve and automate some of its processes, but when she later visited the factory to check on its procedures, she was disappointed to see the lack of progress and was troubled by conditions. "They hadn't moved their production process forward, and workers were sitting in a cramped space breathing in noxious fumes from the plastics they were working with," she says. "I was in there for half an hour and came out with a headache. The process had never evolved, and management had no plan to change it." Needless to say, Lu promptly sold the stock.

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