How an Emerging Market Stock Fund Stays on Top, With Less Risk

Hyung Kim, 44, manages the Virtus KAR Emerging Markets Small-Cap fund.

Photograph by Philip Cheung

Growing up in South Korea, Hyung Kim lived through the country’s significant political and economic changes as it shifted to a democracy in the early 1990s after roughly three decades of authoritarian rule.

The country struggled early on in the process, but now South Korea is considered one of Asia’s powerhouse economies.

Witnessing his own country’s transition has helped Kim, portfolio manager of the $270 million

Virtus KAR Emerging Markets Small-Cap

fund (ticker: VAESX), take a long-term view, particularly when markets are weak. History is filled with investors who stepped in during uncertain times and were rewarded, he says: the late-’90s Asian financial crisis, Brazil’s recession in 2015, and the 2008 global financial crisis.

“The point here is that even though in the midst of a turbulent time, when it may feel like the world is going to an end, life goes on” says Kim, 44. “People get married, have kids, send their kids to school, buy homes, go grocery shopping.”

Overlooking potential long-term investments could lead to missing significant opportunities, says Kim, whose fund typically takes a five-year horizon. He highlights

Samsung Electronics

(005930.Korea) as an example: It was a small-cap company in the 1990s and now has a market value of about $313 billion.

“If you are willing to take a long-term view that emerging market economies will continue to grow faster than developed countries, now may be a good time to look for the next Samsung Electronics while it’s small,” he says.

Under Kim, the fund has significantly outperformed Morningstar’s diversified emerging markets category and its benchmark, the MSCI Emerging Markets Small Cap index, over the past five years. It ranks in the top 5% of the category for the period, with a 5.5% five-year annualized return. Morningstar says the fund’s 1.79% annual expense ratio is above the category average, but Kim counters that the category consists mostly of large-cap emerging market funds.

Kim became portfolio manager of the fund in 2017, when he joined its subadvisor, Kayne Anderson Rudnick Investment Management, after covering emerging markets and international equities at Advisory Research Investment Management.

To reduce risk, Kim chooses companies with strong balance sheets, steady earnings profiles, and low leverage compared with the MSCI benchmark. He favors firms with pricing power, as they typically offer protection against inflation, and their nominal earnings growth may offset rising prices and currency depreciation. The high-conviction portfolio owns about 40 names. Most are businesses with locally used products and services that consumers need and want, or that have high switching costs or strong brands. The approach meets its goals: Over the past five years, the fund has taken on less risk to post its higher-than-average returns.

The fund’s holdings of online classified businesses check a lot of these boxes. Lithuania-based

Baltic Classifieds Group

(BCG.UK) operates the No. 1 generalist classified listing in Lithuania and Estonia. The fund’s No. 3 holding,

Grupa Pracuj

(GPP.Poland), is Poland’s largest online job board, with a 64% market share; it also has operations in Ukraine. These companies have strong network effects, being the dominant player in users’ minds, Kim says.

“If you’re the go-to place to find a buyer or seller or find a job…it’s really hard for a competitor to displace you,” Kim says.

Grupa Pracuj’s stock, however, has been dragged down by Russia’s invasion of Ukraine, even though its profits largely haven’t, he adds.

The Russia-Ukraine war has dented the fund’s overall returns this year: The fund held Russian securities at the time of the invasion, though Kim has since sold them. So far in 2022, the fund is down 18.2%, compared with a 17.2% loss for the category.

Kim also is keeping a close eye on the potential for rising tensions between the U.S. and China, in the wake of Rep. Nancy Pelosi’s August visit to Taiwan—the first by a House speaker in a quarter-century. Beijing asserts the island democracy is part of the mainland, and not independent.

Kim says he hasn’t made any material changes so far, and only 7% of the portfolio is allocated to China, significantly less than the category average of 27%.

Virtus KAR Emerging Markets Small-Cap

Total Return 1 Yr 3 Yr 5 Yr
VAESX -23.2% 6.5% 5.5%
Diversified Emerging Markets Category -19.8 4.0 1.5
Top 10 Holdings % of Assets
Company / Ticker
Tegma Gestao Logistica / TGMA3.Brazil 5.7%
Anhui Gujing Distillery / 000596.China 4.6
Grupa Pracuj / GPP.Poland 4.5
Oracle Financial Services Software / OFSS.India 4.0
Vasta Platform Class / VSTA 3.7
Heineken Malaysia / HEIM.Malaysia 3.7
SaraminHR / 143240.Korea 3.6
Sarana Menara Nusantara / TOWR.Indonesia 3.5
S-1 / 012750.Korea 3.5
Carlsberg Brewery Malaysia / CAB.Malaysia 3.4
TOTAL: 40.2%

Note: Holdings as of June 30. Returns through August 15; three- and five-year returns are annualized.

Sources: Morningstar; Virtus Investment Partners

“The real question is how far is China ultimately willing to go to assert its position on Taiwan,” he says. “China’s reactions so far, to Speaker Pelosi’s visit, seem to indicate that China, at least for now, isn’t behaving irrationally or unpredictably.”

It is a tough time to manage an emerging markets portfolio, given all the geopolitical upheaval, rising interest rates, and higher energy prices. The short-term outlook is anyone’s guess, Kim says, but longer-term he sees a lot of quality businesses trading at attractive valuations.

One such business is Thailand-based automobile-auction firm

Union Auction

(AUCT.Thailand), which boasts a 40% market share. Financial institutions sell repossessed vehicles on the Union Auction site to car and motorcycle dealers. The company faces no inventory risk, as it doesn’t take ownership of the vehicles. And at three times the size of its closest competitor, Union Auction is where financial institutions go to find the most buyers, the portfolio manager says.

Kim also holds

Boa Vista Servicos

(BOAS3.Brazil), Brazil’s second-largest credit bureau.


(EFX) owns 10% of the company, which operates in a duopoly with privately held Serasa Experian. Recession fears and concerns that rising rates will hurt credit demand weighed on the stock earlier in the year, but strong second-quarter results have driven a comeback, he says.

Rising interest rates affect stock valuations and the cost of debt, but that isn’t a worry for Kim. Most of his holdings have little debt and fund their operations through cash-flow generation, illustrating his low-risk approach. Such conviction in quality companies enables him to move through difficult times like these with confidence.


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