AMA: Emerging markets investment analyst

In the spirit of the holidays, I thought I would host a AMA for anybody interested in the life of a buy side analyst that works on an emerging markets fund. I also occasionally contribute ideas to our international developed market funds, but I do not work on any U.S. companies.

Brief background:

Undergrad: one of the top 10 public US universities.
First job: worked for several years as an associate at a midsized, long only global value firm.
MBA: top 10 US program
Post MBA: analyst on an emerging markets fund at a large, long-only manager. We utilize a generalist coverage model. I've been working here several years now.

Shoot with your questions and I'll answer what I can. I've been on this board since undergrad (10+ years now) and like to help out those serious about getting into the industry. Happy holidays folks.

Comments (67)

Dec 17, 2017

Awesome- thanks in advance.

  • How do you incorporate macro into your investment process? Consensus with tilts or do you have internal economists?
  • Do you do frontier markets?
  • Any immediate non-starters for you in EM: industries, countries, company sizes etc?
  • Are your portfolios constructed as a "collection of EM stocks that offer best risk/reward" or are you benchmark centric?
Best Response
Dec 17, 2017
Vagabond85:

How do you incorporate macro into your investment process? Consensus with tilts or do you have internal economists?

Our firm uses a bottom up process, so we don't formally take macro into our process. Definitely don't have an economist.

However, we do manage macro risks several ways:

  • Limit overall portfolio exposure to certain countries. I am particularly aware of this when making recommendations -i.e., I won't make more than 2-3 recommendations in one country, otherwise my overall performance becomes very levered to the underlying country and currency. We pay close attention to how much of a portfolio "bet" we're making vs. the benchmark.
  • Above average awareness of political risks. We subscribe to several services that offer geopolitical analysis. The point here is to avoid missing any big tail risks, i.e. an election that could wipe out the currency, or conversely lead to a big rally.
  • Cost of capital. I think a lot about what the "fair" cost of capital is in a country. It ranges a lot - South Africa and Brazil can be 14-16%, while Korea is 5-6%. If you use the wrong cost of capital you can overinvest in countries that are very risky while underinvesting in safer countries. You also have to consider local vs. USD returns. On a risk and inflation-adjusted basis, a 15% ROE in Brazil could be worse than a 7% ROE in Korea.
Vagabond85:

Do you do frontier markets?

Rarely. Most frontier markets aren't that liquid, so it's difficult to buy a position of size in these countries. You would be surprised what is frontier though. For example, Argentina is considered frontier by MSCI, while Pakistan is emerging (supposedly more advanced). We have positions in Argentina, but wouldn't touch Pakistan.

Vagabond85:

Any immediate non-starters for you in EM: industries, countries, company sizes etc?

We have minimum market cap and liquidity requirements. There is no point doing work on a company that is just too small to matter.

In terms of countries, there are no hard limits, but some of the frontier countries we just don't bother with (Nigeria, Egypt, etc.). The currencies and governments in these countries are so unstable that you often literally can't get your cash out, or it could be worth nearly zero overnight with a devaluation in Nigeria's case.

In terms of industries, personally I think certain industries such as airlines, telecoms, and heavy industries such as steel and shipbuilding are value traps. Occasionally there could be a special situation in these industries that is interesting, but that's very rare. Most of the companies in these industries are value traps.

Vagabond85:

Are your portfolios constructed as a "collection of EM stocks that offer best risk/reward" or are you benchmark centric?

The two aren't necessarily in competition. Most clients judge our performance vs. a benchmark, so relative performance is very important. As I mentioned, for risk management purposes, we carefully evaluate our big bets vs. the benchmark whether those are country, currency, industry, interest rate, or other bets.

It's easy to say an investor should just load up on the best opportunities wherever they find them and ignore the benchmark. However, in countries like Russia and Turkey the currency can literally get cut in half in a few months. You can be right on your bottom-up analysis but still get wiped out in these scenarios. In some ways that's the most frustrating part of the job.

    • 9
Dec 18, 2017

Sorry but how does a currency devaluation effect the share price? Stocks are not fixed in currency terms and a lower currency should equal a higher stock price (even more so for exporters).

Array
Dec 22, 2017
models_and_bottles:

In terms of industries, personally I think certain industries such as airlines, telecoms, and heavy industries such as steel and shipbuilding are value traps. Occasionally there could be a special situation in these industries that is interesting, but that's very rare. Most of the companies in these industries are value traps.

Could you expound on why companies in these industries are often value traps? Would appreciate it.

Oct 4, 2018

Would you be able to recommend good reads to start understanding the geopolitical landscape of different emerging markets? For someone with close to zero background on these markets.

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Dec 17, 2017

For someone coming from the EM debt side I found this super useful! Thanks

Dec 18, 2017

Whar are your views on investing and in general about the current state of China and India? Given they have been the fastest gowing EM economies does your firm have a significant position in the two countries?

"The markets are always changing , and they are always the same."

Dec 18, 2017
JoyfulMonkey:

Whar are your views on investing and in general about the current state of China and India? Given they have been the fastest gowing EM economies does your firm have a significant position in the two countries?

China (+Hong Kong) is a huge part of the EM index, so we naturally have a fair amount of investment there. The same is true of India, but to a lesser extent. We would never have zero exposure there given the countries' size in the benchmark.

To your initial question, again we are not a macro fund, but I can give you some broad thoughts on the two countries:

Starting with India, I have to say I visited there recently and am a lot more bearish than most people. Most of the companies are not particularly well run. You have a lot of family run businesses that are ripe with nepotism, asset stripping, and other problems. The Anil Ambani group of Reliance companies is one great example of this. Disclosure is also horrible so it's hard to know what you're getting when buying a stock. Obviously Modi has been great for the country so far, but the undercurrent of Hindi nationalism in his government is alarming. The country still has a lot of deep structural problems in the banking, agricultural, and retail sectors which I don't see getting resolved under his watch. All in, given the rally India has had over the past few years, I don't think it's an attractive combo. The country could easily continue growing 5%+ p.a. in real terms but it may not translate to attractive stock returns.

On China, I must say I am deeply impressed by the progress the country has made. I've visited China several times in the past few years and each time I'm amazed how much more developed it has become. You also have some very well run companies there, both SOE and private. We still find a lot of great consumer-oriented stocks in China trading at surprisingly reasonable multiples.

The big risks for China are the real estate and financial sectors. This has been true for at least the past decade so it's hard to say when it finally blows up, but my feeling is there are a lot of pent up problems. Real estate prices in most Chinese cities, and especially the tier 1 cities (Shanghai, Beijing, Shenzhen, Hong Kong), have gone through the roof. A lot of it is driven by speculation and funded by debt. Whenever the real estate bubble finally pops it will create major problems in their banking system - think what happened in the US in 2008. Again this bear thesis has been out there for a while though. Personally I have avoided all the Chinese banks and insurers due to this risk.

    • 7
Dec 18, 2017

Interesting.

I don't see china's real estate/finance ever crashing. QE and monetary policy innovations have basically eliminated the ability of a 2008 again. And the chinese government has far more policy levers to pull to prevent a 2008 than anywhere else (and the single [party situation means politics won't mess up good policy).

Array
Dec 18, 2017

Thanks for such a comprehensive reply.

Could you also give an idea about a day in your role as an Analyst at the fund?

Also, what is in general the compensation in the industry?

"The markets are always changing , and they are always the same."

Dec 18, 2017
JoyfulMonkey:

Could you also give an idea about a day in your role as an Analyst at the fund?

Day to day - obviously this varies depending upon what's going on. I travel about 25% of the time to meet companies, attend conferences, and conduct due diligence. I consider this by far the most interesting part of the job. It's basically a dream job - get to travel the world, meeting with C-level execs, and see things and meet people I would otherwise never get to do. It can also be stressful because my schedule is usually jammed with meetings during these trips. At a major conference it would be common to meet with 8+ companies per day.

In the office, I spend about 25% of my time working on existing portfolio holdings, i.e. updating my models, reviewing recent results, updating my price target, etc. This is pretty mundane but important to stay on top of. The other 65% of time I spend looking at new ideas and trying to find new buy recommendations. This is where the real work is and is the most challenging part of the job. Final 10% is spent on client marketing and general administrative work.

In terms of general work/life, I work 10-12 hours per day and maybe a few hours on the weekend. Occasionally have calls at night that I take from home when talking to companies in Asia. Take four weeks of vacation per year.

    • 2
Dec 18, 2017

How did your comp progress over the years (especially during your early years)? Curious to see if base and target bonus rise on a predictable basis at big firms (i.e. 5-10k increase every year for analysts in banking).

Dec 18, 2017
William Abel Kane:

How did your comp progress over the years (especially during your early years)? Curious to see if base and target bonus rise on a predictable basis at big firms (i.e. 5-10k increase every year for analysts in banking).

Keep in mind this varies by firm and I can only speak to my experience.

First year out of undergrad I made 75k (60k salary). So good in an absolute sense but a lot less than banking. Of course my hours were way better, so there's that. Second year made 100. When I left to get my MBA I was making 125. Salary increases were all token, so the increase was almost entirely due to higher bonuses.

Post MBA, I made $250k the first year. A few years post MBA I was made a limited partner, so I now receive quarterly partnership distributions in addition to salary and bonus. I don't want to give exact figures but am making meaningfully more than 250k now. However, bonus is >50% of my income and is very tied to my recommendation performance. I expect that my salary will only increase with cost of living adjustment going forward. Any meaningful increase will come from higher bonuses and/or being awarded more partnership units. Nobody makes big money in this industry from salary increases.

In theory I could sell my partnership units, but the signalling effect would be very negative, so I'm not counting them in my net worth or financial planning calculations.

    • 2
Dec 19, 2017

Was your bonus generally tied to your stock picks or firm performance?

What are some ways junior analysts (out of undergrad) can impress senior analysts/PMs? or what are some things that you appreciate the most as a senior analyst?

And at what point do you start expecting junior analysts to generate their own ideas?

Thanks in advance!

Dec 18, 2017

sorry, lots of Q's, I find international & EM investing fascinating

  1. do you prefer companies that mostly sell to EM consumers or companies that sell overseas?
  2. if you don't have a macro view, how does currency come into the equation? is it just something to be aware of or do you have an active view of a currency with each pick (e.g. buy FMX but hedge MXN)
  3. I feel like everyone knows about china & india (and maybe to a lesser extent, brazil & mexico). where are you finding opps that are under the radar? poland? turkey? philippines? colombia?
  4. how do you deal with messy data at the company level? say you have a shipping company in Panama with great numbers, bottom up work would make them look like a buy. but how do you deal with what could be false or stretched earnings data? in essence, I'm betting you have to "kick the tires" a bit, what does that look like?
  5. how do you stay current while being based in the US but covering exclusively non-US investments?
  6. what are some good news sources for some of these emerging markets?
  7. what's been your favorite place to travel for business?
    • 2
Dec 18, 2017
thebrofessor:

do you prefer companies that mostly sell to EM consumers or companies that sell overseas?

Not sure exactly what you're asking here. We can own multinational companies that generate the majority of their revenue from EM consumers. Obviously mostly MNC have better governance and disclosure than some local company in Russia or wherever, but the valuation different is often wide as a result.

thebrofessor:

if you don't have a macro view, how does currency come into the equation? is it just something to be aware of or do you have an active view of a currency with each pick (e.g. buy FMX but hedge MXN)

If you use the appropriate cost of capital you are accounting for a lot of this risk. As I mentioned earlier, we are also quite aware of the currency bets were making. We also consider any currency mismatch inherent to the business model. For example, a South African miner would be inherently short ZAR (labor is all paid in ZAR) and long USD. Conversely, a Russian retailer like Magnit is long RUB and partially short EUR and USD.

thebrofessor:

I feel like everyone knows about china & india (and maybe to a lesser extent, brazil & mexico). where are you finding opps that are under the radar? poland? turkey? philippines? colombia?

Until this morning I would have said South Africa, but that secret is out of the bag now.

Other interesting markets are Russia and Korea. Both trade at sharp discounts to fair value though for different reasons.

thebrofessor:

how do you deal with messy data at the company level? say you have a shipping company in Panama with great numbers, bottom up work would make them look like a buy. but how do you deal with what could be false or stretched earnings data? in essence, I'm betting you have to "kick the tires" a bit, what does that look like?

Well there are different types of messy data. Some companies just don't disclose much information - this is common in Korea and India. That doesn't mean they're frauds, but you have to be comfortable working with less data. Usually that comfort involves a greater valuation discount too.

In terms of fraud risk, the risk is much higher in certain geographies (i.e. China, Russia) and industries (lending, insurance, consumer companies with long distribution chains). You have to know what to look for.

Ultimately you also have to rely more upon local sources and your own observations from visiting the companies, in addition to common sense. This is a big reason why I travel to meet companies.

thebrofessor:

how do you stay current while being based in the US but covering exclusively non-US investments?

Read more local news sources and also rely on local brokers and other third parties for information. It's important to visit the companies and get to know the management. On these trips you'll also meet local investors that share local knowledge with you.

You'll always be at an information disadvantage to a sophisticated local investor, but you can usually avoid missing anything major.

thebrofessor:

what are some good news sources for some of these emerging markets?

Most large EMs have dedicated local business newspapers. For example, South Africa has the Financial Mail and M&G. I also get daily news emails from local brokers which contain the most relevant articles. I quickly skim through these each day and follow up on anything relevant.

International publications such as the FT and Economist help too, though their articles are usually more reactive than proactive in nature.

thebrofessor:

what's been your favorite place to travel for business?

Oh that's a tough one. A few:

  • South Africa - most beautiful. I would retire to Cape Town if it weren't on the other side of the world.
  • Brazil - Rio is beautiful, as are the people.
  • Hong Kong - wouldn't want to live there full time, but I love the city. You can be in the middle of skyscrapers and then out hiking in the countryside in a matter of minutes.
    -Chile - I really liked Santiago, it reminds me of California but with a lot less people and attitude. I like to ski and Chile has great skiing too.

Least favorite: Indonesia, Malaysia, most of mainland China.

    • 7
Dec 18, 2017

shocked on the indonesia making your least favorites list. why is that?

thanks again, the comment on incorporating forex into cost of capital makes sense

Dec 18, 2017

Excuse my ignorance as I know very little on EM investing and I would like to learn more.

1)What websites would you recommend I read?
2)How does your due diligence for EM investing differ from opportunities with domestic securities?
3)What do you think of the future of countries like Colombia, DR, Panama, Brazil? Any countries you are targeting more so than others?
4)How do you take into account for cultural differences, politics and global events?
5)How would you recommend a college undergrad to best prepare for a career in EM investing and is it possible out of undergrad? Would an internship abroad help? Foreign language?

Thanks in advance and happy holidays.

Dec 18, 2017
TheROI:

1)What websites would you recommend I read?

I read the WSJ, FT, and NYT daily. Not the whole paper, but the most interesting articles online. I also read the Economist, though I usually have a 4-6 week backlog there.

A few books I've found really good too:

Passport to profits - Mark Mobius (this is an easy ready and fairly entertaining. I live a mini, much less glamorous version of his life) Breakout nations - this was written by Morgan Stanley's head of EM and is really good. The Rise and Fall of Nations - also written by the MS guy. Strongly recommend this one.

TheROI:

2)How does your due diligence for EM investing differ from opportunities with domestic securities?

Good question. At the first firm I covered companies globally, so I have experience looking at both EM and U.S. companies. Main differences:

On the ground research: it's very important to visit the company and get to know management. This helps not only avoid fraud risk, but also gives you a sense of the local market, the company's standing within the industry, and management's capital allocation priorities. With a U.S. company you can usually read the transcripts and annual reports and get a good sense, so there often is no need to visit.

Disclosure: in the U.S. you get all the data neatly packaged into a 10-K or 10-Q. in EMs you usually get a lot less data. You have to learn to work with less data, but to also ask the right questions to management and competitors to make up for this lack of disclosure.

Cost of capital and macro: again we're not a macro fund, but you simply cannot ignore the macro and political environments in EMs. You have to be at least aware of the risks and manage your overall exposures. Using the correct cost of capital is also very important given differing local inflation and interest rates.

TheROI:

3)What do you think of the future of countries like Colombia, DR, Panama, Brazil? Any countries you are targeting more so than others?

Well those countries are all really different so I can't group them together.

For Brazil - the big question is what happens after Temer. I'm getting more nervous that whoever comes next will slide back into the Rousseff / Lula way of doing things. The country still has a lot of serious problems that will not be resolved during the remainder of Temer's term. It's too bad, because Temer has done so much for the country in just two years, yet according to the polls he's one of the last popular presidents there ever.

One thing I've learned about Brazil is it's such a consumer society, the people are generally very short term oriented / live for today. If some populist comes along and tells them they can retire at 55, have a full pension, only work 30 hours a week, etc. they they usually vote him or her into office. They don't want a Temer, who brings discipline and builds for the future. They want everything now.

TheROI:

4)How do you take into account for cultural differences, politics and global events?

Again that's a very broad question. There are really two angles to this: acute events and structural issues. Acute events such as elections are something you need to be aware of manage from a risk standpoint. They can move the share price a lot but don't necessarily impact long-term value or fundamentals that much.

Structural issues have a greater impact on the cost of capital and growth assumptions you use for a country, industry, or company. They definitely affect the intrinsic value of a company. I mentioned some of the structural issues with Brazil above. In my view, these issues lead to a structurally higher cost of capital and reduced real growth rate compare to a country such as China or Thailand, just to use a few examples. [/quote]

TheROI:

5)How would you recommend a college undergrad to best prepare for a career in EM investing and is it possible out of undergrad? Would an internship abroad help? Foreign language?

I think it's very hard to specifically target working at an EM fund. I got lucky through a combination of right place / right time and overall preparation.

Looking back, the things that have helped me most have been:

  • knowledge of international affairs and local history. I've been reading the Economist since high school and love to read about local history. It helps me understand how countries evolved and the political forces at work in the country, which of course affects businesses and stock outcomes.
  • good knowledge of macroeconomics.
  • language skills: this never hurts, but truth be told I only speak English. As many countries as I visit, I wouldn't even know where to start. If you do study a language, pick a widely spoken one like Spanish or Mandarin though. Mandarin is especially valued because it's more difficult to learn.
  • study abroad: I think this can be a really good experience in undergrad, particularly if you do something more unique and outside of the normal comfort zone. For example, studying in Korea, Hong Kong, Cape Town, Moscow, etc. would be unique and challenging given cultural and language barriers. Studying in Barcelona isn't.
    • 8
Dec 18, 2017

Thanks!

Dec 18, 2017

Curious where your fund's investment style falls on the growth/value spectrum? Do you have a specific value tilt or is it stock specific?

Very interested read overall. Thanks for doing this, your posts are always very insightful

Dec 18, 2017
ai215:

Curious where your fund's investment style falls on the growth/value spectrum? Do you have a specific value tilt or is it stock specific?

We're value oriented. You'll find that means a lot of different things to different people though.

    • 1
Dec 18, 2017

Great thread and thanks for taking the time. Have a few questions for you:

1) I'm going into long-only value investing after college as well and am curious how you tried to make the most of that unique opportunity to not only learn about investing but also add value to the fund without having prior experience in banking. Any additional detail you can provide on your role and what you did to become as great an investor as possible would be helpful.

2) Did you try and lateral to another fund instead of pursuing an MBA? Even if you didn't, do you have any tips for me if I'm interested in continuing my career in investing without going to b school?

Thank you.

Dec 18, 2017
man-1500:

I'm going into long-only value investing after college as well and am curious how you tried to make the most of that unique opportunity to not only learn about investing but also add value to the fund without having prior experience in banking. Any additional detail you can provide on your role and what you did to become as great an investor as possible would be helpful.

Sure, well my first job was an associate position at a global value firm. Think Dodge & Cox, Brandes, Hotchkis Wiley, Causeway, etc. I think all these firms have standard 2-4 year associate programs.

In terms of how to get the most out of the experience, a few suggestions:

1) Sounds obvious, but make sure you do a good job. These are really coveted positions and put you on the ladder for an analyst role. Don't take your eye off the ball and start thinking about your next move too soon. Build a good foundation.

2) Try to analyze companies outside your industry. Most of the firms I mentioned have sector coverage models, so you'll spend most of your time looking at a specific industry, but after you're there a year or more start volunteering or asking for work outside your coverage sector. The more diverse the set of companies you look at the better. If you can't get any work outside your sector at least read the analysts reports in other industries to get a feel for what they're saying.

3) When appropriate, pick the analysts' brains. If they like a company a lot, ask why. They hate it, why is that? What do they think makes a good company? How do they think about the tradeoff between valuation and quality? On and on. Most of them are proud of their work and want to talk to others about it. Know your crowd when doing this though and do it at the right time.

4) Read other managers' quarterly letters and study their portfolios. Recognize that your firm's way of doing things may not be the best, whether that's in terms of investment philosophy, portfolio construction, culture, performance measurement, etc. Don't complain, but do take notice of the differences. Figure out which other managers you respect and which ones you don't. Be able to name a few great managers besides Buffet.

5) Get to know your coworkers and classmates. Your fellow associate today might be a PM in 10 years. This is a small industry so reputation is very important. Be friendly and humble, but also take your work seriously. Don't let anybody at the firm think you're a slacker or just cashing a paycheck.

6) Read investment books. I mentioned a few good ones above. Read the Ben Graham books and Warren Buffet's annual newsletters.

man-1500:

2) Did you try and lateral to another fund instead of pursuing an MBA? Even if you didn't, do you have any tips for me if I'm interested in continuing my career in investing without going to b school?

I interviewed a few places but I was pretty set on getting my MBA. Looking back maybe I should have focused more on trying to lateral. I don't regret getting a MBA though, it all worked out very well and it was also an interesting and educational experience.

    • 5
Dec 19, 2017

Great, that's very helpful.

As a follow up, can you talk about your MBA recruiting experience? Did you have a significant leg up compared to your peers who were also interested in IM? Did you feel confident that you would secure a full-time offer in investing or did you ever have to consider other paths like banking, corporate strategy, consulting?

Also curious about your take on MBA recruiting too seeing as lowest % of HBS MBAs went into IM this year and general interest in the field seems to be at a trough for most MBA students.

Thanks very much for the perspective.

Dec 19, 2017

I currently cover EM in DCM and I am very interested in moving into the HF space, specially EM equity (even though would consider credit opportunities as well). What do you think are key skills I should develop if I want to make the transition, as well as what next step would make most sense for the transition.

Dec 19, 2017
jaah94:

I currently cover EM in DCM and I am very interested in moving into the HF space, specially EM equity (even though would consider credit opportunities as well). What do you think are key skills I should develop if I want to make the transition, as well as what next step would make most sense for the transition.

You really have two challenges here: moving from sell side to buy side, and trying to move from debt to equity. It would be a lot easier to do one switch at a time.

The easiest option would be to see if you could move to your firm's ECM desk before later jumping to the buy side. If you really want to cover equities then you should try to make that transition as soon as possible, it gets more difficult as you become more experienced.

    • 2
Dec 19, 2017

Curious what do you think of gazprom? Looks like one of the cheapest stocks I can find. I'm way more comfortable with natural gas than oil stocks since any more to battery tech could help support natty as a power source while bearish oil.

They own a bank too.

A bit worried they are investing way too much in capacity (mostly pipelines). They do own a bank which seems to be extra value and not on the balance sheet. But getting to buy a stock at 2-3 times earnings is very enticing. Is it mostly a fear of putin stealing? I don't see natty gas as having a ton of devaluation risks (if anything I think russia slowly coming back).

Array
    • 1
Dec 19, 2017
traderlife:

Curious what do you think of gazprom? Looks like one of the cheapest stocks I can find. I'm way more comfortable with natural gas than oil stocks since any more to battery tech could help support natty as a power source while bearish oil.
A bit worried they are investing way too much in capacity (mostly pipelines). They do own a bank which seems to be extra value and not on the balance sheet. But getting to buy a stock at 2-3 times earnings is very enticing. Is it mostly a fear of putin stealing? I don't see natty gas as having a ton of devaluation risks (if anything I think russia slowly coming back).

A lot of the Russian SOEs are just vehicles for the oligarchs and certain politicians to take money. Ask yourself why the stock price for companies such as Gazprom, Surgutneftgas, or RusHydro (among many, many others) never seems to go anywhere despite them having world class resource bases.

The profit always gets diverted to either the government or the cronies. It's the same reason these companies always backtrack on their dividend promises. There are some interesting companies in Russia, but most of these resource-related SOEs are value traps.

    • 3
Dec 20, 2017

Close to my concerns. Putin steals to much (more broadly oligarchs).

Still think its interesting with 6% yield which they have paid. If the thesis of too much stealing ever changes could be a homerun.

Array
Dec 19, 2017

You seem like a good guy to ask about this - any thoughts on Turkey? Seems like the political situation has kinda gone to shit there in the last year, but curious to hear about market conditions.

Dec 19, 2017
Fantastic:

You seem like a good guy to ask about this - any thoughts on Turkey? Seems like the political situation has kinda gone to shit there in the last year, but curious to hear about market conditions.

Turkey is a really sad story. I was in Istanbul a few years ago and loved the city and people. The companies weren't necessarily the best managed, but there was a good macro story at the time (young, educated population with growing disposable income). Hard to believe now, but not that long ago people thought Turkey would be the next to join the EU.

In the past few years Turkey has basically gone from a secular democracy to an Islamic dictatorship. Erdogan used the coup attempt as a pretext to become a de facto dictator. He has coopted the Islamist part of Turkish society, which was always present but was weaker after the Ataturk reforms, to support himself. He also gins up support by playing up a section of the population's fears about Kurds, immigrants, the educated "elite", and other countries (sound familiar?).

While de facto dictatorships aren't unusual in EM - in fact there have been some very economically successful ones such as Chile under Pinochet and Thailand under the previous king - Erdogan is unique in that he is clueless about economic matters. Hence you see him making claims like "high interest rates lead to high inflation" and thus forcing the CBRT to keep interest rates way too low. The country now has enormous inflation problem and the TRY continues to devalue at a rapid pace.

Unfortunately I don't really see any positive changes until Erdogan is gone. He may be forced to face economic reality and let the CBRT do what is necessary, but as far as I'm concerned the guy is just another nutty dictator using religion to further his personal agenda.

    • 5
Dec 19, 2017

Thanks for doing this AMA.

1) Do you have any interest in spinning-off to start your own fund? How would you change your process/role if you did so? Totally understandable that you can't give specifics about the firm's process/philosophy but any general comments would be interesting.

2) What impact (if any) will MIFID II have on your names? I've seen some speculation that fewer EM names (specifically down the cap spectrum) will be covered by international analysts and that some slack may be picked up by domestic analysts.

3) What is your favorite question to ask management?

4) You previously mentioned reading other investors' quarterly letters. Do you have a favorite, must-read letter?

Appreciate the insight!

Dec 19, 2017
EFInvestor32:

1) Do you have any interest in spinning-off to start your own fund?

Not at the moment. It has become more difficult to start your own fund, especially if you're trying to do a plain vanilla long-only strategy. Remember, the industry is shrinking overall.

If I were to do my own thing, it would be as a hedge fund pursuing a more niche strategy within EM. I've kicked around some ideas but not planning to do this in the next few years.

You also have to keep in mind that I have a tremendous platform at my current firm in terms of broker and management access, client recognition, not to mention getting paid very well while taking little personal risk. If I wanted to start a somewhat complementary fund at my firm it's certainly possible in a few years if I got management buy in. Now if I wanted to do something radically different, say a L/S EM fund, I would have to go elsewhere or start my own fund.

EFInvestor32:

2) What impact (if any) will MIFID II have on your names? I've seen some speculation that fewer EM names (specifically down the cap spectrum) will be covered by international analysts and that some slack may be picked up by domestic analysts.

Well the companies won't be impacted at all. Most of them don't even know what Mifid II is.

More broadly, Mifid II will result in further broker consolidation, so there will be fewer sell side analysts which in turn means less coverage. Brokers will definitely stop covering smaller companies that don't attract client research spend. This trend already started post the GFC and has accelerated recently. Arguably this could be good for buy side firms.

Also, you'll see the remaining brokers focus more quality, differentiated research instead of pumping out "flash notes" and other garbage. The brokers will cut off smaller managers that can't pay, which will in part lead to further consolidation on the buy side.

FYI - Mifid II only affects European managers, so we are mostly exempt as a U.S. manager, but it's clear what direction the industry is headed. U.S. clients will start demanding the same standard even if it's not law in the U.S..

EFInvestor32:

3) What is your favorite question to ask management?

How do you plan to allocate capital going forward and why.

EFInvestor32:

4) You previously mentioned reading other investors' quarterly letters. Do you have a favorite, must-read letter?

The Oakmark international / Harris Associates quarterlies used to be pretty good. They've become more skimpy over time. They were never the most entertaining, but you can get a good sense of how Herro and his team are thinking if you read a bunch of them.

Mark Mobius' books and interviews are entertaining and really appeal to Templeton's retail investor base. I don't consider him a good investment mind, but the guy was a genius at marketing. Strutting around in a white suit and shaved head probably made the guy a few hundred million. There's a lesson here - there is more to success than just being right about stock picks.

Buffett's annual letters give good insight into his mind and style of thinking.

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Dec 20, 2017

FYI, 1 good fund I've recently come across is Platinum Asset Management. John Hempton mentioned them in his blog and they've had consistently strong international equities performance.

A fund that spun-off from them that also releases lengthy commentary is called Antipodes.

Dec 20, 2017

1: How long until western investors stop treating EM as a risky place you run to when yield is low. What I'm trying to say is when will EM stop being a niche and become something as well know and well loved as DM.

2: If you could start your career again, would you still choose EM or would you go elsewhere, add reasons please.

3: Does the future look bright for those who choose to start their careers in EM?

Also, have you ever been bribed?

Absolute truths don't exist... celebrated opinions do.

Dec 20, 2017
kayz08:

1: How long until western investors stop treating EM as a risky place you run to when yield is low. What I'm trying to say is when will EM stop being a niche and become something as well know and well loved as DM.

I don't agree with the way you've phrased this, but the answer is EM will always be a higher beta market that performs well in risk on scenarios. I don't think it's viewed as a niche and, in fact, EM is well loved right now with the MSCI EM index up over 30% YTD.

kayz08:

2: If you could start your career again, would you still choose EM or would you go elsewhere, add reasons please.

3: Does the future look bright for those who choose to start their careers in EM?

I think asking whether I would do EM again or not is far too narrow of a question. The bigger question is whether I would choose equity research again.

If I were in undergrad today and wanted to get into investment management I would try to focus on an area that can't easily be disrupted by passive products. For example, fixed income, private equity, infrastructure, activist funds, and other products. Basically, products that involve investments in illiquid markets where skilled, experienced investors can have a high information and/or relationship-based advantage.

There's no doubt in my mind that traditional, long-only active investment products are becoming largely obsolete. This of course has a negative spillover effect on sell side equity research. EM products might be somewhat more insulated from this trend because we operate in less liquid markets with more informational advantages, but I think we are still feeling some of the pressure too.

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Dec 20, 2017

"I don't agree with the way you've phrased this, but the answer is EM will always be a higher beta market that performs well in risk on scenarios. I don't think it's viewed as a niche and, in fact, EM is well loved right now with the MSCI EM index up over 30% YTD."

I agree, EM will always be a higher beta market.

Your last sentence in this paragraph is what I was partly alluding to. It's loved right now and total aum has been growing since 2016. However, this was not the case from 2011 to 2015.

Returns: MSCI EM index
2011: -18.42%
2012: 18.22%
2013: -2.6%
2014: -2.19%
2015: -14.92%

AUM flows have been increasing for passive EM funds but between 2014-2016, the same could not be said about active funds (especially fixed income).

I am probably wrong, don't wish to pick a fight with an actual professional who has been in the game for many years.

But it seems like the EM trend has started again, maybe due to the search for yield or the fact that EM markets are becoming more resilient to western central banking actions. If the Fed were to raise rates by 3% for example, I'm sure we would see major outflows in EM as money goes back to DM.

Finally, I call EM niche and I don't have the numbers to back it up but i'm sure DM total aum dwarves EM.

Absolute truths don't exist... celebrated opinions do.

Jan 3, 2018

"For example, fixed income, private equity, infrastructure, activist funds, and other products."

Would you include L/S equity Hedge Funds in this category?

Dec 22, 2017

Have you seen anyone from banking transition to a role similar to yours after a stint as an analyst? I'll be starting full-time at a top BB in a coverage group but I think a role like yours could be a great fit for me. Any advice you would give to someone in my position?

Dec 22, 2017
iConsult:

Have you seen anyone from banking transition to a role similar to yours after a stint as an analyst? I'll be starting full-time at a top BB in a coverage group but I think a role like yours could be a great fit for me. Any advice you would give to someone in my position?

I have seen a lot of people move from banking to a buy side role, particularly early in their career. In fact, many firms look to hire IB analysts with 2-3 years experience for associate (entry level) positions. This applies broadly to most investment managers, it is not specific to EM.

In terms of advice, a few things that would help your case:
- start and pass the CFA exams
- be able to demonstrate an interest in investing. That could take several forms such as running a small personal portfolio, attending investment conferences or the Berkshire Hathaway or Fairfax meetings, etc.
- Read investment-related books and managers' newsletters. See earlier comments.

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Dec 22, 2017

Fintech startups are quite hot right now. What changes are you seeing in the industry, in terms of artificial intelligence taking over the fundamental investment world, and arguably eventually replace a lot of the investment analysts like us? Thanks!

Dec 22, 2017
lkjhgf:

Fintech startups are quite hot right now. What changes are you seeing in the industry, in terms of artificial intelligence taking over the fundamental investment world, and arguably eventually replace a lot of the investment analysts like us? Thanks!

The biggest disruption for investment analysts is the move to passive investing. This is a structural change which I believe will continue. I don't think that has anything to do with fintechs.

Fintechs are much more likely to disrupt the wealth management industry. Companies like Ameriprise, Northwestern Mutual, Edward Jones, etc., are particularly at risk because they are catering to a mass market client base that have relatively straightforward investing, tax, and estate planning needs. A lot of this work can be automated - this is the exact market that Personal Capital and Betterment are targeting.

This type of disruption makes a lot of sense as most of the "advisors" at the aforementioned firms are just sales people that don't add much value, but charge high fees. On the other hand, I think firms catering to HNW and ultra HNW clients (Julius Baer, CS, GS, etc.) will be relatively safe since these clients have complex tax and financial situations that can't easily be addressed via an automated system.

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Dec 24, 2017

These are some really great responses models_and_bottles. Are you able to breakdown your investment process? For example, when you are considering a new idea, how do you assess (modelling, risk management, reading broker reports etc) it to arrive at a recommendation?

Dec 27, 2017
scuttlebutt94:

These are some really great responses models_and_bottles. Are you able to breakdown your investment process? For example, when you are considering a new idea, how do you assess (modelling, risk management, reading broker reports etc) it to arrive at a recommendation?

Ideas come from several sources. Most common would be:

  • we have several proprietary screens in addition to those that I run on my own. I'm looking for companies that generate positive EVA (ROIC>WACC), where the valuation is reasonable, and the management has a good track record of allocating capital.
  • looking at comps of companies that I like. There are certain industries and subsectors that are structurally attractive and thus almost any business in that industry is highly profitable. I might look at one company I like, but find that it's valuation isn't overly attractive, and thus I look at other companies in the comp set which might trade at more attractive valuations. This only works if you know the industry fairly well, otherwise the valuation discount might be warranted (for example, you wouldn't buy Sears because it trades at a big discount to Walmart).
  • met the company at a conference and really liked the business. Keep an eye on it and wait until the valuation becomes compelling. These have been some of my most successful ideas because I am generally very familiar with the company by the time the valuation becomes attractive, which could take years.

One I identify that an opportunity looks attractive based upon back of the envelope calcs, I read some of the more recent broker reports, build my financial model, and might talk to a sell side analyst or two. I almost always try to set up a call with management or investor relations to get an update on the company. The overall process from the time I say "this looks interesting now" to putting a buy on it is generally 1-3 weeks, depending upon my familiarity with the company.

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Dec 26, 2017

@models_and_bottles I am new to wso and have some career related questions for you and any guidance would be appreciated. I am just an undergrad with major in economics right now and have recently started giving thoughts on my interest in portfolio management. Everything looks interesting because one gets to know about different industries and how the whole world actually works and people use their wits to find those hidden companies who have potential to grow and make money.

Since I am from South Asia with not a recognizable university, it is obviously difficult for me to enter the industry because I read it on some online blogs and forums like this one (efinancialcareers and M&I). I want to work in Europe and I am thinking of applying to some b schools there for MSc Finance programs. I know there are some really good schools in the UK, but since I dont know what impact ongoing brexit talks will have on asset management companies in future I want to play it safe. I want to know what do you think about this situation being different firms shifting to different cities in continental europe. Being a non european citizen will play a negative role for me which I am well aware of. If I ask you to tell me what schools are really worth applying to then I would be grateful. I am even happy to work anywhere which invests in equity and even ready to have a low salary. Also can you guide me what steps should I take? Sorry for sounding very idiotic, but I was reading some international economics and development economics and I liked the idea of investing in emerging economies. It sounds very interesting and challenging. I don't know if these are even related to your profession.

Dec 27, 2017
Blackbriar-nonEU:

@models_and_bottles I am new to wso and have some career related questions for you and any guidance would be appreciated. I am just an undergrad with major in economics right now and have recently started giving thoughts on my interest in portfolio management. Everything looks interesting because one gets to know about different industries and how the whole world actually works and people use their wits to find those hidden companies who have potential to grow and make money.

Since I am from South Asia with not a recognizable university, it is obviously difficult for me to enter the industry because I read it on some online blogs and forums like this one (efinancialcareers and M&I). I want to work in Europe and I am thinking of applying to some b schools there for MSc Finance programs. I know there are some really good schools in the UK, but since I dont know what impact ongoing brexit talks will have on asset management companies in future I want to play it safe. I want to know what do you think about this situation being different firms shifting to different cities in continental europe. Being a non european citizen will play a negative role for me which I am well aware of.

I'm based in North America so don't have any advice specific to your situation. I would think that the biggest challenge for you would be moving to Europe / establishing a presence there, so I would focus on that first. The easiest route would be for you to attend a school in Europe, as you mentioned. I'm not too familiar with the programs there, so will leave that research to you.

I wouldn't worry about the Brexit situation, that's way beyond your control. Even if Brexit finally happens, there will still be a lot of people educated in England that work at the big European banks.

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Dec 29, 2017

Thank you very much for the insightful answers, models_and_bottles! I have some more questions too.

-How valued is the CFA qualification in the industry?

-What are some of the biggest red flags you have seen in EM companies? (e.g.How do you know if the management would steal shareholders' capital?; Accounting red flags such as Cash Flow << Net Income)

-Any tips on idea generation?

-Do you buy small/mid cap "start-up like" companies that are not profitable yet? If yes, how do you value them?

-What in your view is good capital allocation? (e.g.Putting all capital expenditure in the highest margin business? )

-I am a fan in EM consumer staples actually. Do you think in general local brands can compete with brands from MNC like Unilever, P&G? It seems as locals get wealthier some move away from local brands.

-What's your view on Africa? They are coming up with a new free trade zone. Do you think their economy can one day develop their own consumer market, and not be dominated just by commodities?

Dec 29, 2017
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Jan 8, 2018