Emerging markets (EMs) are no longer routinely regarded as the investment arena’s equivalent of the Wild West. Once readily associated with risk, volatility and even the unknown, they are increasingly acknowledged as home to a remarkable range of opportunities.

Even so, they continue to give rise to some intriguing questions. One is whether EMs are better accessed through local investment managers rather than through managers based outside a specific country or region.

This consideration recently came to mind when I read about Carlo Ancelotti’s appointment as coach of the Brazilian national football team. An Italian, Ancelotti is the first foreigner to take the reins of the Seleção since Argentina’s Filpo Núñez oversaw a single friendly in 1965.

It ought to be a match made in heaven. Brazil are the most decorated side in the history of the World Cup, while Ancelotti is the most decorated manager in the history of European football. Logically, trophy after trophy should follow.

Yet many fans are dismayed. They see Ancelotti’s recruitment as a betrayal of Brazilian culture. They claim his success elsewhere does not automatically mean he understands the unique and cherished elements of o jogo bonito – “the beautiful game”.

I should make clear at this juncture that I am Brazilian and a life-long Seleção fan. Yet I am firmly in the pro-Ancelotti camp – and not just because Brazil’s form of late has been so abysmal that it seems any idea, however outrageous it might prove, must be worth a whirl.

I should also make clear that I co-manage an Asia-focused fund yet spend much of my time in the UK. You may therefore be unsurprised to learn I am also in favour of accessing EMs through non-local investment managers.

There are two points I ought to stress without further delay. The first is that I am certainly not aligning my own achievements with those of Carlo Ancelotti. The second is that there are important nuances at play here, as I will attempt to explain next.

Pros and cons

It is useful to first reflect on why non-local managers could be disadvantaged. The most obvious potential drawback is a lack of in-depth knowledge of the businesses and markets in which they invest.

The less you know about a company or a country, of course, the more vulnerable you are to unpleasant surprises. Unfamiliarity with the “terrain” could lead to a manager being mistaken, misguided or even misled.

As with Brazil and Ancelotti, cultural aspects may also enter the reckoning. These can differ not only from nation to nation but from business to business, not least in a region like Asia.

Take South Korea, where corporate life is rooted in a blend of extraordinary politeness and rigid adherence to hierarchy. As in so many EMs, the country’s past, attitudes and even eccentricities can play a significant role in investment choices – which is why it is vital to be aware of them.

So what about the flip side? A key benefit of being non-local is often that a manager is not consumed by the dominant domestic narrative.

For example, imagine an EM is in the midst of a political crisis. Most local managers would likely be depressed about the outlook for the economy, as the prevailing mood music would drown out almost everything else.

As a result, they might miss evidence of cycles or fail to discern the ways in which their own market retains an edge over others. In effect, “noise” could blind them to opportunity.

By contrast, non-local managers may recognise circumstances they have already encountered in other EMs. They could be better able to draw useful parallels and comparisons. Maybe above all, they might be sufficiently detached to appreciate an EM’s place in the wider investment world.

On-the-ground knowledge and global insight

By now it ought to be apparent that there is something to be said for a “best of both worlds” approach to EMs. Ideally, a balance should be struck between local expertise and a “bigger picture” perspective.

You may recall I mentioned spending much of my time in London. Crucially, I do not spend all of my time there.

Our team specialises in Asian smaller companies, which means we want to identify the brightest hidden gems across the region. In our view, we can fulfil this objective only if we have an on-the-ground presence and genuinely global resources at our disposal.

Accordingly, we use an investment process that is centred on in-depth research and direct engagement. We carry out both quantitative and qualitative analysis – some at first hand, some from afar.

To put it another way: our stock-picking is driven from the bottom up and from the top down. We see merit both in “being there” and in adopting a broader view.

Ultimately, it is a matter of combining micro and macro factors in an effort to arrive at fully informed investment decisions. This might be particularly useful in times of uncertainty and volatility.

Speaking on Brazilian TV shortly after his appointment was officially confirmed, Ancelotti said he would “love to get to know Brazil in general”. “I want to see Rio,” he said. “I want to see the beach…”.

Football fandom is notoriously fickle, but to me such a sentiment sounds very much in the “best of both worlds” vein. Perhaps a few more trophies really are on the horizon. Vamos, Carlo!

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