Alistair Reynolds, Scottish Widows Emerging Markets
For Alistair Reynolds, there are two types of company in this world: the type that takes IR seriously, and the type that doesn’t give a fig. ‘Those that don’t are typically family-controlled companies,’ says the senior fund manager for Scottish Widows’ £100 mn Emerging Markets Fund. ‘They’re mainly in Asia, Latin America and Russia. They might be aware they have some regulatory requirement for financial reporting but often they see the international markets as a source for finance only.’
For many, once the cash is raised, there’s little to do beyond the regulatory minimum required to keep investors informed, Reynolds says. Naturally, he prefers to avoid companies with poor IR, but he won’t bypass them completely. Around 10 percent of his portfolio comprises companies that have excellent growth prospects, but often dismal IR.
Conversely, good IR presence and company fundamentals, lashed onto a deeply unreliable political and legal system, are to be avoided. Take the example of Yukos in Russia. ‘We’ve had no holdings in Yukos but it has very good IR and has really embraced principles of free access to information,’ Reynolds points out. ‘Unfortunately, that doesn’t stop the company being embroiled in legal and operational difficulties. The interpretation and application of the law are still at an early stage.’
A sector where communication is always reliably awful, whichever country it’s in, is property investment companies, says Reynolds. They’re often family-owned and dragging a heap of dynastic squabbles behind them. Definitely ones to skip, he advises, as are some Korean companies – even respected blue-chip players like LG Group.
‘LG Group is a big Korean industrial with wide interests – everything from heavy industry to retail – and it has myriad cross-holdings,’ Reynolds explains. ‘There have been numerous occasions where one of its listed companies has transferred funds to an unlisted arm of the group, or given it a loan. And because decisions are taken at a level far higher than the IR people or minority shareholders, there’s very little the IR team can do to forewarn you of these issues.’
Edinburgh-based Reynolds and his team of six analysts make good use of online voting system Votex, which allows them to check on resolutions for general meetings and to get their views across – forcibly, if necessary. Hard copies of annual reports are good to have around, but the sheer convenience of downloading a PDF with up-to-the-minute financials blows annual reports away when it comes to timeliness, Reynolds says.
IR commitment to better web site information also remains an ongoing project for many. SingTel, a Singapore Telecoms company, has the sort of web site Reynolds wishes more companies would invest in. ‘There are downloadable reports and quarterly updates, and it provides contact details of all the IR team, plus a forward calendar of expected announcements and events it’s going to be hosting with investors,’ he says. ‘It’s just great.’
David Dowsett, BlueBay Asset Management
However sophisticated IR and emerging markets become in the future, says David Dowsett, fixed-income senior portfolio manager at BlueBay Asset Management, ‘you’re never going to take the wild-card element away.’ For Dowsett, that wild-card ingredient is one that livens up his job tremendously: tantrums between the ratings agencies, the nebulous world of Russian hedge funds posing as respectable banks, even packed throngs of sacked Brazilian bingo workers attempting to bring down their government.
Dowsett, based in London, co-manages BlueBay’s emerging markets £105 mn bond fund – up almost 10.5 percent in the last year – which has a 70:30 mix of government and corporate debt. Despite investing in some dodgy investment territory – Colombia and Ecuador, for example – the BlueBay fund manager says corporate transparency is generally of a far higher standard than it was even five years ago.
‘Even in a place like Indonesia it’s well understood accounts have to be complied with,’ Dowsett explains. ‘It’s very rare to be surprised at a governance level.’ But when dealing with information from which you’re two or three levels removed, you really have to watch the figures; and the same applies if you’re dealing with investment banks, Dowsett warns. ‘Often issuers receive bad advice from investment banks, which can be short term in their outlook,’ he says. ‘The next fee on a deal they bring is more important than the ongoing market performance.’
Rather than put up with investment banks piling onto the scene, often in difficult environments, Dowsett prefers to deal with an issuer directly – provided this can be done with care and thought. ‘If a poor issue comes out of a corporate or a country , you can forget future issuance prospects [from there],’ he points out. ‘[Russian gas giant] Gazprom is a good example. It issued a 30-year bond in April, despite unfavorable conditions, which has compromised its issuance prospects for the rest of 2004.’
April, in fact, was when concern over US interest rates started to rise rapidly, but Gazprom just stuffed the issue onto the market. ‘Several existing bonds fell five or six percentage points,’ says Dowsett. ‘That was severe material loss for some investors.’ But turmoil can be taken advantage of, provided the long-term view is solid. When 30,000 Brazilian bingo hall workers lost their jobs in April because of a government crackdown on corruption – the former head of the Rio de Janeiro state lottery had been secretly filmed demanding government kickbacks – confidence in the generally reform-minded Brazilian financial markets began to erode.
Anticipating the moves of rival rating agencies – downgrading or upgrading credit status – can also provide investment opportunities, as well as taking advantage of the agencies’ ongoing rivalry. ‘Moody’s upgraded Russia to investment grade status because its ability to pay back debt is not in doubt,’ explains Dowsett. ‘But S&P found any excuse not to upgrade it, and still hasn’t. The agencies’ decisions are important because some investors just won’t invest until Moody’s and S&P both upgrade something.’
While the credit movers and shakers squabble, Dowsett urges more governments and companies to get down to basics: better IR. ‘Even if there’s unexpected bad news-flow about a particular country we’re invested in, we’re more concerned about where and when it does issue bonds,’ he says. ‘It sounds obvious, but few follow this process.’
Christopher Nicholson, Oraca
Any talk of corporate social responsibility (CSR) commitment to the manager of a chemical industrial plant halfway up the Ivory Coast is probably a limited conversation for both Christopher Nicholson and the company manager. ‘Many [emerging markets] managers are really quite sophisticated and would know what [CSR] is,’ Nicholson says. ‘But they might well roll their eyes and think, The West has suddenly discovered its activities are polluting the environment, and so is now suddenly imposing costs on us. Well, how convenient.’
Nicholson, an independent sell-side telecoms analyst, provides sell-side emerging markets equity research to hedge funds, business information providers and bank corporate finance departments. Nicholson’s London-based company’s coverage includes Africa, Latin America, Russia and some parts of Asia. He notes that although roadshows are particularly valuable when it comes to emerging market companies, he’s still mindful of the massive resource drain it can be for them.
Like Scottish Widows’ Alistair Reynolds, Nicholson regards Russia with huge caution. Russia has many profitable telecom businesses and, in principle, investors would want a share of that, he says. ‘But it is an economy where the rule of law is often not imposed,’ he cautions. ‘Even in Russia there has to be a rule of law that underpins property rights. It’s no good for the government to confiscate property from political opponents, even if they are robber barons in the old US style.’ He is, of course, referring to Yukos and the imprisonment of ex-CEO Mikhail Khodorkovsky.
When it comes to valuing companies, Nicholson says conventional macro-micro judgments can be close to useless, even conventional ones like skill bases and education. Often it’s more about understanding a country’s exposure to existing infrastructure weaknesses. ‘Is its electricity or power generation reliable, for example?’ he asks. ‘If you can get an idea about this you won’t lose your nerve if the company loses three days a month to electricity failures.’
Basic local cultural knowledge also helps – even down to the seemingly inordinate length of the local midday siesta. ‘When it’s 50 Celsius outside there’s absolutely no point in trying to do business, especially if the air conditioning supply is unreliable,’ Reynolds says. ‘You’ve got to value the companies in the markets in which they operate. You can’t just parachute someone in from the West.’
Slim Feriani, Martin Currie
Ranked no 1 by both Lipper and Standard & Poor’s recently, Martin Currie’s £20 mn Emerging Markets Fund is a light, aggressive fund containing just 55 stocks. Slim Feriani is the manager at the Edinburgh-based fund. He doesn’t stick to the traditional Asia/Russia/South America mix, but is prepared to dip into little-known pockets like Croatia – pharmaceutical company Pliva, for example – when doing his shopping. ‘We don’t want to hug any index,’ Feriani explains. ‘The only way to really add value to our fund is to hold a relatively short list of stocks – it really is quite punchy, compared with the competition.’
Feriani wouldn’t think about investing in a stock unless he has built up confidence through one-on-one meetings; all his picks are true conviction choices. Meeting with IROs and managements, he says, is really not about discussing the share price. ‘It’s often more about credibility, what they say, and what they do,’ he notes. ‘A second meeting is often more rewarding. By the time you’ve had a fourth of fifth, you’ve really got a feeling for what they will say, and what they will deliver.’
Feriani is not greatly interested in hearing about the latest tally of units sold, or any management spiel about business on the company’s own patch. ‘I want to get the overall view of the sector,’ he explains, ‘not just within, let’s say, the local South African context but also the global context. And it’s important to see whether [management] has that global view, and isn’t just biased by local factors.’
Nor is information – often of questionable accuracy – communicated well via, for example, a Chinese translator, Feriani says. ‘Chinese companies really do have an issue with communication because meetings always have to be translated, so you don’t get the full version – it’s secondhand information,’ he comments. However, he concedes that Chinese oil conglomerate CNOOC is an exception, with excellent IR.
Company annual reports barely register for Feriani. ‘As a fund manager I don’t have the time to read the whole annual report – it’s about priorities, he says. ‘If you’re a decision-maker. you don’t have the luxury of just 20 companies in one sector to follow.’ Timely and useful communication from an IRO is, however, more prized, not to mention needed. ‘Getting that really is crucial,’ he concludes. ‘I appreciate it very much when investor relations officers send information to me direct, rather than through a broker – and in its original version.’
