2023
January
In January, we started a research trip to Latin America to meet with the CEOs of over a dozen companies in Mexico, Colombia and Chile, and undertake multiple site visits to assess their assets and operations.
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Our first rendezvous was with our second-largest portfolio holding, a $4b regional commercial bank in the Mexican state of Guanajuato whose stock price increased by 73% since we invested in July 2022. We spent an entire day with the bank’s executive team and had 5 meetings (one-on-one with the CEO; executive team lunch; meetings with the digital transformation, SME, and agriculture teams) as well as two site visits. We toured the bank’s headquarters in Leon and were impressed by the employee amenities: free on-site childcare, affordable canteen, petting zoo, recreation rooms. Guided by the ex-governor of Guanajuato and ex-mayor of Leon, we also visited an industrial park in the logistically advantaged state of Guanajuato and witnessed the massive “nearshoring” unfolding in Mexico as many major global conglomerates are building new plants or relocating production facilities from Asia to Mexico. Our bank benefits from this nearshoring trend – on top of its stellar organic growth through digital initiatives – and conservatively guides its 2023 earnings growth at over 30%, all at a valuation of only 10x LTM P/E.
February
In February, we finished our trip to Latin America, meeting over a dozen companies in Mexico, Colombia and Chile.
This month, the world witnessed a tragic earthquake in southeastern Turkey. Our fund owns four portfolio companies in Turkey, and right after the earthquake we reached out to all four to express our condolences and asked if there was any impact on their operations. We were relieved to learn that besides one portfolio company which had to close 5 shops out of 118 (representing only 1% of its annual sales) there was no impact on our holdings as they largely operate in Istanbul and globally, and from February 6th (earthquake date) to the end of the month they all had positive returns of up to 7%.
To avoid a panic sell-off and to boost stock prices, Turkish capital markets authorities and the government implemented a highly substantial support package: the stock market was closed for trading for 5 days; pension funds were mandated to increase their exposure to Turkish equities from 10% to 30%; a special government fund was set up to buy Turkish stocks; tax waivers on share buybacks were enacted (which led to dozens of companies buying back shares); and short selling was banned on dozens of stocks. This effectively helped calm the panic in the market. We believe the government will continue doing whatever it takes to support equities this election year.
March
In March, we met a dozen companies we had never met before, hailing from Malaysia, Thailand, Kuwait, South Africa, Vietnam, and Poland. The prevailing sentiment we captured from this sample of businesses was that the world is possibly heading into recession this year as most companies are currently experiencing softening demand. Nonetheless, an $800m regional car distributor in Kuwait stood out for its optimistic growth outlook, cheap valuation and unique competitive advantages, further supplemented by the firm’s obscurity in the market due to its recent IPO.
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This month, we sold a Philippines-based land holding company after our earlier meetings on the ground and a forensic accounting analysis by our local CPA revealed significant corporate governance concerns such as the founder buying shares for free a few years ago and a lack of sufficient disclosures to verify intercompany and external deals. We never tolerate governance problems and are quick to act when we identify them. We also sold a Vietnamese air cargo handling business on deteriorating growth prospects caused by a substantial decrease in Vietnam’s trade.
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After banking issues at SVB and Credit Suisse came to light, we reached out to all our portfolio companies and asked about any impact of the banking crisis on their operations. None of our companies see any direct impact.
April
In April, we took a deep dive into the port assets of one of our largest portfolio holdings – a $250m Turkish diversified investment group which owns the world’s largest cruise port operator, a highly profitable business with a 70% EBITDA margin. We met with the management of Barcelona (largest cruise port in Europe), Catania, Bar, and Venice ports and learned that the expected number of ships and passengers this year by far surpasses the 2022 and even 2019 figures, while docking fees are set to increase after multi-year freezes. With such strong tailwinds and with five other growing subsidiaries, our holding which trades at only 4x LTM P/E is a bargain.
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We also visited a brand new factory of our $150m Turkish luxury leather goods maker, which was set up in Italy. Conveniently located right next to the company’s clients, world’s top luxury brands, this factory opens a plethora of growth opportunities for our company – especially now amid the recovery of China’s luxury market. Regardless of the macro noise in Turkey, our companies generate substantial profits denominated in foreign currency, and we estimate that both have the potential to surprise the markets by doubling earnings this year.
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The modern-day Marco Polos, we also went to Uzbekistan for the first time. We met with the stock exchange CEO and learned about his plans to increase liquidity in this up-and-coming market.
May
In May, we bought a $150m long-haul low-cost airline based in Malaysia. With Southeast Asia having exited the pandemic restrictions later than other parts of the world, the steep post-pandemic air travel rebound is felt particularly profoundly in the region now. After a period of restructuring, our company – a household name in Malaysia known for its innovative spirit and bold business moves – is already showing better results in some metrics than in 2019 and is sure to generate substantial profits this year.
We also visited South Korea where we met with a $140m language data and translation services company. The firm benefits from the intensified demand for language data by the largest global tech companies and keeps growing its sales and order sizes every quarter. According to the CEO, the expansion of all things data and AI is further speeding up his company’s rapid growth.
This month, Turkey had presidential elections, and as we expected the incumbent remained in power. Our fund’s Turkish holdings are primarily exporters with hard-currency-denominated profits and our Turkish lira position is fully hedged. As such, we were fully prepared for either outcome of the elections. From May 14th when the first round of elections took place to the end of the month, our four Turkish stocks returned +6%, +8%, +12% and +17% (in EUR) respectively, while the local index was negative.
June
In June, we bought a $1.5b toll road operator in Indonesia. Trading at 9x LTM P/E, this company’s highways are experiencing a strong pick-up in traffic as the world’s fourth-largest population is hitting the road like never before, helping drive the economy toward a solid 5% GDP growth target.
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We also bought a $900m airline in Thailand serving domestic routes between the capital city Bangkok and seaside tourist destinations. The airline is recovering swiftly after being grounded during the Covid era and is benefitting from a profound rebound in international tourism (with over 1,000% more international visitor arrivals to Thailand in Q1 2023 vs Q1 2022) which used to contribute over 10% to the country’s GDP before the pandemic.
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This month, we increased our position in a $900m car distributor based in Kuwait which posted 47% net income growth in Q1 and shows no signs of stopping on the back of dissipating bottlenecks in global auto manufacturing. We also increased our stake in an $80m Turkish electrical contractor trading at 6x LTM P/E which is supported by several currents: the government’s post-earthquake rebuilding program, metro extension for the upcoming local elections, $50b in construction contracts awarded to Turkish builders by Saudi Arabia, and increase in domestic investment appetite after the presidential elections. The company fixes 85% of its contracts in EUR terms.
July
​In July, we bought a $125m Indonesian jewelry manufacturer and retailer. Trading very cheaply at only 6x LTM P/E, the company posted 40% earnings growth in both Q1 and Q2, started exporting its products to India, and intends to further grow exports to the UAE and Europe. We also acquired shares in a $500m mid-tier brokerage in Vietnam which after a period of market turbulence became profitable again in Q2. The majority of Vietnamese companies that used to be superstar performers prior to 2022 (the year when the market collapsed -33%) are too expensive as they still do not produce meaningful – or any – earnings growth. However, we observe a strong pick-up in trading volumes driven by the local and foreign investors “hoping for a strong 2024”, and our new portfolio addition stands to capture this trend of increased market liquidity – the best leading indicator for brokerage earnings.
This month, we also made a research trip to the Mexican cities of Leon and the capital Mexico City where we met with the CEOs of two of our portfolio companies.
Our portfolio of cheap, growing, high-quality companies trades at an average P/E ratio of 7x (vs 13x for the EM index), with an LTM earnings growth of 53% (vs -8% for the EM index) and an ROE of 25% (vs 12% for the EM index). We are currently seeing the greatest number of highly compelling investment opportunities since mid-2021.
August
In August, we made a research trip to Indonesia, meeting half a dozen companies: a $150m jewelry retailer and exporter whose three factories, a jewelry exhibition, and an impressive customer event that gathered 500 of its distribution partners we visited; a $100m industrial estate developer building a manufacturing hub near Jakarta which we toured with the company’s management; a $2bn toll road operator seeing people hit the road like never before; an $800m home improvement retailer recovering its pandemic-hit growth beyond expectations; a $350m taxi operator surpassing its 2019 profit records; and a $2bn industrial holding developing an industrial port in Surabaya, the country’s second-largest city. These businesses trade at very cheap valuations and most delivered Q2 earnings growth of at least 40%.
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This month, we bought shares in a $2bn investment holding in the Philippines. Driven by its banking and Toyota dealership businesses, the company grew earnings 150% in Q2, is positioned to continue strong growth next year, and still trades at an ultra-cheap 4x P/E valuation.
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We also bought a $350m manufacturer and supplier of electrical products in Saudi Arabia trading at 13x P/E (a cheap valuation relative to the Saudi market) with Q2 earnings growth of 250%. Lastly, we acquired shares in a $600m bank in Pakistan trading at only 3x P/E while delivering over 100% earnings growth and over 50% return on equity.
September
In September, we made a research trip to Turkey. Local sentiment was upbeat given that the new finance minister and central bank governor were given carte blanche by the president to effect an orthodox economic policy which hasn’t been in place for many years and as a result foreign investors started investing in the country again. We met with six portfolio companies which have been growing earnings over 100% in the past several quarters: a $350m holding which owns the world’s largest cruise port operator; a $200m electrical and solar energy contractor moving into EV charging station manufacturing; a $200m luxury leather goods maker; a $100m venture capital investment group; a $2b brokerage; and a $150m diversified investment banking business – all are happy about the improving economic stability.
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We also visited Mongolia and met with the stock exchange, largest listed company, largest bank, and best broker to learn about this obscure market we haven’t explored before. We were particularly inquisitive about the steps the regulators are taking to increase trading liquidity and encourage listings by local companies as well as market participation by retail and international investors.
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This month, we bought a $200m pipe manufacturer in Saudi Arabia which has been bagging substantial production contracts in recent months. With financial gain to reflect only a few quarters later, its valuation of 9x LTM P/E is very cheap.
October
In October, the Evli Emerging Frontier Fund celebrated its 10-year anniversary. At an event at the Olympic museum in Helsinki with over 100 clients in attendance, we showcased what we have accomplished since the fund’s inception, while Professor Alex Edmans explained how our fund grows the pie for investors, and CEOs of two of our best-performing portfolio companies shared how they expand shareholder value through a purpose-driven approach.
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During the exciting first decade, our fund returned nearly 3x while the frontier emerging index was roughly flat. In the past 5 years, with the current investment team advising the strategy, the fund achieved +16.0% annualized return (vs +1.4% of the frontier emerging index). On Bloomberg, our fund is ranked #1 out of all 564 emerging markets funds launched before 2014. On Morningstar, our fund has five stars. On Citywire, our fund is ranked as #1 best-performing fund for five years. This year, our fund won the Lipper award as the best EM fund in Europe (out of 219 funds).
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Throughout the past 10 years, we have always remained true to our strategy of investing in cheap, growing, quality companies in frontier emerging markets. We go where others don’t, looking for misunderstood companies in overlooked markets. We will continue enhancing our process to deliver even better results for our clients in the next decade.
November
In November, we made research trips to Kuwait and Saudi Arabia. In Kuwait, we identified two particularly attractive look-alike companies: both are investment holdings severely hit by the 2008 financial crisis; both went through enormous restructuring in the last 15 years to become debt-free now; both are small (MCap of $250m and $350m), cheap (P/E of 4x and 8x), and growing (YTD earnings growth of over 50%). The market still thinks they are in crisis or no longer exist, while they are alive and earning.
In Saudi Arabia, we met with the Evli Emerging Frontier Fund’s two largest positions which benefit from the country’s megaproject agenda: a $300m steel pipe manufacturer trading at 9x P/E, and a $400m supplier of telecom products trading at 12x P/E. With recent triple-digit earnings growth and promising outlook, these companies are very cheap, given that the average P/E ratio of the Saudi market is 19x.
This month, we also took our Finland-based clients to a meeting with a prime Dubai real estate developer which the fund has owned for the last 2.5 years for a total return of over 100%. Known in the market for its high quality of execution, this company – which trades at only 6x P/E – boasts a robust project pipeline amid heightened global demand for Dubai real estate. The management exuded unmasked optimism: it surely helps that Dubai's population is expected to grow by 50% in the next decade.
December
In December, we made a research trip to Argentina where a new president had been elected just two weeks prior and was inaugurated during our visit. In the past 30 years, Argentina had nearly a dozen currency crises and at least four banking crises; it has defaulted on its international debt nine times, including three times in the past two decades; and it has participated in no less than 21 IMF programs. The country continues to experience major inflation of nearly 200% this year, and the currency has depreciated by 99% over the past 10 years. The new president believes he will solve Argentina’s economic problems through austerity measures and free market policies. He has already had a strong start with reduction in the fiscal deficit, elimination of subsidies, plans to privatize state assets, and devaluation of the artificially strong currency whose official exchange rate was set about 70% stronger than the black market rate. Although his platform is reminiscent of the 2016 president’s plan which received much love from the market but proved yet another disappointment, everyone we spoke to in the country seemed remarkably optimistic – “this time it’s different!” We met two companies that stand to thrive in this new environment.
We met with the head of the local stock exchange, which itself is a listed company with an unrecognized gain of nearly 30% of the company’s market cap due to the artificially low FX rate in the country. With the president’s plan to devalue the currency, the company will have the opportunity to book this gain which will represent more than its entire year's earnings. On top of this, the number of retail clients increased by 2,400% in the past five years due to integration with new fintech businesses as Argentines search for ways to preserve capital in an inflationary environment, and trading volume has more than doubled this year alone. Additionally, optimism for macroeconomic reform should translate into foreign interest in local stocks.
We also met with the CEO of the largest private energy company in the country which will benefit from the elimination of government subsidies as this will increase its earnings and lower counterparty risk of dealing and negotiating with the government. The company has experienced significant production growth in the past year and plans additional capacity increases in the next 3-4 years. It further stands to benefit from the eminent official exchange rate lift-off.
This month concluded the fund’s 10th calendar year. The Evli Emerging Frontier Fund is currently rated 5 stars by Morningstar and ranked #1 among frontier peers on Citywire for 5 years. This year, the fund received a Lipper Award as the best-performing EM fund in Europe for 3 and 5 years. According to data on Bloomberg, the fund is ranked #1 out of all 703 EM funds over a 10-year period, and #2 out of all 1,030 EM funds over a 5-year period.