2016
January
In January, we must have broken a record of some sorts with visits to 13 countries. But instead of souvenirs we took home a thick stack of notes and business cards. Our travels took us from Panama to the Philippines and our company visits ranged from small banks to milk producers. Last year’s stock market dips uncovered many great companies with valuations that are now intriguing a value investor. We, for example, found an interesting Colombian retail chain in an old drug cartel city and an Indonesian builder in the middle of horrendous traffic. We searched and we found.
Myanmar, previously known as Burma, represents the real frontier. The country is in the process of opening up, as evidenced by a newly established stock exchange that will be allocated one new listing per month. The exchange is taking its baby steps, but economic growth is going ahead at full speed. The capital city Yangoon’s streets were still empty two years ago, but now it is impossible to escape the traffic. While there we met with local banks that were each growing at least 30% per year. Valuations for the firms are still largely low, making the market very interesting.
The year started with speedy travel and clear market shifts as developed and developing exchanges continued their retreat after brief New Year’s celebrations. Our portfolio’s value foundation, however, kept the portfolio drop muted relative to the broader surrounding markets.
February
It’s springtime in Iran. The country still looks barren, but the budding trees represent a much more meaningful and complex transition. On January 16, Europe and the UN removed their Iranian trade sanctions and at the end of February an election filled the Teheran district council only with reformists. As a result of the budding transition, we visited the capital, meeting companies, banks and the leadership of the local stock exchange, and got in touch with the people and an economy that is hungry to become a part of the wider world.
The country naturally still has its challenges: the conservative leadership, debt-laden banks, and low oil price are likely to slow down the progress. However, as a counterbalance the country also boasts the most diverse economy in the region and the 90-million-strong well-educated and optimistic people. The country’s exchange is taking its first steps and so buying shares may still take some time, but we are now keeping tabs on several promising companies.
Outside Iran, the global markets continued their search for direction in February. China is keeping many fearful, but luckily there are still plenty of places besides China that provide strong growth. In addition to Iran, the list of promising countries includes markets such as Pakistan and Vietnam. We operate in these countries and, better yet, look for companies that should perform well.
March
We kept up a brisk pace in March and were able to meet over fifty companies in between the flights. This group of businesses included Egyptian builders, Vietnamese logistics firms, and a Saudi appliance company. We also visited a teleoperator in Kuwait, and while in Kuala Lumpur spoke to a local piling company. We made a few new investments, out of which the plastic wrapping producer in Malaysia is a good example of an efficiently growing value company that operates far from the limelight of the metropolis.
The company visits of the last few weeks have served as a good reminder about the scale of our markets. For example, one of the developers that we met is currently constructing a suburban neighborhood in Cairo that will house six hundred thousand residents. In Hanoi, we had a discussion about how companies are moving their production from China and other countries to Vietnam. As an example of this growth, we can look at Samsung’s operations in Northern Vietnam where they have already hired well over one hundred thousand people and continue expanding rapidly. The need for new products in these growing markets and their ability to produce them is enormous.
The global markets finally calmed down in March as the Chinese economy did not fall off the cliff and central banks stayed true to fiscal easing. The same positive trend was supported by the devaluation of the Egyptian pound and the restructuring steps of the Saudi economy. Our portfolio companies caught some of that tailwind, and the improving springtime atmosphere continues to create a good basis for the future.
April
An analyst we met in Thailand was regretful about the slow pace of Bangkok’s rail expansion. The traffic-filled Asian metropolis desperately needs mass transit, and the rail construction project is a stark example of the story of catch-up and massive scale. Bangkok has 80 stations today. In six years that figure may be more than 300.
The expansion of rail transit to millions of Bangkok residents will change the structure of Thailand’s capital city and create opportunities for well-positioned companies. We visited a developer whose main activity is building homes next to the new stations. The company picks from its many brands the right one for each station, building apartments for both the poor and the wealthy. The firm has a sound strategy, but we are waiting for the right moment to invest.
Meanwhile in Turkey, we inspected the operations of a cement factory a couple of hours away from Istanbul and visited a local auto factory. Closer to the city, the company in charge of servicing many of the Turkish airports also pulled the scale-card as we discussed the new Istanbul airport, which is projected to service up to 250 million annual visitors. Many of the companies seemed interesting but we will wait for a while for Turkey to settle its political turmoil.
April saw some improvement in the markets. While investors were still jittery with familiar themes (China, currencies, politics, etc.), we were quite happy with the strength and growth of our portfolio companies, as witnessed from the first quarter’s results. Our largest investment, a Vietnamese steel sheet company, rose over 40%, providing some support.
May
May took us to the deserts of Kalahari and Saudi Arabia. In Namibia, we met local banks and construction firms. We found that even Dubai’s housing market pales in comparison to Windhoek’s rise in prices where some neighborhoods have appreciated fourfold in a decade. The situation mainly stems from failed city planning. For example, only a couple of hundred home building permits were awarded last year. We didn’t find anything in Namibia this time around, but a visit to Johannesburg proved fruitful and led to an investment in a telecom player with an efficient prepaid technology.
Saudi Arabia has faced real struggles lately. The stock market has depreciated strongly during the last year due to challenges including the Saudi state having currency reserves to last for only two years and the country’s budget deficit reaching $200 billion. A change of direction was vital, and changes had in fact come – even at a surprising pace. The valuations are now beginning to look attractive. It is not only that the loss of value is only natural when the purchasing power of consumers and the state strongly diminishes, but also that the market holds companies that will benefit from the changes in the country. We are, however, still waiting for the dust to settle and for the winners to begin to emerge.
Overall, the month was positive as we waited for remaining quarterly results. We were pleased again as our portfolio companies clocked in with a 30% median increase in earnings from last year.
June
Brexit was a massive shock to the markets and companies throughout Europe and the rest of the world. Our companies also – all the way to Vietnam – felt the global blast, but its effects were significantly smaller in the frontier regions than in the center of London. A systematic approach and focus on good companies rather than participation in the macro guessing game served us well as the fund recovered from the initial damage faster than indices and returned 6% for the month.
We have been pleased with our portfolio companies but still did some fine-tuning at the beginning of the month, selling a few companies and investing in new ones in Thailand, Vietnam, and Pakistan. One of the new firms in the portfolio is a Thai consumer electronics retailer that has been able to grow quickly thanks to effective marketing and valuable contracts with shopping malls. At the same time elsewhere, our old investment, electrical contractor in Turkey, resisted the European problems and appreciated 20% on the Turkish exchange.
The European crisis has started to affect global portfolio weightings. The return of money to developing markets continued after the Brexit vote as investors continue to look for diversification and growth. We believe in the potential of our target countries but, as always, trust in the potential of our target companies even more.
July
July can be expressed in one word: Turkey.
Coups don’t come along every month – thus its effect on the Istanbul exchange was strong. We had found many good companies in Turkey over the previous months and even invested in a new one in July. As the exchange plummeted, we surely discussed our investments but came to the conclusion that our companies’ abilities to function and make money had not been compromised. Electric works and computers would still be needed. Within a week, the exchange had turned and a few of our companies rose even higher than before the coup. Being cool-headed seldom leads one in the wrong direction.
If one were to use a second theme to describe the month it would be diversification. It is important to note how not much happened to our other markets as Turkey dove – even the Middle Eastern markets rose the very next day. We seek not to place too much weight on individual countries, and our investments in countries ranging from Peru to Vietnam still appreciated nicely on average. The Egyptian telecom company turned its direction after several quarters in the red and rose over 30%. The auto manufacturer in the fast-growing Pakistani market did the same.
Much is happening in growth markets and last month was no exception. Market volatility remained high, but good – and often forgotten – companies could still be found. In these sorts of times a patient investor can reap the rewards that are hard to find in other markets.
August
The August markets were either taking a break or anticipating the Fed’s September decisions. We, however, focused on our portfolio companies and on potential targets, investing in six new companies that ranged from an Indonesian retail chain to a Vietnamese fertilizer. The month required active tracking, as half of our companies reported results. One of the reportees was the Egyptian electrical products company that nearly doubled its earnings from the year before.
This Egyptian company of ours produces cables and other electrical products and constructs power plants in North Africa and the Middle East. In a short span of time, the company has garnered expertise in quick-build power plants, constructing in challenging environments. The company’s exceptional ability has been met with strong regional demand. In Egypt, the government’s goal has been to provide both electricity and bread to its people, and our portfolio company has been central in helping fulfil the first promise. We expect growth to continue as the company has a backlog worth a few years of projects.
September
Bangkok was hit by monsoon while Hanoi was bothered by smoke from burning fields, but we managed to complete our company visits without interference. In Thailand, we met with an electronics company and a couple of developers. Being able to offer the right housing products at the right time seems to make a big difference in the country, particularly in Bangkok. Testing this theme, we walked into a drab-looking office building and met with the management of a fast-moving medium-sized developer. The company possesses a strong brand, offers competitive pricing and has a significant project pipeline. We will continue studying this and other opportunities in the Thai real estate development market.
In Vietnam, we met with a local investment bank. The bank created value by building its own brokerage and fund management capabilities – services that are still underdeveloped in the country. Growth potential of the company is evident, given that only 1% of the 95-million-strong population has any sort of a brokerage account.
The markets have been favorable recently and, even though we trust individual companies the most, we do expect positive things from some countries as well. In Egypt, we are still waiting for a concrete reform plan that could support investments and growth. Reforms may, in fact, arrive along with an IMF loan and over time improve the fates of individual companies. If this is the case, Dubai is a great location from which to travel to Egypt to conduct due diligence on the most interesting businesses.
October
We travel to the corners of the world to find inexpensive, high-quality companies. During its first three years, the fund has benefited from our strategy and stock selection, returning over 50% when overall emerging markets returned less than 20% in performance. At the same time, the fund’s volatility was a couple of percentage points lower than that of related markets. The risk-return ratio has thus been very favorable.
The fund’s strategy focuses on companies, but here are three macro themes that seemed to affect the performance in the past couple of weeks: the U.S. elections, strengthening of the euro, and the devaluation of the Egyptian pound. We will not dwell into the first two topics, but we took a short-term hit with the third one before local valuations started rising. We invested into a few very interesting Egyptian companies whom the awaited devaluation should affect either positively or neutrally.
The past three years have inevitably brought both ups and downs. As markets have rumbled, we have always returned to the same basic questions: Has the story of the company changed? Have its fundamentals deteriorated? Does the firm face new risks that will affect its future? If potential had still been there we held on tight and waited. And the strategy has paid off well.
We expect good things from our markets – central banks around the world are still accommodative and emerging market growth still comfortably exceeds that of Western markets – but we trust in our companies even more. Vietnam still has a growing need of steel roofs and Kenya of home insurance. We believe the story will continue.
November
In November, the fund was awarded five stars by Morningstar for its exceptional three-year track record. These years have strengthened our belief that our perspective and strategy differ much from competition. Our strategy leads us to visit and to invest in companies that in some ways fly under the radar. These potential targets are inexpensive, of high quality, and have strong potential for healthy growth.
A few weeks ago, we met with companies like these in Malaysia. We flew to Kuala Lumpur and visited sites from downtown all the way to where the jungle and suburbs begin mingling. One of the companies on the outskirts showed promise due to its expertise in design and manufacturing of high-variability batches of specialty electronics. This business was also on the verge of winning a large contract from an auto manufacturer, which could double its order book. A second interesting company is growing both organically and through acquisitions – its facilities maintenance business provides a base for margins while its more promising two businesses are growing at a fast pace. We invested into both companies and into a third well-positioned infrastructure firm.
December
December took us from Turkey’s slush to South African summer. The countries face different seasons, but both struggle with political and financial uncertainty. Bright spots can, however, be found in individual companies.
South Africa is a country fraught with various challenges and depressed sentiment – with a severe drought, 26% unemployment, high inflation, and an unstable currency. The president is also believed to be corrupt, and barring an impeachment people are looking to the election of 2019 for hope of any political progress.
Our trip occurred the week before most South Africans go on holidays for a month. While this sentiment was clear with almost every one of the 14 companies we visited, we were impressed by the work ethic at one IT company. The meeting went past normal working hours and the parking lot was still full. This company has also compounded earnings at an incredible rate and has a unique culture and a strategy which should sustain a healthy growth rate going forward. Despite this, the stock seemed relatively undiscovered, trading at a very attractive multiple. We are still considering this and a few other potential investments in both countries.