Clark Capital’s Wev on Argentina & Relative Strength

For this post, I interviewed Mason Wev from Clark Capital Management Group to get his views on Argentina and their relative strength-based approach to investing. Mason is a Portfolio Manager at Clark Capital.

What factors led to your decision to invest in Argentina?

We have developed a quantitative matrix of 205 ETFs that we rank weekly based on total returns over the intermediate term. This list of 205 ETFs includes those focused on U.S. equity style boxes and factors, U.S. sectors, international equity, fixed income, currencies, and commodities. There are 84 single country and regional ETFs within the international equity category.  In the case of international equities, the top 16 out of the 84 eligible ETFs become candidates for inclusion in the portfolio. With respect to Argentina, we knew that the country had gone through a few terrible years lately, both economically and in equity market performance. As sentiment and performance began to turn, we became interested as it rose into the top half of our rankings and then even higher.

We tend to find the most success in ETFs that have had multi-quarter and multi-year underperformance, but then experience positive changes and finally begin to find their sea legs.  Our research has shown that historically after a long period of underperformance (like we saw in Argentina over the past few years), the likelihood of an ETF then entering a period of strong, sizeable outperformance is greater.  Considering this, we feel that the Global X MSCI Argentina ETF (ARGT) is an ideal holding for our portfolio.

When looking at relative strength, are you comparing Argentina to other developing nations or to a broader group of equities?

We compare all international ETFs – developed, emerging, and frontier – in a matrix that ranks them by their relative strength.  This rankings-based methodology is flexible and can invest anywhere.  An important aspect of the matrix is that the U.S. itself is a country and potential holding, and we find that the U.S. equities often rank very highly during global market weakness.  Aside from using the rankings-based methodologies as the primary filter for choosing holdings, our other major concern is constructing a portfolio that avoids too much concentration.  We end up spending much of our time thinking about how much hidden risk, such as currency, sector, or commodity risk, is contained in the portfolio.

Do you see positive relative strength among the broader emerging markets right now, or is this really an Argentina-specific story?

We do see a number of emerging markets rising through our ranking system, but we believe what’s more important than a country’s level of development right now is its exposure to commodities.  Many of the international ETFs rising through our rankings are commodity complex-centered countries.  Argentina itself has 30% of its portfolio in Energy and 6% in Basic Materials.1  Having 36% in the commodity complex is not extremely high for an emerging market, but we see others like Peru, Russia, and some developed markets like Canada Small Cap, and Norway with very high commodity exposures that are rising through our rankings.

We believe what has been holding back the relative strength of the broader emerging market space is weakness in China.  When you include A-Shares2, China is a huge weight in most broad emerging markets indexes, but the country’s stock market has been persistently weak over the last twelve months.  Therefore, we prefer to slice the universe more narrowly to find opportunities within the emerging markets where there is strength.

Much of the momentum in Argentina has been driven by the positive sentiment around President Macri and the reforms he has implemented in his first few months in office. Do these factors explicitly come into consideration when you consider investing or are they implicitly considered through the relative strength analysis of Argentina?

Our relative strength-based methodology is completely agnostic as to why an ETF ranks highly or poorly.  The methodology attempts to pursue strong relative performers, as we have observed their strong performance continue over the intermediate term.  Therefore, investing in Argentina was entirely based on recent performance and not due to a qualitative analysis of recent political changes.  Our belief is that every day the market prices in all of these factors into equity prices, and we prefer to trust the market’s collective wisdom in the form of real prices and returns.

Is there any consideration for Argentina’s valuations, or is the analysis purely based on relative strength?

The analysis is based purely on relative strength.  However, just as we favor ETFs rebounding from periods of weakness, we prefer to see ETFs that we judge to have both attractive valuations and that are showing relative strength.  The reasoning makes intuitive sense – an ETF with both attractive valuations and positive relative strength has both momentum and value characteristics, possibly setting it up for a period of strong future performance.  The latest data on the MSCI Argentina Index3 (as of 5/31) shows a 12 month forward P/E4 of 11.31.  Thus we find Argentina to be very attractively valued, and while it presents both opportunities and risks, we believe that we will be adequately compensated for taking those risks.