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In January, we interviewed 112 companies from 28 countries which we hadn’t met earlier during our 11 Sectors in 11 Months project as most had IPOed after our deep dives into their respective industries.

We found two recent Turkish IPOs which we believe can double in the next 12 months. One is a fast-growing $150m software solutions business which is currently ramping up with master franchisees of Burger King and other QSRs and is only trading at 9x LTM P/E. The second is a $65m investment banking boutique trading at 11x LTM P/E, which expects earnings to double in 2021 on the back of improving M&A activity as well as growing brokerage, wealth management, and NPL businesses. Both are led by highly experienced US-educated CEOs (with degrees from MIT, Harvard, Georgia Tech, and Rice) who own significant stakes in their companies and thus are incentivized to grow the pie.

These two IPOs went unnoticed as investors in Turkey have been focused on a yet-another currency crisis. In 2021, after a long search for the right solution, we were able to start hedging our Turkish lira exposure, saving us nearly 3% performance during the first two months when the lira fell over 40% against the US dollar. We’re happy to be protected from future currency turbulence in Turkey as it is home to so many of the overlooked, small, liquid, cheap, growing, high-quality companies we love to own.


In February, we increased our position in a $40m hospital operator in Turkey, becoming a substantial shareholder through our ownership of nearly 10% of the company. The business continued its impressive growth with historic-high earnings in Q4 and shows no signs of slowing as it made another acquisition, further extending its bed capacity. We also bought shares in a $900m Indonesian lifestyle retailer that is swiftly recovering from the pandemic as consumers return to the stores which are now more efficient than ever thanks to operational improvements and cost-cutting measures triggered by Covid. We’ve been following this company for two years and believe the time to invest has finally come.

This month, the world witnessed an attack on Ukraine ordered by the Kremlin. In over 8 years since our fund was launched, we have never invested in any Russian company. As soon as the war started, we emailed all our portfolio companies and asked each one about their Russia-related revenues. The survey revealed that the vast majority of our companies have no exposure to Russia, and the fund’s overall portfolio-level revenue exposure to Russia is at an insignificant 0.148%. We are currently working on repositioning our portfolio to address the ongoing crisis. 


In March, we took actions to safeguard our portfolio against the supply shocks and inflationary effects of the war in Ukraine.

We sold all our portfolio companies in Egypt. Before the war, 86% of the country’s wheat imports used to come from Russia and Ukraine, and now the economy stands to see dramatic increases in inflation as it tries to replace this and other imports amid the global shortage of commodities. Our decision was timely: a week after we cut our exposure the Egyptian central bank devalued the local currency by 14% to address the rising costs of basic goods and foods. Limiting the inflationary pressure on our portfolio from the global food industry, we also exited our positions in a dairy company in Malaysia, a packaged foods business in the Philippines, and a shrimp producer in Thailand. We also sold an airline and a truck operator in Mexico due to their high cost exposure to oil.

We bought several companies which should do well in the current environment as they either grab market share from Russian firms now shunned by former buyers, or as the prices for their products stay at exceptionally high levels due to global shortages amid high demand. These include: a nickel producer in Indonesia; an integrated petrochemicals business in Saudi Arabia; fertilizer manufacturers in Vietnam and Pakistan; and a producer of platinum, palladium and gold in South Africa. 


In April, we started two significant streams of research. Our first research stream seeks to improve our skill of finding undiscovered companies which could double in 12 months. To achieve that, we are analyzing the vast amounts of data from over 2,200 company meetings we conducted in the last three years, looking for the specifics in management messaging that could be linked to positive abnormalities in stock price returns in months following our meeting. Our preliminary results suggest that there are statistically significant signals in the CEO sentiment which can help us derive additional alpha going forward.    


Our second research stream focuses on assessing new investment opportunities in light of the current volatile geopolitical and economic world order. We are engaging with each of over 1,700 companies we have met since 2019 by email and asking them three questions which we see as highly relevant in assessing their earnings potential for the rest of 2022. We ask whether they see global inflation as a significant challenge to their business; whether they think the war in Ukraine and sanctions imposed on Russia will be a net positive or net negative for their business; and how much they expect their earnings to decline in 2022.


In May, we finished reaching out by email to over 1,700 companies we met in the past three years to learn how they are coping with inflation and the war in Ukraine, and what their 2022 growth plans are. Based on the first batch of responses we processed, we have already made adjustments to our portfolio.


We sold a Mexican restaurant operator feeling the pain of higher wheat and dairy prices, as well as a Vietnamese broker whose sentiment turned negative after regulatory investigations into the brokerage industry. We increased our weight in a South African paper packaging producer trading at 5x LTM P/E which is prospering in the current macro environment marked by strong demand, lack of supply, and sanctions affecting its Russian competitors. 


We also bought three Turkish stocks (which we currency-hedged): a $125m cruise line operator trading at 6x LTM P/E that is seeing a massive recovery with booking rates above pre-Covid levels; an $800m investment holding which despite expecting its earnings to grow 250% by year-end currently trades at a bargain 5x LTM P/E; and a $50m publicly listed venture capital firm trading at 7x LTM P/E which has invested in 52 companies and started having major exits all while most investors either still think it’s a computer peripherals business (which it was many years ago) or struggle to track valuations of its high-potential startups.


In June, we finalized the analysis of data from over 2,200 company meetings we had in the past three years. This resulted in alpha-generating insights regarding management sentiment which we will use to enhance our investment process, as well as in submitting a PhD dissertation which was successfully defended – thus making our managing partner a Dr.

We also finished processing the responses to our questions about inflation, war in Ukraine, and 2022 prospects that we emailed to over 1,700 companies we met in the past three years. 4% of the companies that responded believe inflation is positive for them, 24% believe it is negative, and 72% think it is neutral. The impact of the war in Ukraine is positive for 15%, negative for 20%, and neutral for 65%. 54% expect to grow earnings this year, while 6% and 4% respectively think earnings will be flat or decrease, and 35% find it difficult to estimate. 7% of companies expect earnings growth of at least 20%: we are currently researching this sample of high-growers shielded from inflation and war to select new investments for our portfolio.

One such company which we added this month was a $35m leather goods exporter in Turkey trading at 9x LTM P/E. The firm’s production costs are in ever-cheaper lira while profits are in hard currency. The management is expanding capacity with two new factories and expects earnings growth over 100%.


In July, we added several cheap growing high-quality companies to our portfolio, taking advantage of low valuations offered by the current market conditions. We bought a $2b regional bank in Mexico whose exceptional income growth on the back of digitization and market share expansion is now further boosted by higher interest rates. Trading at 8x LTM P/E, it has already revised earnings guidance upward twice this year.

We acquired shares in a $1b airline in Kuwait trading at 10x forward P/E. Despite higher fuel prices, the company is seeing extraordinary travel demand and easily passes extra costs to the passengers. We estimate the firm is on track to surpass its record pre-Covid 2019 results and more than double its bottom line from 2021. We also bought a $200m food processing holding in Vietnam: trading at 12x LTM P/E it is on track to deliver 50% earnings growth this year, driven by domestic post-Covid reopening and the recovery of exports of fish, shrimp and nuts.

We sold a few stocks whose valuation and growth prospects no longer justified the fundamentals: a car leasing company in South Africa which can’t get new cars delivered due to semiconductor shortage at the Toyota plants in Japan; a fertilizer business in Vietnam whose energy and raw material costs now grow faster than its revenue; and a Turkish IT company whose customers in China were affected by the Covid lockdowns.


In August, we added two Turkish companies to the portfolio, both trading at 3x forward P/E: a $400m exporter of granite tiles expecting to at least triple sales this year thanks to quadrupling production capacity, improving operational efficiency, and securing new contracts in Europe where its peers struggle to compete on price due to ever-increasing energy costs; and a $250m frozen and canned foods producer forecasting triple-digit growth on the back of increased local consumption of basic foods, recovery in tourism, and growth in exports; in both cases, we hedged our Turkish lira exposure. We also bought a $1.5b Saudi Arabian hospital chain whose CEO expects earnings to grow 4x this year, benefiting from the resurrected post-pandemic demand for non-urgent medical care.

We trimmed two stocks: a 3x LTM P/E South African paper and packaging producer whose European operations are facing energy-related cost increases, and a 5x LTM P/E Indonesian wooden business whose sales of building materials to the US declined as the demand for new homes dropped after the Fed increased interest rates.

We also sold two positions: a Philippine Internet provider which halved its year-end guidance amid weak new subscriptions and margins, and a Thai starch producer now expecting a softer second half of the year. Both traded at over 15x LTM P/E, and this deteriorating growth sentiment made valuations too expensive.


In September, we traveled by sea and by air to Izmir and Istanbul to visit our portfolio holdings. Turkey is unloved by foreign investors due to its currency depreciation and 80% inflation but this year we found there several excellent cheap, growing, quality companies: a $400m granite producer quadrupling capacity; a $60m electrical contractor benefiting from metro expansion; a $70m leather goods maker starting a new factory in Italy; a $1.4b investment holding enjoying a windfall due to high power prices; a $250m frozen foods producer expanding market share every month; a $150m cruise port operator seeing port utilization stretch over 100%; a $60m investment bank growing a warrants business in partnership with Goldman Sachs; and a $50m VC investment firm doubling its NAV every year.


Our meetings reinforced our conviction in our stocks. They operate in different industries yet have two things in common: all trade at cheap valuations (between 4-10x LTM P/E) and are on track to grow earnings over 100% this year. Since we invested, two companies have doubled and four others have grown over 30% in EUR. We hedge our Turkish lira exposure to invest in these gems.


This month, we also bought a $150m Philippine land holding trading at only 0.6x P/B, whose management is committed to unlock vast shareholder value by selling or developing the land through JVs with foreign investors.


In October, we took advantage of the low valuations offered by the market and increased weights in several cheap, growing, high-quality portfolio holdings: a $200m Malaysian automation equipment business trading in Hong Kong at a 60% discount to its listing in Malaysia; a $150m Vietnamese nuts and seafood exporter generating sales in USD; a $500m Pakistani IT outsourcing firm growing earnings in triple digits which has increased IT headcount by 20% this year; a $600m Indonesian digital group constantly expanding its suite of innovative products and services which now also include affordable electric motorcycles; and a $3b Mexican regional bank which has upgraded earnings guidance every quarter this year on the back of successful digital strategy execution and margin expansion.

We also bought a $1.5b chemical distributor in Indonesia which is adding a new major profit stream through developing a massive industrial port estate in Java that will host the world's largest copper smelter. We sold two stocks in Kuwait: an airline with softening margins and a stock exchange with deteriorating trading sentiment.

Due to the phenomenal performance of our Turkish stock picks (up 27% for the month) which continue growing earnings rapidly, we had to decrease several holdings in order to keep the weight of our Turkey position below 25%, the maximum exposure we can allocate to any single market.


In November, we added two cheap Vietnamese stocks to our portfolio as we took advantage of attractive valuations offered by the Vietnam market. This darling of emerging markets investors has been in a drastic meltdown (-30% YTD) due to a broad earnings decline which we noticed early on and largely avoided thanks to our bottom-up approach. We became a major shareholder in a $50m construction stone maker which trades at 7x LTM P/E, is forecast to have a strong Q4 thanks to recognition of industrial park income, and stands to benefit from increase in public infrastructure investments next year as it expands production capacity. We also bought shares in a $250m marine transportation business trading at 8x LTM P/E which has been very consistent in growing earnings and shows no signs of slowing.


This month, we also acquired two Mexican stocks benefiting from a profound air traffic rebound: an airport operator, and the world's most efficient low-cost airline which is now able to pass higher jet fuel prices on to the passengers.


We increased our position in a Colombian glass manufacturer which reported remarkable Q3 results, and decreased weights in a South African paper producer and a UAE property developer which are both cheap and growing but might face demand normalization next year. We sold a Saudi hospital operator and a few Turkish names which came short of our Q3 expectations.


In December, we had a very productive research trip to Thailand, Malaysia, Indonesia, Philippines and Vietnam, meeting with over a dozen CEOs and undertaking site visits to assess companies’ factories, stores, and land assets.


As a result of our due diligence during this trip, we decided to increase our position in a $1.5b Indonesian investment conglomerate developing a massive industrial estate in a special economic zone in Gresik near Surabaya, which we visited. The project will incorporate a deep sea port and an industrial park with the world's largest copper smelter, and we estimate that the land sales from this development will contribute to the company’s cash flows in the next few years at a rate far beyond what the market expects. We also increased our weight in a $130m Vietnamese agricultural holding which despite showing a very strong earnings growth on the back of constantly increasing exports is trading at its cheapest-ever valuation below 7x LTM P/E.


The fund finished the year at -5%. While the fund does not have an official benchmark, the Emerging Markets index was -15%, and the Frontier Emerging index was -13% for the year. As a result of strong performance in short-, medium-, and long-term, our Evli Emerging Frontier Fund is currently rated 5 stars by Morningstar, and is ranked #1 among peer funds on Citywire for both 3-year and 5-year investment periods.

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