January was interesting both globally and for the fund. The continued fall in oil prices, the heightened currency volatility, and the eurozone problems were affecting the global markets all over. In the midst of this turmoil, the fund itself began the new year strongly, returning 11% as one-sixth of the portfolio companies went up over 20% in five different countries.
One of the winners of the month was the fund's Indonesian developer. We had waited for several months for an announcement about a new Jakartan island to be developed, and now that the project was confirmed the share price quickly appreciated over 30%. The company has been a good example of a value investment where despite very long breaks the stock has provided a return of over 100% to the patient investor.
In Pakistan, shares were also on the upswing as the fund's transformer maker started its year with a 30% return. The share did even better in the previous month, so once again patience was rewarded. Another strong grower was a cement company that had stayed put most of last year, but went up 20% in January, just as it did in the last two months.
Many companies appreciated, and for good reasons. Whether due to a massive construction project, improved balance sheets, increasing demand or cheaper financing, all showed characteristics of well-run companies and proved the strength of local demand. Of course, the original low prices for these companies mattered to us just as much. And now that the other investors have woken up, we couldn’t be happier.
February provided a good tailwind for the fund, lifting it another 4% while most of the markets were showing signs of freezing, especially at month’s end. Many of the success stories of January also kept climbing higher in February, and we received good news from several countries including Nigeria, Turkey, Kenya, and Chile.
The strongest performance of the month came from Malaysia where the fund's furniture maker stepped closer to our expectations by adding 39% to its valuation. The uptick was helped by the company’s announcement of over 40% growth in its earnings per share – which, for a company with a P/E ratio of less than 7x, is much higher than the market expectation. Naturally, this growth was rewarded quickly.
Another strong performer was the fund's Kenyan investment – the largest insurance company in Eastern Africa. The markets, independent from any big company announcements, decided to continue to correct the firm’s low valuation. The stock price grew by almost 20% in February.
Our visit to Thailand and Malaysia was somewhat hampered by the Chinese New Year celebrations, but we still managed to have several deep conversations with company managers. In Bangkok, among other meetings, we met with an interesting chicken feed producer, and in Malaysia we analyzed an efficient maker of construction cranes.
The market slowdown that began at the end of February finally reached the fund in March, resulting in a loss of 3%; the fund's third negative month in over a year. The market downturn in Pakistan made a dent in the fund's portfolio, even though the companies themselves still produced strong quarterly results. A similar mood was felt in Turkey, albeit in reduced measure.
During these spring storms, we ventured out to meet companies in Vietnam and South Africa. In Johannesburg, the driver reminded that night-time stopping at red lights would only result in losing our belongings. Luckily, the meetings were much more upbeat and the fund added a couple of firms into the portfolio, including a company that provides a payment system based on biometric identification which has already expanded to several countries and covers over 20 million customers.
In Vietnam, we met with companies in various industries – from fish production to lamp manufacturing – including a Ho Chi Minh-based developer of affordable housing that is experiencing strong demand in an economy growing “only” about 5% per year. We also found a rapidly growing transportation company a few hours away from Hanoi which enjoys strong truck sales thanks to recently changed regulations. We invested in both.
The month was red overall, but it also ended in a potential turning point for Pakistan and for other markets. We firmly believe in the value-based strategy and in the strength of the fund's portfolio companies.
April results were influenced more by Greece and euro fluctuations than by the 30% price increases of the fund's Pakistani cement producer or Botswanese bank. However, even as Europe was in debate mode, other parts of the world focused on growth. The portfolio companies grew a good amount bringing in yet another profitable month.
Pakistan signed on large infrastructure projects fueling the growth of one of the portfolio’s high performers, an electronics manufacturer and distributor that reported further improvements to its bottom line. The sale of transformers increased by 16% while profits nearly doubled thanks to excellent cost controls. The need for power lines and white goods keeps growing at a fast pace and the company, which works in both domains, is meeting that demand.
During the month, we also visited a technology firm and air traffic-related companies in Istanbul. Their growth stories were strong, and we will keep them on our radar. Even though we did not add any new companies this time around, the fund restructured the portfolio by selling a significant amount of shares that had doubled in value. We have kept the portfolio inexpensive even as global equities have become pricier, and we believe the fund's portfolio companies still have plenty of room to appreciate. We are excited to find out who the next winners are.
Five countries and quite a few CEOs. The month of May was spent on the road discussing anything from reinsurance to middle-class energy consumption. Our travels led to changes in the portfolio and the addition of six new companies. The month was negative in the overall market, but the portfolio remained positive.
The month’s winner was a Vietnamese truck reseller that the fund invested in about six weeks ago. Its shares appreciated strongly, adding 36% in May alone. Of course, the month also had some dips, with the Panama-based airlines losing 23% of its value because of suffering Brazil operations.
The month’s visits focused on Vietnam, Kenya, Kazakhstan, and Pakistan. At the end of the month we also visited companies in the United Arab Emirates. In Vietnam, we toured smaller locales in the middle of the country and in the south. Amidst all the tourist attractions in Da Nang we found a fast-growing company that is building a housing project in the desired city center.
In Kenya, we met with banks, energy players, and other firms. What impressed us most this time around was the only electricity distributor in the country that stands to benefit from the government’s plans to double energy production and distribution by 2017. As the company’s annual growth had already been higher than 20% and is likely to remain similar for the foreseeable future, a P/E ratio of 4x seemed like a good entry point for a long-term investment.
Turkish democracy gained a victory in June when AKP could not renew its single-party rule. The stock exchange suffered, however, having temporarily dropped 5%. It was insightful for us to visit Istanbul in the immediate aftermath of the election and meet with companies and analysts. It turned out that the companies are still optimistic about their projects and the analysts expect an AKP-CHP coalition.
During our trip, we met companies in several sectors ranging from car distribution to fertilizers. One of the firms we met was a small but respected electrical contractor that is waiting for the outcome of its bid for a large metro project. The Istanbul metro will be expanded to 300 km in the coming years and the company has an opportunity to grow many times over, should its bid turn successful.
Emerging markets suffered heavily in June due to fears stemming from Greece and other areas. Fortunately, the fund managed to escape most of the damage, falling less than 2%. The fund's South African investment into mobile payments made a couple of acquisitions and the stock climbed up 25%. The fund's companies in Pakistan also did well as the country continued the reforms. The budget for the coming year boosted the power and cement industries, both of which are well-covered by the portfolio.
July took us to Asia to meet companies producing anything from vegetables to lubricants. One of the new companies that the fund invested in was an efficient Malaysian company selling kitchens. The firm does almost no manufacturing (unlike its competitors), but rather focuses on supply chain management and kitchen assembly with the best materials from around the world. The company’s management expects future growth to come from surrounding countries.
Greece still dominated world news last month. The country is not related to the fund's companies, but its past and future negotiations affect currencies and overall business sentiment worldwide. Additionally, the expected China stock market slide that started in June continued this month, spooking investors further. The emerging markets indices fell in July, but the companies in the fund fared well and kept the fund in positive territory.
The most interesting market news in our perspective, however, was the Iran nuclear deal. The country is still uninvestable, as long as sanctions are in place, but the market holds a great potential given its population size and average education level. The Iranian stifled consumer has waited for a change for years, and we are keen to follow the situation.
Last month’s market turmoil brought along what we had expected for over a year with China leading the global downward charge in stock market values. In addition to stock repricing, currencies also began to devalue around Asia. Commodities took a heavy hit as well. The fund had been able to resist the downward current for quite some time, even reaching its all-time high in early August, but the global market sentiment finally caught up bringing the fund down notably.
The fund's worst losses came from the Kuala Lumpur region as the Malay markets were squeezed between cheap oil and the renminbi devaluation. The ringgit depreciated extensively while the local exchange fell even faster. The panic-filled wave of selling took the KL index down 16% in euro terms.
We chose not to join the stampede, and instead waited for opportunities the storm might uncover. As a result, the fund made a couple of new investments and added to shares that had become even more interesting. We were also very pleased to notice that the fund’s investors exhibited their long-term stance as the fund flows turned strongly positive during the month.
While the global markets were wobbling, we took a tour through Mexico, where we visited several companies from tortilla makers to banks. The ability of the local consumer banks to sustain high margins year after year made a couple of the financiers very appealing, but our best conversation was had with an auto manufacturer producing suspensions for a number of global brands. Even though the fund didn’t make any investments at this time, we trust that the portfolio exposure to the western hemisphere may increase in the near future.
The world is still wondering what direction to go. Will growth continue or not? In the long range, the answer may be clear, but the expected volatility seems to still have a hold on the markets. We, nonetheless, still continue to travel and find companies – quality firms that are even cheaper than they were two months ago.
In September, we received new results from companies, and the fund's Pakistani cement holding was well on display. One of the largest producers in the country, this company saw its net income increase by 28% from a year before, even though the revenue was flat. Income is expected to continue to rise as the company takes part in large infrastructure projects and continues to produce its own cheaper and more reliable energy. Pakistan is additionally seeing a surge in private building as the 5% GDP growth and historic-low 7% interest rates are putting more money into the pockets of the regular Joe (or the average Mohammed).
In another corner of the world, the fund's Vietnamese truck seller improved its future sights by winning exclusive rights to sell the American Navistar truck in the country. The company plans to grow its 17% market share to a quarter of the market within two years.
The world has its worries, but the businesses of the fund's companies have not materially suffered. The fund's portfolio companies are financially stable, their incomes have risen by 20% in the past year, and their prices are reasonable (average P/E ratio is 8x). We cannot predict the future, but we believe in the power of our disciplined process, even if unlocking the value takes some time.
South East Asia woke up to the potential of the Pacific Free Trade Treaty, when initial signatures were put in place. We were traveling through local cities and countryside when many of the companies we had just met saw their stocks surging. We met with a car distributor in Vietnam, where consumption habits have just started shifting from scooters to cars. The potential removal of tariffs should further support the industry transformation and the business itself. In Thailand we met with a business park developer that expanded to neighboring countries. The developer would likely be another recipient of increased business when the treaty is ratified.
The mood in Egypt was more muted. The country’s economy is undergoing a large transformation, and individuals and companies are anticipating a 15-20% devaluation of the Egyptian pound. Unsurprisingly, the companies we visited advertised their foreign currency earnings. The fund invested in one of these companies – the business was able to multiply its revenues through construction projects in Saudi Arabia, as well as locally in Egypt. The company is likely to continue benefiting from government focus on infrastructure and home building.
On a global scale, October finally brought some relief as markets recovered from the slide of the last few months. The portfolio also performed well: the fund used the market correction to buy more shares of high-quality companies and many of them have returned to previous valuations since the fund's purchases. Once again we noted how important it is to hold your course steady when markets panic.
November was very much a month of travel. In Thailand, we met with a local developer that has been building apartments for the lower middle class for the past two decades, becoming increasingly more competitive. Their condominiums are wanted not only due to their good price (mortgage payments are kept on par with rents), but also thanks to their management and support services. The company is currently finishing two thousand apartments while the government has promised to provide additional subsidies for buyers of these lower-income homes. We felt that the time for investment was excellent.
We also visited several companies in Pakistan, in both Lahore and Karachi, ranging from the auto industry to glass manufacturing. One of the businesses that we took notice of was the largest insurance businesses in the country. The market is expanding rapidly and the company is focused on reducing its internal inefficiencies, so the promise of a good investment is clear. The Pakistani market itself has suffered over the past months and weeks due to foreign investors pulling their money out, just as it has been happening in many of the other developing markets. This resulted in a lot of unnecessary portfolio volatility, but at the same time provided several opportunities to make investments.
The overall volatility in our target markets has got worse in the recent months. The world is holding its breath waiting for the U.S. interest hike. The rate increase in itself won’t have that much of a direct impact on the fund's bank in Botswana, for example, or on many of the fund's other investments, but the general nervousness is visible in the investor behavior. We, nonetheless, are sticking to our strategy and have made several new investments in some very interesting companies that we believe will add value to the portfolio in the future.
Turkish business leaders seemed pleased with market conditions, even though some expected relative weakness in the first half of the year due to the decrease of trade with Russia. Local economists in contrast were eager both to understand the programs of the AK Party that regained its stronghold of the parliament and to see whether the President would again try to dictate rates to the central bank. Government actions remain to be seen, but our company visits did not let us down.
In Istanbul and Izmir, which have been left out of the limelight, we met with growing companies whose local and international positions are especially strong. One company sells patented electrical products around the world, another sells fire trucks. We will, however, be waiting for the right moment to invest in these. We also visited a portfolio company that may have succeeded in doubling its business this year and projects further growth and strong cash flows in the coming year, with new subway tunnel projects in its pipeline.
We spent the rest of the month planning an extensive 11-country trip for January, among other things. We were also pleased that the Fed finally raised interest rates. The sky did not fall after all, and the future of the fund's portfolio companies still seems firm.