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FT: EM Affiliates Outperform Their Multinational Parents, says Yale Professor

Updated: May 20, 2022

My note: The observation the EM affiliates outperform was that Hugh Young and his team at Aberdeen had been aware of for several years. I picked up the lead, contacted Martijn, and provided him with the data he needed to turn Aberdeen's observation into a statistically significant finding.

What’s the best way of investing in emerging markets? Local companies or multinationals with big exposure to emerging markets? How about getting the best of both worlds, says Martijn Cremers, of Yale University. Cremers shows in a study published on Monday that emerging market-listed affiliates of multinationals perform much better in the stock market than their parents. The 92 such affiliates comfortably out-perform both emerging markets and developed world markets. Take a bow, Hindustan Unilever, Walmart Mexico, and Coca-Cola Icecek (Turkey).

The companies in the study, commissioned by Aberdeen Asset Management, span the EM globe, with 24 from Asia, 15 in eastern Europe, 22 in the Middle East, 9 from Africa (all South African), and 22 in Latin America. Their listed parent companies come from the US, western Europe and Japan. including some with more than one affiliate, notably Unilever, the Anglo-Dutch group with three, and Nestle, with two.

Cremers, an associate professor at the Yale School of Management, found that between June 1998 and June 2011 a dollar invested in these affiliate companies would have grown to $23.03, compared to $8.92 for an investment in their local stock markets. A portfolio of the 86 parent companies (six are unlisted) would have fallen behind, with a dollar investment growing to only $4.15. And the rich-world markets in which they trade have done worse of all: a dollar invested would have brough back just $2.00. For comparison, the MSCI index over the period would have brought a return per dollar of $1.63.

The chart below shows the outstanding out-performance of EM affiliates:

Moreover, as Cremers shows, the extra returns earned from investing in EM affiliates don’t come at the price of greater risk. The annualised volatility of the affiliates’ portfolio was 24.6 per cent, lower than for their country indices (29.7 per cent), and only slightly higher than their parents (21.4 per cent). Cremers argues that this out-performance is the result of the affiliates’ better corporate governance than other companies in their local markets, plus the stabilising role played by the multinational parent groups.

Both these factors are particularly important in a crisis. When other investors head for the door, and finance may be hard to find, multinational parents tend to stand by their EM affiliates. What’s particularly striking about the report’s findings is the way that the EM affiliates have pulled away from their parents since the 2008 crisis. The crisis clearly forced many investors to put their portfolios through some rigorous scrutiny. They decided that they liked the safety of the affiliates over their local markets – and the growth prospects of the affiliates over the parent groups.

What the analysis cannot say is what comes next. Could it be that other EM-based companies learn from the experiences of multinational affiliates, improve their corporate governance and improve their stock market performance? Or do they face too many local pressures – political, economic and social – to change their ways very much? If the local competition doesn’t improve, multinationals’s affiliate could continue to out-perform. But if it does, they and their stock market performance could come under pressure.

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