The Exchanges

Q When you say around these countries, emerging markets long enough, you also have Lots of big political events. What did you see in your early investment banking years about, call it the political governance as it affects companies and stocks?

A One that certainly comes to mind when I had just switched over to the buy side, this of course is the political governance. I strongly believe that you can't have a purely bottom-up discussion on emerging market stock because you miss a key part of their story, which is the nature of the system these companies operate in. So the story I like to tell is, is Russia. There was a time when Airbus and Boeing were thinking of the next generation aircraft, what should be materials used. And there was a debate whether they should use a composite or titanium. The vast majority of the world's Known reserves of titanium are in Russia. And so I went to see the oligarch who, and of course there are always oligarchs in Russia, who owned VSMPO, which is the company that had the titanium reserves in Russia, to see if they could get surety of supply. Obviously, once you design an airplane using titanium, your expectation is you're going to lock that in for 30 years. You can't design around that once you start using titanium. And so when I had dinner with him at a restaurant not too far away from the Kremlin, he starts very loudly Complaining about the corrupt Putin regime made me feel very uncomfortable. It's one thing to do it in his office, another to do it in a very public forum. And even then I was, even though it was many, many years ago, I knew of the nature of the regime. So I changed th…

AI assessment note: “you can't have a purely bottom-up discussion on emerging market stock because you miss”

Q When it comes to constructing your portfolios, a lot of strategies like this are benchmarked against whatever it is, Morgan Stanley Emerging Market Index, which is just a construct of size and can't possibly take into account all of the factors you're talking about, about investing with good countries and the right type of culture and sectors. How do you think about the benchmarks that you're investing against?

A In emerging markets, between 95 and 98% Of the money managed in this asset class is benchmark against MSCI emerging markets. It's a reality. I know that other asset classes, you have more diversity. We don't have it in emerging markets. So for better, for worse, and I think for worse, we have to live with MSCI. And what do I say by for worse? I don't agree with the opportunity set that they've created. It's a poor starting point. I'll give you some examples between a quarter and a third of the benchmark are state-owned enterprises. Think Gazprom, Rosneft, PetroChina, ICBC, Petrobras. Most of these companies that I hope you can appreciate are governance challenged. They don't necessarily represent the future of emerging markets. Tencent certainly is not an SOE, and certainly look at what that share price has done over time. Walmex, the Walmart de Mexico in Mexico, is a private sector company. Look at that share price, what that's done over many, many years. And so MSCI places a heavy emphasis on state-owned enterprises, and they miss a lot of new economy stocks. So Mercado Libre, which is Latin America's Amazon C, which is Southeast Asia's Tencent and Amazon. They're not in the benchmark partially because they're not traded in their home markets. And I don't know why MSCI has that bias and partially because they want to see how an industry develops before perhaps putting them in…

AI assessment note: “So for better, for worse, and I think for worse, we have to live with MSCI.”

Q So you walk through each of those, and let's start with that country assessment. What are the key variables that you want to look at to determine if that's a country you're likely to invest capital in?

A What am I looking for? I have to understand the political process. I have to understand the macroeconomic management. I have to look at the comparative advantages of each of the countries. I have to look at things like industry diversification. Taiwan, two thirds of the index is tech. Russia, 80% of the index are oil and gas and natural resources broadly. These are all factors that matter because I'm not predicting GDP growth or inflation. I'm making an assessment of the choices that these countries have made In some cases, the people have made them via choosing politicians. In other cases, they're in dictatorships. But the choices that are made influence the environment that these countries operate in. The implication of all these choices, the economic trajectory of these countries, macroeconomic and geopolitical risks that these countries take. And then, of course, because of that industry issue that I raised as the cyclical considerations. And so this is what we do. And how do we do that? Well, we meet with The country head of the IMF and the World Bank. We meet with politicians. We meet with opposition politicians. We meet with journalists. We meet with regulators. We meet with everyone and anyone that can give us insights into that process, the political process, economic process, and the resulting outcome. We also spend a fair amount of time with our own resources at Janu…

AI assessment note: “I have to understand the political process. I have to understand the macroeconomic management.”

Q So we've gone through this period of probably more than a decade now where the US markets have just outperformed the rest of the world. And I'm curious as you're talking to people about what you've done, does this question come up of, you know, why are you bothering?

A Why bother? Well, number one, I would say if you were to strip out the 40 most successful US stocks out of the S&P 500 and compare that to the, so the remaining S&P 460, I guess. The S&P 400 sixty's performance is actually bang in line with emerging markets. Bang in line with European markets. There's an outsized, outperformance by the likes of Google and Apple that have sort of skewed US equity returns. Historically, there were two reasons to invest in emerging markets, outsourcing and convergence. Outsourcing, of course, is building cheaper, faster, better. So TSMC, the semiconductor maker, and Emphasis, the business processing company, are examples of successful business models in outsourcing. Then there was convergence. So as income levels rose in emerging markets, you'd expect households to want to buy cars, homes, So HDFC in India and Walmex in Mexico are good examples of those. But we're now beginning to see an emerging third reason to invest in emerging markets, which is innovation. And a lot of these are technology enabled companies that are solving EM frictions in very new and interesting ways. We have to keep in mind that emerging markets are home to great economic inequities, very uneven access to healthcare, financial services, and so forth. Some of the most exciting innovations that we're seeing address those obstacles. Why do you need to build branch network in r…

AI assessment note: “Why bother? Well, number one, I would say if you were to strip out”

Q So what was the path that led you to go from the sell side to the buy side?

A Certainly as an investment banker, we were very transaction oriented. Certainly we were financial advisors to companies and governments, but I wanted to eat my own cooking. I'm always suspicious of chefs who want to eat their own cooking. And as an investor, that's exactly what you're doing. When you make recommendations, when you place them in your portfolios, and you, as a shareholder of the fund, you are eating your own cooking. You have to believe. As a investment banker, we would sometimes put together a transaction That we didn't necessarily, at least I didn't necessarily believe in, but if the shareholders, if the market wanted to buy it, and that was the market caveat emptor, that was their decision. But I wanted to be more in a situation where I was investing in things that I bought into, that I really fundamentally believed in. That's what led me to move away from investment banking and toward the buy side.

AI assessment note: “That's what led me to move away from investment banking and toward the buy side.”

Q So once you get into the bottom-up, what are the types of companies that you like in your portfolios?

A So what we like to do is I ask my analysts, I don't want research reports on Mexican cement. I want you to tell me how you're different. A research report says this is the Mexican cement industry. These are the major players. That's not as interesting as we should buy this stock in the Mexican cement industry. And this is the homework that I've done to have a differentiated view. And we would like to divide that differentiated view in four key areas, either the You have a differentiated view in the magnitude of the earnings or cash flows that you see. You have a difference in view in the duration, the quality, or the use of the cash flows that are going to be generated. So are they empire builders, for example, or they actually return cash to shareholders. This allows us to focus our stock selection in one of those four key drivers. If you believe that the market is misunderstanding the duration of growth, then let's see the homework that you've done to have that view. And that gives us more confidence that we're not focusing on research projects, but actually an investment case is being made for the stock.

AI assessment note: “divide that differentiated view in four key areas, either the You have a differentiated view”

Q When you put that together in a portfolio, what's typical kind of number of names you have?

A We usually have between 50 and 80 names. My style bias is agnostic, which is a very strange term. I allow the bottom-up stock picking to drive my portfolio tilt. If the bottom-up stock picking leads me to a tilt toward value, then so be it. If it tilts me toward growth, so be it. There are times to be tilted one way or the other. We are not theological about having a growth portfolio, a value portfolio, and I think that's important in emerging markets. You have to consider that before Value outperformed growth on average six out of seven years in emerging markets, but post 2008 growth, I think has outperformed nine out of 11 years. And so if you always had a value bias or always had a growth bias, you would tend to outperform in one regime and tend to underperform in another. Maybe the construct of value versus growth is artificial. Why not allow bottom-up stock picking to drive what you own in your portfolio?

AI assessment note: “We usually have between 50 and 80 names.”

Q When you see a company like that, that is aligned the right way with tailwinds, how important is the management team?

A Enormously. Enormously. Earlier in a lot of these emerging market histories, the kind of capabilities that was asked of the management teams was more on the political side. Political connections. How you develop your moats was directly related to how you can influence the government to set up barriers or creative ways of using government regulatory pressures to make sure that you are the only license holder. But as the world has evolved and changed, and as those barriers have come down, I wouldn't necessarily say they've all come down everywhere. The ask on the management team has changed. And then suddenly, the kind of things that you ask about for a management team are more like what you would expect to ask for a management team in the West. And so building a culture, rewarding employees with, with stock, what are your motes? How defensible are those motes? What are your thoughts about returning cash to shareholders? Are you an empire builder? Many of these old school controlling shareholders, the old families are empire builders. They find it hard to return cash to shareholders. You could point to a lot of Korean companies, for example, are that way. And so the ask of the management team are changing, but at the same time, there's also generational change. We've noticed that as the patriarch, the family patriarch of the family hands the reins over to the next generation, a l…

AI assessment note: “Enormously. Enormously. Earlier in a lot of these emerging market histories”

Q What's been your biggest mistake and what have you learned from it?

A You might find this a curious answer. When social media was first beginning to make an impact, I frankly didn't understand. I did not appreciate the business potential. I thought it was going to be limited because I couldn't imagine sharing personal details and my own opinions for others to see. If you really are a true friend of mine, shouldn't you just pick up the phone and we shouldn't we just catch up over a dinner? I did not understand it. The lesson here is that sometimes you are not the target audience. Number one. And number two, sometimes you become the target audience as you change. I underappreciated that when social media first showed up on the scene, I had to join Facebook to understand what is it that people are talking? What are they doing? I've gained an appreciation that for many, it's about making connections with similar minded people, even if they're not your friends, maybe they're your online friends, but they're not your personal friends. It's about finding communities. And the different ways of monetizing that. And so just because I didn't see the potential doesn't mean that there isn't potential. And so again, who is the target audience? And you have to be humble enough to appreciate that maybe you will change. I mean, you will become the target audience.

AI assessment note: “I did not appreciate the business potential... The lesson here is that sometimes you are not”

Q How do you intersect your assessment with what's happening at the country level with how that impacts particular industries within that country?

A So the Chinese have this concept called politically correct. What does it mean to be politically correct is to invest alongside national policy goals. And certainly while China is an extreme example that you always, you generally want to be investing in companies and industries that are being politically correct, that you generally need to appreciate that as countries develop, that certain industries will have their day in the sun. And certainly some industries will have support from the government. And some industries will be faced with regulatory thunderbolts from the blue. And so what we try to do is then go from the macro to the micro. And that's where the heavy work, the heavy lifting is done by our analysts to understand, given the environment, the soup, the river that I've identified in terms of the operating environment, these companies face, what are some industries that are going to be winners? And what are some industries that are going to be losers in this? If we're very concerned about the currency, for example, maybe exporters are better placed. To be, for instance. And so these are the kinds of discussions that we have that we start marrying the top-down views with the bottom-up views. Now, let's be clear. The bottom-up is enormously important. You have to choose the right companies, strategies, the right modes, the right valuation, but in emerging markets, that …

AI assessment note: “we start marrying the top-down views with the bottom-up views.”

Q How do you manage around the challenges of language and cultural barriers individually with you and your team compared to the countries you're investing in?

A So this is where there's strength and diversity on a team. But the first point I would mention is that most emerging markets, you could get by with the international language of bad English, but you need to do more than that. Obviously you will miss cultural nuances. Things get lost in translation. And so you do want to have members of your team that do speak different languages. I speak Spanish and understand Portuguese. They're members of the team that speak Chinese, and that does matter. That is important. Yes, meeting with a CEO and CFO that many cases speak English or bad English, as I said, we all speak bad English, I suppose, um, that, uh, certainly gives you one perspective, but imagine if you could speak with the line manager or the head of the factory or the head of the union in the local language over drinks, over dinner, over lunch, and you get a much more unfiltered view of what's happening. Maybe It prompts questions that you hadn't thought of. Maybe you get a better sense of how deep in the organization some of these changes the CEO is talking about are really penetrating. Due diligence isn't just about asking a treasurer or CFO or IR at a conference in New York. That's not sufficient due diligence. You need to travel to these countries, kick the tires, meet with competitors, meet with the supply chain, meet with former employees, expert networks, Meet with gover…

AI assessment note: “you do want to have members of your team that do speak different languages”

Q I'm curious to go from that individual assessment up to part of your process, which is the types of information that you're gathering in the 30 countries around the world, lots of different companies, a lot of different political regimes, requires a breadth that many have struggled with in emerging market equities. And I'm curious, what does your team look like?

A I am a firm believer that emerging markets are not an island to themselves. Not all the world's crises originate from emerging markets. Not all the world's problems originate from emerging markets. We get hit from contagion from other asset classes. Um, and so it's very important to have a more integrated approach. We spend a fair amount of time talking to the emerge, our emerging market debt team to get their perspective, to hear about what the global fixed income team is thinking. We spend a fair amount of time integrating with centralized research at Janice Anderson. Many of our emerging market Success stories started off as carbon copies of successful business models in the U.S., and then we evolved and changed depending on local conditions. But nevertheless, it's very helpful to hear the centralized research point of view in terms of what's happening in other parts of the world. We integrate with the ESG team to talk about what the latest standards are. We have a dedicated team of analysts, but we rely on the larger part of the organization to complement what we do. It's very hard to keep track of what's happening in 30 countries, plus what's happening in the U.S. markets, plus what's happening with the ECB, plus what's happening in geopolitics. And so consequently, I think by being part of an organization that values partnership and values collaboration, makes us all bett…

AI assessment note: “We have a dedicated team of analysts, but we rely on the larger part”

Q When you put this all together, what is a portfolio that you're constructing look like in terms of, I guess you'd start at the country level, sector level, and stock level?

A Specifically, what we then look at at the stock level is we look at the valuation skew. I don't like point estimates. I think that gives you a false sense of security that you know what's going to happen in Russia in year eight or China in year 12. Give me standard deviations. If the stock plays out as you expect, what do you think the market will pay for it? That's your base case outcome. If the stock plays out even better than you expect, that could be your reasonable bull case. And if the thesis is broken, what's a reasonable bear case? You could always come up with Uber bear cases in emerging markets, but give me a reasonable bull, reasonable bear, reasonable base case. And that is how we compare stocks across sectors and countries. Now that we've identified which are the good companies in the good countries with good governance, the way we compare the Those stocks is to look at a stock that might have 80% upside and 20% downside on that versus 20% upside and 50% downside. That gives us an ability to compare and sort of then becomes those portfolio candidates. It moves from these are the best ideas within that intersection to now let's compare how we build a portfolio from those best ideas. The next step would then be the most crucial step because I'm a very firm believer in risk adjusted returns. The next step Is how do these stocks play with each other in the sandbox? Wha…

AI assessment note: “how do these stocks play with each other in the sandbox? What I mean by that is the risk characteristics.”

Q There's always these times in emerging markets where some country is blowing up in a bad way and others blowing up in a good way. And I'm curious if you looked at on the horizon, what countries are you most excited about and which ones are you most concerned about?

A I would say that Vietnam is one that I'm most excited about. It's not a very well-researched market. It's a success story. If I were to turn the clock back on China, 3040 years ago, that's exactly where Vietnam is today. So think a government that is very much attracting foreign investment or an export-led model. They have a young demographic labor force willing to work, a great infrastructure. And so they've created the right ecosystem. For example, the largest exporter of Vietnam today is not shoes and t-shirts and it's actually Samsung. Samsung doesn't produce smartphones in China anymore. They do produce them in Korea, but the low and medium end phones are now produced out of Vietnam. The largest exporter of Vietnam is now Samsung. And so as a result, you have this positive feedback loop that wages can rise. And as wages rise in Vietnam, you get a domestic consumption story that's sustainable. And with good macroeconomic management that Vietnam has gone through periods where they weren't, they didn't have good macroeconomic management, but they learned. And again, I am a proponent of crises. I know that they hurt a lot of people, but they clean up bad practices and they better position the country for many times for a better future. And that's exactly what's happened in Vietnam. Many people invest in Vietnam by buying staples and certainly earlier stage economic development…

AI assessment note: “I would say that Vietnam is one that I'm most excited about.”

Q So if we look through to your portfolios, what types of exposures does that lend itself to in both Vietnam and Brazil?

A So Vietnam, as I said, is not yet in the benchmark. And so any exposure there, which we have about three percent of the portfolio is totally out of benchmark. We would love to have More in Vietnam. But as it stands today, about three quarters of the Vietnamese stock market, maybe a little less now, are state-owned enterprises, which again, we struggle with from a governance perspective. And then of the remaining balance in Vietnam, many of those have hit their foreign ownership limits. So it's rather hard to buy those shares. But as more companies list, and as those foreign ownership limits change, and we would expect that to happen in the coming years, that we would be buyers of that situation.

AI assessment note: “which we have about three percent of the portfolio is totally out of benchmark.”

Q When you have that type of alignment with the government's interests in a sector that, say, in China, as you said, is politically correct, how does that influence how you think about just the valuation of the business itself?

A So as I said, no one really knows what's going to happen in the far off future in emerging markets. So we have to not be a theological and we have to approach valuation in many different ways. I don't like to see one way of approaching valuation. If you look at EV to sales, many of these early stage companies are evaluated on EV to sales. Let's confirm that. Let's confirm the valuation coming from something very high up on the income statement with a DCF. Let's confirm that with comparing similar stage companies and other jurisdictions. One would argue that maybe the duration of growth is higher in China, well, let's have to say the US, but at the same time, the risks are higher. And so we can have that debate that where was Google trading? Where was SAP trading at similar stages of their development? Give us a sense of what these stocks were trading at and compare. And so that will give us a framework of, is this even in the realm of probable or possible?

AI assessment note: “duration of growth is higher in China... but at the same time, the risks are higher.”