MARK MOBIUS, FRANKLIN TEMPLETON
Mark Mobius might well be called the ‘dean of emerging markets’. He has been researching emerging markets for over 30 years and joined Franklin Templeton as president of the Templeton Emerging Markets Fund in 1987. At the time, emerging markets funds were a relatively new concept – but a good one at that. What started as a $100 mn investment nearly 20 years ago is now worth over $9 bn.
When Mobius was studying economics at Massachusetts Institute of Technology (MIT) in the 1960s, emerging markets were called ‘third world, poor nations,’ he says. In the mid-1980s the International Finance Corporation, a wing of the World Bank, asked Templeton to set up a fund to provide capital to the third world. ‘Being a multinational institution, it had to come up with a euphemism,’ says Mobius. Today, with Asia and other markets truly emerging, there is no need for a euphemism any more. ‘People realize that these countries can grow fast,’ he says.
While Hong Kong is technically his home base, Mobius travels extensively. The firm’s emerging markets portfolios have eleven offices around the world. Headquarters include South Africa, Brazil, Argentina, Turkey, Poland and Russia. From these local offices, analysts feed corporate information into a central database housed in the Hong Kong office; it now holds information on thousands of companies. ‘We are constantly scanning and updating to see what we should be buying,’ says Mobius.
At present, oil, gas and banking are strongly reflected in Templeton’s emerging markets portfolios because of the presence of these industries in countries like South Africa, Korea and Taiwan. Templeton’s diversified portfolio, however, has no more than 20 percent invested in a single country or industry and no more than 5 percent in any one company.
Mobius’s team pays careful attention to sell-side analysts, who they rely on to do some serious tire-kicking. ‘[We expect them] to find out what’s really happening on the ground because the initial research may be false or contain inaccurate information,’ says Mobius. Then the in-house screening process begins. ‘We look at ownership, corporate governance and, of course, the balance sheet and financials,’ he says. ‘Before we make a collective decision on buying, we must go and visit the companies. We do it on a regular basis, at least once a year.’
Of course they do not believe everything the sell side tells them. ‘We missed dot-coms pretty much because the evaluations were so unrealistic; we don’t believe in chasing bubbles,’ he says.
Despite the global trend towards better corporate governance and IR, there are still holdouts. As Mobius recounts, one Russian CEO recently started a meeting by saying, ‘Before you ask your questions, I have a question to ask you: I’d like to know if the destruction of the Russian economy by you capitalists is on schedule.’
‘It takes time for some people to get used to the idea that the company they are running is public,’ he concludes. ‘But eventually we won them over.’
VENKAT CHIDAMBARAM, GENERAL ASSET MANAGEMENT
Venkat Chidambaram manages $100 mn in two separate funds – global equities and emerging markets – for General Asset Management. There is some overlap between the two, says Chidambaram, with several Asian companies in both funds. The global equities fund also includes some Latin American companies.
Born and educated in India, Chidambaram moved to London to do his MBA and joined GAM in 1994. His stock selection process begins with a global economic outlook. ‘We then run spreadsheets on different regions and countries, so we can identify where there is an industrial recovery,’ he says. ‘Then we identify themes like, for example, the current pick up in the Asian economy.’
The final stage in his analysis is to evaluate individual companies, looking at valuation, financials and market share, and so on. The decision on where to buy ‘depends on how liquid the local stock is,’ he says. ‘If it is [liquid], we buy locally but we do buy ADRs in New York or London, if necessary.’
Chidambaram relies on magazines, newspapers and investment-banking research for leads. While focused on growth stories, he still considers companies that are restructuring. ‘When we go into Asia, we buy banks that have had a very bad time but are now beginning to restructure,’ he says.
These days, Chidambaram is staying away from pharmaceuticals and the oil and gas industry. Current oil prices are too high, he asserts. As for pharmaceuticals, GAM had a very large exposure (16 percent) two years ago but that was a defensive holding, which it dropped when the economy began to recover. ‘We’ve also seen a lot of patent expiries, leaving a lot of pharmaceuticals companies with big gaps in their product pipelines,’ he notes.
Chidambaram looks for changes that will make emerging markets more attractive. He watches for reforms that will improve local stock markets. On the currency front, he looks carefully at companies with natural hedges like exports priced in foreign currency. He also monitors recovering currencies, like Brazil’s real. ‘After the devaluation, the economy started to recover on the back of a reasonably good trade surplus and the currency started appreciating again,’ he says. ‘So now there are indications that interests rates will come down.’
On the corporate level, Chidambaram says the company tries to understand just what drives business and demand. ‘Also, what the margins are, what it costs to make the basic product and where other big costs are,’ he adds. The secret, he says, is to try to understand the business from the viewpoint of someone on the inside.
Researching a company begins with looking at its annual report, and these are more obtainable and detailed since many large developing world companies are now being listed in US and UK markets. As always, the final stage before buying is to meet the management. ‘In the US or Europe, management knows what to tell you,’ he says. ‘But in emerging markets it is slightly different. We do company visits in different parts of the world and we also share information with colleagues from different GAM funds who run Asian and European strategies.’
Not all companies have reached the new IR age, though. ‘Often, it’s someone in the finance department who meets you and he or she might feel that the questions you ask are not appropriate,’ he says. ‘But it is changing. With China, since they realized the potential of capital markets, some of them are getting their act together.’
IR in emerging markets is sometimes more reactionary than proactive, Chidambaram observes. There are exceptions, however, and most companies now post their latest presentation on their web site. ‘One promising sign is that most companies around the world have now hired someone dedicated to IR,’ he adds.
LIU-ER CHEN, EVERGREEN INVESTMENTS
Evergreen Investments’ Liu-Er Chen came to the US from Shanghai so he has direct experience of the biggest emerging markets. He did medical research in China and the US, where he first arrived in 1988, before doing an MBA at Columbia in 1993. He joined Boston-based Evergreen in 1995 and since then has been creatively applying his experiences by managing healthcare as well as emerging markets investments.
Chen’s emerging markets growth fund includes over $180 mn in equities. About 55 percent of that total is invested in Asian equities; the rest is invested in other emerging markets. For his part, Chen has visited every country his fund is invested in. Most recently he traveled to the Czech Republic, Hungary, Poland and South Africa. He also ventures to China, South Korea and Taiwan every year.
Experience has taught Chen the importance of meeting with management before taking a position in a stock. Years ago, he bought an Indian stock that was trading really cheaply but when he met with management, he realized they were saying different things than the broker recommending the stock. ‘Now it’s part of the process – we have to meet with management before buying the stock,’ he says. ‘Sometimes they come to see us but we travel a lot, too.’
Although there are drawbacks to investing in nascent markets, there are also opportunities for the discerning, notes Chen. ‘If you look at an average company in India, it’s really cheap,’ he observes. ‘There are more than 3,000 companies listed on Indian stock exchanges and several of them would have made you a lot of money if you had discovered them five years ago.’
Typically, Chen tries to meet with CEOs or CFOs annually. ‘But for the big companies, you don’t need to see the CEO every year,’ he says. This is largely because he takes a long-term approach to investing – he buys stock that is cheap (when comparing earnings to book value) but his analysis looks to the future.
Evergreen does asset allocation by country and industry, and carefully scrutinizes the political and regulatory environments of different nations. Chen cites telecom companies where the regulatory environment can really affect the degree of competition, and hence profitability.
Along with meeting management, Chen also looks at governance and transparency issues when screening potential investments. He uses the MSCI Emerging Markets Free Index as a benchmark but Evergreen also conducts its own fundamental research to pick stock for its mostly American shareholders. Regardless of the country, 60 percent of the assets are invested in companies that are market leaders. ‘We buy those companies at the price we think will allow us to make a consistently high return for the shareholders,’ summarizes Chen.
Another 20-30 percent of the assets are in companies that provide essential goods or services for a country. ‘For example, we will buy stock in telecoms companies in all these countries,’ he says. The rest is invested in companies making a mark in technology or services, such as Hong Kong companies that can bridge the gap between Chinese low-cost producers and American buyers of branded goods. Hong Kong’s Techtronic springs to mind, as does logistics company Li & Fung.
Currency is, of course, important in country allocations. ‘But also, more importantly, we look at where the currency is moving going forward – its budget deficit, for example,’ he says. Chen is cautious about investing in Europe and Latin America. ‘Over the long term, you always need much higher benchmarks because of the high interest rates,’ he says. ‘You have to be really careful, even though companies grow fast. Most of the industrial products are global now – how can you make money by investing in the company where interest rates are double digit? But, over time, there is always money to be made in countries like Brazil and Mexico, despite the high interest rate.’
