A top-3% fund manager over the past 5 years explains how to ride momentum in markets and find under-the-radar winners overseas

• Instead of attempting to outsmart the market, Ivo Kovachev rides stocks’ momentum.
• Little-known companies in emerging markets are his favorite investments.
• Here’s how Kovachev selects stocks and where he sees the best opportunities now.

Ivo Kovachev, a market veteran, rises above his peers by following the pack.

While many fund managers seek to buy undervalued stocks before they rebound, Kovachev goes against the grain by riding market momentum. That counter-contrarian approach may appear paradoxical, but it has worked wonders for Kovachev in recent years.

According to Morningstar, the JOHCM Emerging Markets Discovery Fund (JOMEX), which Kovachev co-leads with Stephen Lew and Emery Brewer, outperformed 98% of diversified emerging markets funds in 2023 and is in the top 3% of its category over the last five years.

Aside from their returns, Kovachev and his colleagues at J O Hambro Capital Management stand out by remaining open-minded rather than firm in their beliefs.

“We are humble guys — we listen to the market,” Kovachev told Insider recently. “So, if the market is rising, such as in AI, we go out and buy something.” And if the market begins to correct, we don’t think we’re the brightest people on the planet.”

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The strategy Kovachev has devised is ideal for this year’s momentum-driven market.

“We always look for something that moves,” Kovachev explained. “We’re trying to regain momentum.” And the secret is that momentum can be found not only when everyone sees it and stocks are flying and insanely expensive, but it can also be found starting in the recovery points.”

“That’s the beauty of those markets,” Kovachev later added. “There is always something moving up somewhere.”

As the market continues to rise, the fund manager has been looking for opportunities, including those in rapidly growing industries such as artificial intelligence. Despite admitting that the excitement surrounding AI-related companies is similar to a bubble, Kovachev feels compelled to play it — albeit cautiously. He believes that there are small companies with AI exposure that aren’t vastly overvalued.

However, Kovachev believes that growth investing entails more than just buying hot stocks. He also looks for “recovery growth” names that have stabilized and shown signs of life after falling. While last year demonstrated that there is no foolproof way to prevent losses, it can aid in risk management.

“What happens with growth funds — even though most of them do okay and very well in good years, they’re all crushed in bad years,” Kovachev explained. “And we mostly avoid those drawdowns.”

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While Kovachev considers broad market movements when investing, he remains a bottom-up stock picker who looks for several key qualities in stocks.

According to Kovachev, the most appealing companies have a substantial, sustainable competitive advantage and simple business models that translate to strong sales and profit growth.

The fund manager also looks at a stock’s technical chart patterns to determine its momentum, which is especially useful outside of earnings season when company news is scarce. Kovachev considers a company’s relative valuation to see if it is justified based on its growth trajectory after finding firms with promising technical setups and vetting their businesses.

As the name implies, Kovachev’s JOHCM Emerging Markets Discovery Fund focuses on underappreciated stocks in emerging international markets.

Most emerging market stocks go unnoticed until they are discovered by a large investment firm that recognizes the opportunity and initiates coverage on it. Many of the best-kept secrets in global markets will remain undiscovered unless this occurs.

Kovachev believes that stocks in emerging markets are particularly appealing right now. Companies in those economies, unlike their counterparts in developed markets, were not buoyed by a wave of fiscal or monetary stimulus during the pandemic. Instead, Kovachev claimed that they suffered from higher interest rates because governments were concerned that too much support would dilute their currencies.

Fortunately for emerging market stocks, Kovachev believes interest rates will eventually fall as inflation falls alongside oil prices. Discounted valuations, on the other hand, do not reflect that opportunity.

Almost half of the fund’s assets are concentrated in two high-growth sectors: information technology and consumer discretionary. Kovachev said he prefers smaller companies in Taiwan, China, and Korea, some of which have a tangential connection to artificial intelligence.

“Instead of having a few big companies that get all the attention, like Nvidia or Amazon or whatever,” Kovachev explained, “they have several small companies along the supply chain.”

Taiwanese firms Voltronic Power Technology (TPE: 6409) and E Ink Holdings (8069.TWO), which manufacture electrical equipment and electronic paper displays, are among Kovachev’s top holdings. Although Kovachev admits that the threat China poses to its smaller neighbor causes him to lose sleep, his fund’s investments in Taiwan still account for 22.5% of its assets.

If rising geopolitical tensions and war lead to capital flight from China, Kovachev believes India will be one of the biggest beneficiaries. Top positions in that country for the fund manager include car software provider KPIT Technologies (KPITTECH:NS), bottle distributor Varun Beverages (VBL:NS), and hospital chain Narayana Health (NH:NS).

Mexican companies are another group that stands to benefit from redirected investments. Firms in the United States looking to relocate their supply chains closer to home are looking south of the border, and while some of the country’s stocks are expensive, Kovachev says it’s for good reason.