A fine way to invest in emerging markets has been to avoid them: Snap up shares in multinationals that are expanding into Africa, Asia and South America, instead of taking your chances on regional firms with limited reach and questionable accounting standards.
But is the wisdom of this approach now fading? Unilever PLC offers a compelling example of how it is.
The consumer products giant has long been one of the go-to names in emerging markets, where sales in Asia and Africa alone accounted for more than 40 per cent of the revenue total for the Britain- and Netherlands-based company in 2013.
The company's goal is to drive its emerging-markets share up to 75 per cent of sales eventually, gaining access to a market that McKinsey & Co. has called the "biggest growth opportunity in the history of capitalism."
Unilever's stock has largely followed the company's vision, returning 228 per cent over the past decade, after factoring in dividends. That beats the S&P 500 over the same period.
More importantly, at least to emerging-markets investors, it has outperformed the iShares MSCI Emerging Markets exchange-traded fund – which holds 837 stocks trading on exchanges in countries such as Brazil, South Africa, Indonesia, India and China – by more than 30 percentage points, and showed less volatility.
However, Unilever now says that domestic companies operating in emerging markets offer the stiffest competition, rather than rival multinationals such as Procter & Gamble, Nestlé SA and Colgate-Palmolive Co.
"We don't see Procter & Gamble as our toughest competitor," Paul Polman, Unilever's chief executive, told the Financial Times. "People still have this framework – that you compete against these three [global] companies – it's just not true any more. Most of our competitors in the emerging markets are regional players."
So why not invest in these regional players instead?
A report released earlier this month by Boston Consulting Group said essentially the same thing as Mr. Polman. So-called local dynamos – 50 emerging markets-based companies the group identified for their fast pace of growth – are successfully competing against much larger multinationals.
Between 2009 and 2013, these companies expanded their sales at an average annual rate of 28 per cent, and the publicly traded ones generated returns of 26 per cent a year to shareholders – versus returns of 16 per cent a year for Unilever over the same period.
The traditional advantage of lower cost is no longer the key to the local dynamos' success, but rather "catering to customers and local conditions, leveraging digital technologies, operating at warp speed, and adapting to uncertainty and circumstance," the Boston Consulting authors said in their report.
The dynamos they identified include South Africa's department store chain Woolworths Holdings Ltd., China's supermarket chain Yonghui Superstores Co. Ltd., India's restaurant chain Jubilant Foodworks Ltd., Indonesia's Bank Rakyat Indonesia and Vietnam's food and beverage producer Masan Group Corp.
Admittedly, it isn't easy for small investors to buy individual stocks on local exchanges overseas – and some of these dynamos are pricey next to trailing earnings.
But the bigger point is that emerging-market stocks as a group (and the ETFs that track them) are now looking like a compelling alternative to multinationals.
Sure, you have to put up with more instability, given that shifting economic conditions will have a bigger impact on smaller, regional companies than the multinationals that span the globe.
In the rush to tap into the rising affluence within emerging markets, though, regional companies are not just competing against the behemoths. They are thriving.