September 16, 2025 • 39 mins
Emerging markets have had one of the strongest years since 2017, with currency appreciation a key driver of returns. In this episode of Inside Active, host David Cohne, mutual fund and active management analyst with Bloomberg Intelligence, along with co-host Marvin Chen, BI’s senior Asia equity strategist spoke with Robert Marshall-Lee, founding partner and chief investment officer of Cusana Capital about its sword-and-shield framework, which seeks high-quality, founder-led compounders with structural growth and avoids value-destructive companies. They discussed why emerging-market indexes are full of weak companies, why tariffs are seen as short-term noise rather than structural impediments and where future opportunities could be strongest.
The podcast was recorded on Sept. 9.
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Speaker 1 (00:13):
Welcome to Inside Active, a podcast about active managers that
goes beyond sound bites and headlines and looks deeper into
the processes, challenges, and philosophies and security selection. I'm David Cohne,
i lead mutual fund and active Research at Bloomberg Intelligence.
Today my co host is Marvin Chen, Senior Asia equity
strategist at Bloomberg Intelligence. Marvin, thank you for joining me today.
Speaker 2 (00:34):
Hi David, thank you for having me.
Speaker 1 (00:36):
So you recently published a note pretty interesting on you know,
emerging market and so, you know, I just want to
see what's kind of driving the markets right now.
Speaker 2 (00:48):
Yeah, David, So, you know emerging markets is, emerging markets
are having a pretty good year, one of the best
since I think around twenty seventeen. And what we like
to do is, you know, we like to break down
the returns of emerging markets in terms of currency change, valuations,
and the earnings outlook. And what is interesting is that
(01:09):
we're noticing that, you know, a lot we've seen some
valuation rerating, particularly in you know, China, some of the
North Asian markets such as Korea and Taiwan. But what
has been the main driver this year is the currency
change you know, the weaker dollar has helped drive returns
in some of the best performing markets. If we look
(01:31):
at some of the top performing markets such as Korea,
some of the Latin American countries, you know, the currency
gains have accounted for maybe ten to thirty percent of
the returns. So the outlook of the dollar is quite important.
I think we think going forward, you know, it has
been a big driver in the first half of the year,
(01:53):
but uh, you know, things will be changing going forward
with the expected fed rache Chet cycle beginning again.
Speaker 1 (02:04):
Be something to watch. And speaking of emerging markets, I'd
like to welcome Robert Marshall lead to the podcast. Rob
is the founding partner and chief investment officer of Kusana Capital.
Rob thank you for joining us today.
Speaker 3 (02:16):
Thanks David, it's a pleasure to be here.
Speaker 1 (02:18):
So let's talk about the Kasana's emerging market strategy. Your
sword and shield approach is really a unique framework you
kind of unpack how that philosophy shapes your portfolio decisions.
Speaker 4 (02:34):
I started investing in emerging markets in about nineteen ninety nine,
and at that point I was a chartered accountant beforehand,
and I just started investing it. I was a utilities
analyst Newton Investment Management now part of BNY Mellon, and
I was there at the very early stages of the
kind of the industrialization of China, and it was a
(02:55):
fascinating place to invest, and a lot of companies did
very well through that that industrialization boom, which led to
a commodities boom. I ended up being a mining analyst
as well, and as a time, you can make ten
times of money in mining sector. During my experience since
ninety nine, you know, I became progressively aware that there
(03:17):
were some very, very value generating companies in emerging markets,
but they were kind of being offset by a whole
bunch of companies which kind of go violently sideways or
even violently down. And so when you look at the index,
all you see is the combination of those two effects
going on. So the compound is being offset by the
value destroyers effectively, and Henry Besenbind has done some really
(03:39):
good work on that which highlights that in pretty much
any stock market over time, it's a relatively small number
of companies that generate most of the returns. And that's
something I kind of observed over my own experience, you know,
over the first ten years of investing globally, but with
you know, with a significant amount of emerging market experience
in twenty eleven, and I had the fortunate ability to
(04:03):
set up an emerging market strategy from scratch, having been
a global port value manager for the a number of
years before that, and because of my experience, and because
I didn't have any pre existing clown promises, I could
think hard about what I was trying to achieve. And
what I realized is you don't want to be tracking
the index. You don't want to be measuring the risk
(04:25):
relative to an index which is not your friend. So,
for example, if you've got thirty percent of the index,
which is state identities, which is broadly the number, those
companies are not run for shoeld of value creation. So unlike,
for example, the US market, which on the whole is
quite eva centric, that is absolutely not the case for
large swathes of emerging markets. So although you might have,
(04:46):
you know, for example, a commodity boom and things like this,
there are some parts of the market which are creating
value and a whole load of others which are destroying value,
even if they have good years every now and then.
So rather than chasing those ups and downs of the
oil price or whatever is driving those swings back and forwards.
It's much better to understand whether value creation is really happening.
And there are some great companies in emerging markets with
(05:08):
some very long, strong underlying growth pinnings. But it's understanding
what attributes you're looking forward doing that and then being
able to construct a portfolio which captures those without worrying
about all the swings in the index. So all that
kind of sign is kind of obvious, you know, where
if the crazy risks from state identities and olig ar
coned oil companies in Russia and those kind of things
(05:30):
at the same time as created, you know, for example,
investing in the brilliant consumer franchises in India. So you
think it's well, of course, you know, why doesn't everyone
do that? But the difficulty comes because everyone's kind of
weighed against an index on an annual basis. You get
annual bonuses within a large investment house. The market convention
from media and so on is to focus on the
(05:51):
last twelve or eighteen months or rolling three years even
and if you stand out from the crowd and do
something different, you can look really silly for a period
of time. So if all those state owned Chinese banks
rally by fifty percent like they did in mid twenty fifteen,
and you don't own them because you don't want to
earn them, then you look a little bit foolish for
a while. And the question is can you stomach looking
(06:12):
foolish for a while, or do you lose your job
or do you use your cliants because you haven't given
them reason to understand that you're going to do something different.
But stepping back, you know, over the period since twenty eleven,
the strategy that I started at that point and have
run since then and at Kusana since twenty two has
generated something like three or four times the index return
(06:34):
cumulatively over time. So the index has gone up a
little bit, you know, each year, but it goes violently
up and down on in a given calendar year. But
stepping back from that, you know, we've had stots which
have generated here multiples of return over a sustained long
term period with a much larger position size, and so
you actually generate a much higher return with a lower
(06:54):
level of absolute growth. So stronger corporate governance, high return
on capital, businesses, strong balance sheets. These are the things
that protect your capital. And it's a bit like when
we look at the US mag seven it's a similar
kind of effect. There are certain number of companies which
actually generating those returns.
Speaker 1 (07:12):
So if you know the majority of companies in the
index are value destructive, you know, how do you find
the ones that aren't? Like what is your process?
Speaker 4 (07:22):
It's having a clear idea on the attributes that you're
looking for and the warning signs or the kind of
not even the warning signs, just the you know what
mediocre looks like. Most businesses out there are not competitively advantage.
They'll have the moment in the sun. You know, it's
a steel company makes really good profits one year. Guess what,
(07:44):
someone comes to builds another steel plant next to you,
and supply demand corrects, and then you probably make really
bad returns the next year. That happens with shipping the
whole time, airlines. You know, that's the kind of the
lower quality businesses, and it's most of the businesses, to
be honest. Or in Brazil you have the corporate governance
set up. The incentive structures for most management teams are
(08:06):
focused on sales growth and EBITDAR growth, so They're focused
on P and L growth, not value creation. So if
I'm a manager in Brazil, what do I do? I
raise capital, I do lots of M and a lots
of roll ups. I get paid, and I'm not creating
any sustainable growth. So the shelters will go up and
down and up and down. Actually they don't, you know,
they don't have a long term good good journey.
Speaker 5 (08:28):
So what we look for is is well managed businesses,
normally founder lead, so I think sixty five plus percent
of our portfolio is founder led businesses in China and
India and.
Speaker 3 (08:40):
Brazil, et cetera.
Speaker 4 (08:42):
We look for high incrementalt on capital into a structural
growth opportunity. So we're looking for a long one way
for growth. We want to own stocks ideally for ten
years plus, and we want the compounding effect of reinvesting
in the growth at a high incremental return to be
the core dry of our returns over time. It's far
more predictable, it's lower risk. But you can find those
(09:05):
great business franchises which actually they don't have mean reversion.
They have something which is unique, which is their proposition
to their customers, which they're able to charge for often
with capitalized businesses with big barriers to entry.
Speaker 3 (09:19):
It could be network effects.
Speaker 4 (09:21):
So for example, we have make my Trip, which is
like the booking dot com of India. It has sixty
percent market share. The next peer is at ten percent.
But you have very strong network effects and a high
return business model. And that's when you can you can
start kind of banking on the kind of the sustained reinvestment.
And it is a completely different perspective on value. If
you think you've got a cash earnings per sure which
(09:42):
is companning at twenty percent, it's got a very different
value from the mediocre which is compounding at four or
five percent if you're lucky.
Speaker 1 (09:49):
So you mentioned governance, you know, and gave an example
in Brazil. You know, in emerging markets governance can be opaque.
So how do you vet the skin in the game?
You know, where managers have their interests aligned with other shareholders?
Speaker 5 (10:07):
Is behavioral?
Speaker 4 (10:07):
I mean, really you try and to judge companies over
as long a period as possible. You should buy IPOs
very very warily because you didn't have that kind of
track record. We look for alignment of interest. Sometimes it's clear,
sometimes it's a little less clear. You can have a
really good professional management team which is doing all the
right stuff. So, for example, TSMC was effectively a founder
(10:28):
led business and has become effectively a professional management but
they're reinvesting wisely for the long term. They're trying to
do the best for their customer base and the industry
as well as making very acceptable profits for themselves. So
that's a kind of a nice, you know, a nice
symbiotic relationship. We like founder led businesses, but ones that
(10:50):
don't rip you off, which is kind of in stark
contrast to you know, I don't know a Russian steel
company owned by an oligarch who will be buying a
shipping port for ten million dollars and then selling it
to the LISCO for one hundred million dollars, extracting value
at your expense. And the obvious thing to do to
look for that is look at return on capital and
(11:12):
return on equity and cashlow measures of that on a
through the cycle basis, so you can often see what
warning signs things that don't make sense. So we had
we looked at a fast moving consumer goods company which
made choco pies in South Korea, and we can't understand
why it didn't seem to be profitable enough, and it's
because they would make really nice cash flows, and then
(11:32):
every now and then they go and buy a related
party company an elevated valuation, so the effectively disenfranchising the
minority investors. So we're looking at a whole raft of
different things. We have what we call the investment checklist,
which is really all the learning points of my career
since nineteen ninety nine as an investor and actually even
before that was a chartered accountant, thinking about what are
(11:54):
the things that allow us to have confidence in those businesses?
What are the warning signs? We won't get over perfect.
But what we're trying to do is cut out nineteen
ninety five percent of the market and focus on the
top five or ten percent in order to identify the
best twenty five or thirty opportunities for us to invest
in with a five year horizon.
Speaker 1 (12:16):
So what does the typical holding period look like? You know,
how often do you reassess thesis?
Speaker 4 (12:22):
So the way we work is because we're trying to
give that compounding effect enough time to manifest itself, we
inherently go and win with a five year horizon.
Speaker 3 (12:31):
So everything we're doing in terms of.
Speaker 4 (12:34):
How we're assessing the backdrop, how we're thinking about the company,
how we're thinking about its reinvestment of earnings. We want
to have the ability for it to be recycling capital
through the business and understanding the power of that. So
we find that five years is a period which is
long enough to allow the compounding to become the material driver.
So you're a one year investor, it's kind of eighty
(12:55):
percent about the multiple, which is that kind of the
voting mechanism in Buffett's peak, versus twenty percent the kind.
Speaker 3 (13:01):
Of the earnings power. Whereas if you.
Speaker 4 (13:03):
Take the compounding of effect forward, then it becomes more
like twenty percent multiple move and eighty percent about the earnings.
So although you might think further out, it becomes less certain.
In many ways, it becomes more certain. The difference between
the good ones and the bad ones becomes clearer. And
so when we're we're valuing the companies, when we're assessing
the different scenarios that we see before us, everything we're
(13:27):
doing is with a five year view, and therefore, inherently
that tends to kind of tie in pretty well with
our typical holding period. Now, because in the real world,
share prices don't follow a nice classic compounding curve, even
of the earnings per share and the cash earnings per
shure moved in a perfectly smooth fifteen percent compound.
Speaker 3 (13:45):
Growth rate curve.
Speaker 4 (13:46):
There's always different stuff happening in the markets. There's always
a lot of noise around, which encourages people to trade
backwards and forwards, and that means the share price is oscillate.
So the kind of the anchor of the share price
is effectively that cash earnings perssure curve, but the share
price will re rate and derate depending on the views
on risk reward around the broader market, and that presents
(14:08):
us opportunities to trim backstocks which are done well and
ad to stops which are done less well. So we're
using a time advantage. If we're assessing things on a
five year view and everyone else is working on a
twelve eighteen month view, which is the kind of the
typical in our view in the market, and perhaps even
shorter in places like China. Then we find great stocks
(14:29):
on sale periodically, and sometimes they get bid up to
crazy prices, like internet companies did in late twenty twenty.
So we want to be taking money off the table.
The risk reward is less good than other.
Speaker 3 (14:40):
Opportunities that we have.
Speaker 4 (14:42):
So bringing all of that together, what we're trying to
do is optimize from today with a five year view.
Every single day we're trying to optimize our capital allocation
in terms of our view on the balance of risk.
Speaker 3 (14:52):
Rewards for the next five years.
Speaker 4 (14:56):
And so some stocks will be an eight percent position,
some might be a one position, some will be going
out sometimes. And actually, when we're performing very well, our
turnover tends to go up because we have to recycle more.
And when our performance is lagging the market, which actually
did earlier this year, then actually our turnover tends to
drop back. Because we're pretty happy with our positions, we
(15:18):
don't need to change much. We might concentrate it more
into our top holdings, for example, and that's a sign
of confidence and a sign of a steady temperament. Every
now and then there's a reason why you need to
change things more. So when we came to the end
of twenty twenty, it was we moved from an deflationary
period into an inflationary period. That does kind of cause
(15:38):
you to want to kind of make some adjustments. So
we shouldn't be afraid of managing. We don't manage to
a turnover level. But at our name term turnover, which
is kind of reflective of how we invest, is around
twenty percent. And then we have a kind of a
topping entailing within the portfolio, as I said, trimming the
kind of the strong performance and topping up some of
(15:58):
the weaker ones. And that is so the actual turnout
is more like forty or fifty percent.
Speaker 2 (16:07):
So rab bit upon the macro outlook. I mean, we've
talked about how em is having one of the best
years since you know, twenty seventeen. I guess the big
question now is it sustainable? And you know, how does
the FED outlook and expectations for you know, the race cycle.
Will that be the next catalyst for emerging markets in
(16:28):
the near term?
Speaker 4 (16:31):
Yes, I mean I think I guess I'm not the
kind of the ultimate expert on macro. I'm a stock investor,
but the macro is still is important in supporting the
best franchises. And I have some observations. So generally the
emerging markets tend to outperform in a very correlated fashion
(16:53):
against the Dixie so the trade weighted US dollar, and
of course that gets moved around by you know, fed
rates and and so on. So you see this year
with moving to more dissinflationy backdrop, and there's money exiting
the US dollar from very extended levels after a ten
year bill market. We're clearly seeing the dollar trading often.
(17:15):
That tends to be very good for emerging market relative
performance at the index level. Some of the reasons behind that.
So you know, when the currency drops, it improves the
kind of purchasing power within the emerging markets. Cost of
capital tends to drop. So we've seen bond yeals in
(17:36):
many emerging markets going way below developed market bond yeals.
It's a particularly interesting time actually, you know, I think
the developed world is sort of hitting the limits in
terms of fiscal affordability, you know, with aging populations and
immigration and excessive promises, and so the market is done
to call time on that by raising the cost of capital, just.
Speaker 3 (17:55):
Like we see in an emerging market.
Speaker 4 (17:57):
So like Brazil in twenty fourteen, things like this, you know,
the country lives beyond its means. The market will enforce
discipline through the currency and through the cost of capital.
And I think we see that happening in the US,
but also in Europe.
Speaker 3 (18:09):
And Japan.
Speaker 4 (18:11):
But if for emerging markets, you know, you have a
slightly different situation on the whole.
Speaker 3 (18:15):
So we have.
Speaker 4 (18:18):
A shift from an inflationary period into a disinflationary period.
We see that very clearly, and quite a lot of markets,
China really into kind of pretty much on the edge
of deflation, which is perhaps a little kind of worse
in a way, but it's just bright teetering on the edge.
But broadly, we seeing cost of capital going down and
bond yields moving down. That of course reduces the cost
(18:39):
of money for people, and it reduces the cost of
capital when you're valuing the equity market. It can stimulate growth,
that can stimulate investment, that can stimulate earnings growth. And
when you see more earnings growth coming through, particularly on
domestic oriented companies, then the multiples tend to go up
as well. So you end up having the current see
(19:00):
and the earnings growth and bond yules and hence multiples
all kind of moving together at the same time. So
most of the market is intend to have a very
short term memory, so everyone kind of thinks about what's
happened over the last ten years. When the US market's
done well and emerging market's done relatively poorly, But if
you look at the decade before that, people kind of
(19:21):
forget that emerging markets did a two hundred and fifty
percent dollars a turn in the ten years up to
twenty eleven, and then it's only since twenty eleven that
there's been a kind of a tougher relative period, whereas
the US market has done well where it did not
so well in the previous decades. So these things do
tend to go in kind of waves, and arguably, you know,
(19:42):
there's a there's a pretty strong possibility that we're in
kind of one of those ways of transition.
Speaker 1 (19:47):
Great.
Speaker 2 (19:47):
Yeah, So, I mean you mentioned, you know, China. China
has been one of the you know, market says has
divided investors over the past couple of years. I mean,
you know, it's been called an investible what's your take
on China and how do we find the value and
the opportunities in that market?
Speaker 4 (20:08):
Yeah, China is complicated, but it's got some amazing companies
as well. The way I characterize China is that the
market is probably eighty percent plus not very attractive, but
there's probably a ten percent or so core of very attractive,
you know, high quality growth companies, perhaps even more than that.
(20:31):
And given it's a very large, deep market, that presents
a very interesting opportunity set. And here I'm not talking
about the big banks or the big steel companies or
the property companies who should have been going pop. I'm
talking about the founder lad entrepreneurial growth companies, often technology
and scale and efficiency leaders that have been moving up
the value spectrum. And whereas historically China would import a
(20:54):
lot of high quality or high technology goods, these days
they're competing in the global market, so that Chinese are
really world classed. And I was at in Shanghai back
in January and just traveling around the Yangti Delta, you know,
two hundred and fifty million people, an incredible manufacturing complex.
It's very very hard for the Japanese or Koreans and
Europeans and US to compete. They're so efficient, they're so good.
(21:18):
And then going to Malaysia and finding out everything there's
a cost thirty or forty percent more. That's kind of
one of the China plus one places. They just they
kind of hold the Chinese in are in terms of
how good they are. So we tread carefully with China,
but we do see significant opportunities. It's worth kind of
bearing mind where we've come from. So you know, Chinese
(21:40):
starts presented a huge opportunity. Over the ten years to
twenty twenty, we did phenomenally well. Our holdings did really,
really well. So I'm thinking stops like ten Cent compounding
at thirty or forty percent for a ten year period,
so we have the same comparable value creation, in fact,
probably ahead of a lot of the US market up
to that point. And then I think you had something
(22:01):
of the power of large, large numbers, So likes of
ten per cent of Ali Barbar became very large, and
I think, you know, Jack Mark kind of overstepped the
mark and that led to something of a clampdown to
make sure they knew who was boss, you know, the
Chinese Communist parties in charge and president she kind of
you know, asserted that in the market, and I think
(22:21):
you had a hunkering down of certain companies. So the
likes of ten you know, ten Cent, for example, is
still a very good company, but its growth rate decelerated.
It it really kind of managed down its profitability. It
was less you know, it's competing less in the market
whilst it's trying to keep a low profile, and of
course the growth rates and profitability went down a bit
in the short term, so it's not the underlying businesses bust,
(22:44):
it's just that they decelerated, and at the end of
twenty twenty they've been overly you know, over highly valued
with an extrapolation of the twenty twenty kind of internet
technology boom that we saw through the COVID period. So
that led to you just plot a chart of the
Chinese market against other markets globally, they'll see China had
(23:05):
raced ahead and then are a very substantial pullback through
twenty one, twenty two to twenty three, so you had
a de rating period. We never thought China was oninvestable,
but we were quite selective through that period. In fact,
we invested a lot more in electric vehicle supply chain
and solar companies for example. And where we are today,
(23:25):
I think there's been market repair, so the government realizes
that it needs private enterprises to flourish, particularly as you're
coming out of a property market correction, which is quite
severe after a ten year bubble. So that property market
is steadily deflating. It's leading to a lot of excess
supply and all sorts of stuff, particularly basic materials and
(23:46):
basic manufacturing, which is then flooding the global markets. I'm here,
I'm thinking cement and stuff like that. So you don't
really want to be invested in those areas, and the
government's trying to kind of sort that out. But when
the government gets involved, you're probably best avoiding those kind
of areas. At the same time, you know, you've still
had these high quality, compounding businesses and they're being able
to function again, and that's why those companies are really doing,
(24:10):
you know, quite well. So they're being allowed to re
rate back to a more normal level from a very
depressed level. The currency is strengthening against the dollar and
against other things. You know, there's there's we're not expecting it,
you know, a huge kind of macro boom off to
the races, but it's there. There's certainly a market repair
story going on, and and and investors who've shied away
(24:35):
from China kind of are rethinking that one and have
been coming in at the margin, which is obviously been
driving prices up. And then of course that gets domestic
investors excited, and Chinese investors have a notorious casino mentality,
so they get overly pessimistic and overly optimistic as well.
So I don't think we're into the full over optimistic thing,
but the government's starting to get a little bit queasy
(24:57):
on that, so it might start doing a little intervention
to of hold the market back a little bit after
some very strong rebounds. So in that kind of context,
what do we do. We have something like twenty six
percent or something of the portfolio within a benchmark agnostic
strategy invested in China, but our holdings look very little
(25:17):
like the index. We're very select on the type of
companies that we hold.
Speaker 1 (25:22):
So what does a typical holding period look like? You know,
how often are you reassessing your thesis for different companies.
Speaker 4 (25:31):
So in order to allow the compounding effect, to which
we think is the core driver at value creation, for
our clients to actually manifest itself and for us to
make the right investment decisions, then we invest with a
five plus year horizon. So everything we do allows that
because most of the market operates on something like a
(25:52):
twelve eighteen month horizon. In certain markets like China, it's
arguably even shorter. You know, when we're in meetings with
Chinese investors, they're talking about the next month, maybe three months,
whereas we're looking at about how a company is going
to be changing and creating value over the next five
plus years. It gives a very different perspective on risk reward.
It gives us a huge advantage if we have the
temperaments and the process and the ability to understand value
(26:16):
by looking further ahead than the market, because everyone else
is kind of crowding around, making the short term very efficient,
but the long term is much less efficient, particularly in
emerging markets which are highly irritational. So if you're investing
in a one year of view, something like eighty percent
of your equation is about the multiple, which is, as
Buffett would say, a kind of a voting mechanism. So
(26:38):
share prices are wabbling up and down depending on sentiment
and perception on growth, Whereas if you're looking out five years,
the compounding effect for good companies can really differentiate them,
so you can grow through multiples quite quickly. So you know,
if you think back to Apple in two thousand and four,
it was training at one hundred times multiple. It turns
out that was cheapest chips. You know, if you bought
(27:00):
those shares and to sat with them. You've made four
or five yeah, something four hundred times your money since
then because it's compounded at a very high rate. But
the media at the time will be saying, oh, that
stops really expensive, there's a bubble, and all that kind
of stuff. But the key is what is the sustainable
growth rate of that business? Why will some companies go
up one thousand percent and somewhill go down fifty percent
from the same Starling multiple. And everything we're doing is
(27:23):
trying to understand which are the good ones, which ones
are going to be trying to invest in for the
next five to ten plus years, and which ones to
avoid like the plague. And so the attributes that we're
looking for are thinks like corporate governance, economic modes, the
things that give us conviction that the company is generating
a high return on capital when it's recycling its capital,
(27:46):
and everything we're doing in terms of valuation is consistent
with that. So we were trying to really understand the
evaluation scenarios the companning of cash earnings per share out
for the next five or ten years. What is the
market going to be thinking when it's looking at the
company in five years time, when it's looking forwards and
it's a different way of thinking, it takes a different approach.
(28:08):
It's actually much lower risk because we own good companies,
not rubbish companies we think are just going to bounce
over the next three months. We're never going to guess
what's going to happen over the next three months. Only
better than the market, we don't think. But we have
a dramatic advantage in understanding the difference in compounding rates
and understanding which of the great companies in that kind
of context.
Speaker 1 (28:29):
So in your materials you talk about you know there's
different buckets. You're looking at classic compounders narrowing in wide jaws.
Could you give our audience kind of an overview what
they are and how you size positions among them.
Speaker 4 (28:42):
Yes, So if you a classic compounder to us would
be a company like TSMC or Tencent, you know, a
stot that we might have held since twenty eleven when
we started the strategy, and a stop like TSMC we've
probably held in a five percent plus position through most
of that fourteen year period, when it's companning at twenty
twenty five percent year after year. Now there's still going
(29:02):
to be cycles through that, but it's the stain compounding
rate which is the real driver. A steady state business
which is generating say a twenty percent return on capital
or twenty percent ROE if it didn't pay any dividends out,
its sustainable growth rate is defined by that steady return
on equity, So the internal compounding of per share basis
(29:26):
would be around twenty percent. Now, you can use the
capital to buy back shares or pay out dividends and
things like that, but effectively, that's the internalized growth rate.
If a company starts at a twenty percent ROI and
goes to zero, you're going to lose a lot of money.
And if it starts at what is optically a low
return on equity and goes up a lot, you will
make dramatically more than that compounding rate. So and then
(29:49):
hopefully you're going to you know, tail off at that
companding you know that twenty percent in five years time.
So those will be the best return companies, but they
tend to be higher risk, so you might not want
to be sticking your neck out too far on some
of those situations. And in between, there's what we always
called the narrowing GRS company, So it might be a
ten percent row which is becoming a twenty percent hour awe,
(30:09):
or which has a wider range of different scenarios around it.
So historically, a fast moving consumer goods company like hindusan
Unilever something like that, like a Procter Ammal in the
US would be compounding get maybe ten to fifteen percent rate,
which is quite an attractive return for a very low
risk investment. I don't think those FMTG companies as attracted
(30:31):
these days. They've been structurally disadvantaged, but they would have
been a classic, classic steady compounder, but not vastly exciting
for everyone who's trying to make a quick buck. The
best compounders over the last ten years have really been
those online platforms, so Google and Meta and companies like that,
which have been capital like businesses with strong growth runways
and pretty well managed and that's a lot and wide
(30:54):
economic modes around them, and that's allowed them to protect
their profitability and just reinvest in growth. That a pretty
attractive incremental return. If you look to those more like
twenty years ago, they were much higher risk businesses. You know,
they were much less established, they had much more threat
to their business. AI might raise those threats back again
for them. You know, there's a bit of an existential
(31:15):
threat to some of those things, but if you can
pick them up early, you'll make a lot of money.
So what we want room from the portfolio is a
kind of a core of run you know, reasonably predictable,
very well entrenched businesses, high cash generation, quite predictable levels
of growth, strong balance sheets, good governance, those kind of things.
Speaker 3 (31:39):
And then we.
Speaker 4 (31:39):
Want to have space to have the ones which we
think are going to get there or a hart part
way there and therefore generator a better return, but perhaps
at a slightly high level of risk. And then there
might be some which might be, for example, more like
a billion dollar market cap business, a younger business with
a huge runway for growth where it's establishing itself.
Speaker 3 (32:00):
It's got all the right attributes.
Speaker 4 (32:02):
In place, but it's not the polished finished article yet.
And those are the stots you could make five, ten,
you know, even more times your money over the next
ten plus years. But there's a wide range of outcomes,
so you've got to try and judge what the level
of capital employed within the portfolio you're going to do
with those. So we're trying to have it like when
(32:23):
you plant a garden, you don't want all your flowers
to come through at the same time, and you want
the kind of the nice ones, the evergreens, but then
you want the nice flowers which come through at a
later point in time if you look after them. And
so that's really what we're trying to do. We're trying
to create the portfolio for the future. And as a boutique.
You know, we're going to be smaller than you know,
(32:44):
some of the very large investment managers out there, so
we can have larger sizes and some of the small
companies we think are going to be fabulous risk reward
but where they would really struggle to build a meaningful position.
Instead we can actually generate a more meaningful position size
you're investing.
Speaker 2 (33:00):
It's a longer kind of term horizon. But some of
the things that have popped up over the past years,
such as you know, terriffs, how are you factoring that
as a risk? You know, are we passed the peak
tariff tensions or or or do you think of this
as a one off impact to emerging markets or does
(33:22):
this kind of change the kind of global outlook going forward.
Speaker 4 (33:29):
I like the angle there because I think the tariffs
are the biggest issue potentially for the US. I think
it's a tax on the US consumer ultimately. But there's
a lot of as we go through this, and you know,
the Europe is arguably, you know, perhaps more impacted than
a lot of emerging markets. There's a lot of noise
around this because of the way the Trump administration determined
(33:49):
those travelers being such an arbitrary type of measure. They
basically tax the most successful exporters the most. That was
how they made the calculation. So inherently, if you're invest
in more successful emerging markets, you actually had a greater
tariff effect, and if you earn the less successful ones,
you've got less tariffs.
Speaker 3 (34:06):
Go figure.
Speaker 4 (34:07):
So Brazil got impacted less because itself was a tariff
protected economy which therefore didn't really feature in the international
traded market, whereas I don't know, Vietnam or things was
very very good. Therefore it got impacted more. So the
impacts for US is, you know, you had to be
a bit more careful on certain companies. So for example,
(34:29):
Vietnamese banks are potentially if they're lending against companies which
are a bit more impacted than it's a potential risk. Similarly,
you're almost kind of inversely, you know, if you look
at an economy like India. So it's in the news
about tariffs at the moment, but the tariff exposure of
the Indian economy is very low relative to the internal
growth engine. So India's a very well managed economy. It's
(34:51):
got very strong government, been doing the right things, investing
a lot in infrastructure, a very youthful population with relatively
low credit penetration, high productivity growth. So if I was Trump,
I wouldn't be trying to ostracize India. I'd want to
be friends and want to be you know, trading together
and developing alongside each other, and you know, and not
pushing them towards the Chinese, to be quite frank. But
(35:15):
that's not what he's done. But we do know that
Trump changes on a whim. You know, all these things
are very personal. They're not well thought out economic strategies.
You know, he's just a bit and a bit of
a huff with India because they didn't support him for
a Nobel Peace Prize against Pakistan, which would have probably
been ludicrous, to be honest. But so you know, we've
got a fifty percent tariff today. It doesn't mean to
(35:37):
say you can have fifty percent in a month's time,
So I wouldn't worry about it too much. Of your
companies are not too impacted. We think India's one of
the best, were probably the best of the major stock
markets to be invested in over the next ten years.
A lot of very high quality franchises, very well governed,
with huge growth runways. So if you think about Coca
(35:59):
Cola and Pepsi, the consumption of calbinated beverages in India's
about four liters peranum compared with about one hundred and
fifty liters peranum in Mexico and the US, So you've
got this long run growth runway. So if you have
a really good company patching into that, they can generate
some fantastic returns over the long term. And some of
the stots we've held, you know, we've held them since
(36:20):
twenty eleven, twenty fourteen and still hold them today and
they've generated amazing returns. But we see the prospects of
doing that for a long period to come. So tariffs
do impact, but we have to be a bit careful
about over discounting them or over extrapolating them. We have
to think just about trying to find the best companies
in the context of what's happening in the world. It
(36:41):
is a more fragmented world. We don't see that changing rapidly.
But we've also got to be careful about worrying too
much about TARIS, which can be really fickle.
Speaker 1 (36:51):
So we are running out of time, But I just
wanted to ask one more question before we go. Where
do you think the next big opportunities are in the
emerging market? It's region So if.
Speaker 4 (37:02):
You think about what's driven the US market over the
last ten years, actually, you know a lot of the
emerging markets, it's been the shift to online platforms. The
technology is everywhere, and AI is just another part of that.
You know, it is changing things quite rapidly, and it's
disenfranchising a lot of businesses. We're seeing that said with
(37:23):
you know, shampoo companies and food companies and things. They
have less brand power because people use social media, so
it's easier for a young brand to challenge. E Commerce
also disrupts the distribution advantages of a lot of FMCG
companies and so on, So there are there are changes
in you know, the relative competitiveness and where you can
find the the best compounds in the future, it's okay,
(37:45):
where are the barriers to entry? And often it's these
kind of network effects from online businesses. What we find
is there's a lot of companies in emerging markets which
must have you know, we're often either vastly expensive or
unprofitable or excessively priced IPOs back in twenty twenty one,
which are now really attractive businesses. So they consolidated those markets.
(38:06):
They've become profitable, but they're still early in their growth path,
and it's a bit like you know, you're picking up
the mag seven, ten, fifteen years ago in faster underlying
growth markets. So we quite like those kind of online
platforms that you know, monopoly doopoly businesses in frost growing
areas which are underpenetrated. It could be e commerce in
Southeast Asia or the Uber of Southeast Asia that we own,
(38:28):
and there's all sorts of these kind of businesses kicking
around there if you look for them, and we find
that far more attractive than just going owning the biggest
bank or the Samsung in career or something, just because
they happen to be big in the benchmark, so we
think we can do a lot better than the benchmark
over time.
Speaker 1 (38:45):
We have to end here, but this is great. Thank
you again Rob for joining us.
Speaker 4 (38:48):
Yeah, thank you so much. Really nice to talk to you.
Speaker 1 (38:51):
And Marvin. Thank you for being my co host today.
Speaker 2 (38:53):
Thank you, Bosh, and.
Speaker 1 (38:54):
I want to thank you for listening. If you liked
the episode, please subscribe and leave a review. Also, if
you'd like to see more of our research, go to
BI fund Go and b I stocks go on the
Bloomberg Terminal until our next episode. This is David Cole
with inside out of
Welcome to Inside Active, a podcast about active managers that
goes beyond sound bites and headlines and looks deeper into
the processes, challenges, and philosophies and security selection. I'm David Cohne,
i lead mutual fund and active Research at Bloomberg Intelligence.
Today my co host is Marvin Chen, Senior Asia equity
strategist at Bloomberg Intelligence. Marvin, thank you for joining me today.
Speaker 2 (00:34):
Hi David, thank you for having me.
Speaker 1 (00:36):
So you recently published a note pretty interesting on you know,
emerging market and so, you know, I just want to
see what's kind of driving the markets right now.
Speaker 2 (00:48):
Yeah, David, So, you know emerging markets is, emerging markets
are having a pretty good year, one of the best
since I think around twenty seventeen. And what we like
to do is, you know, we like to break down
the returns of emerging markets in terms of currency change, valuations,
and the earnings outlook. And what is interesting is that
(01:09):
we're noticing that, you know, a lot we've seen some
valuation rerating, particularly in you know, China, some of the
North Asian markets such as Korea and Taiwan. But what
has been the main driver this year is the currency
change you know, the weaker dollar has helped drive returns
in some of the best performing markets. If we look
(01:31):
at some of the top performing markets such as Korea,
some of the Latin American countries, you know, the currency
gains have accounted for maybe ten to thirty percent of
the returns. So the outlook of the dollar is quite important.
I think we think going forward, you know, it has
been a big driver in the first half of the year,
(01:53):
but uh, you know, things will be changing going forward
with the expected fed rache Chet cycle beginning again.
Speaker 1 (02:04):
Be something to watch. And speaking of emerging markets, I'd
like to welcome Robert Marshall lead to the podcast. Rob
is the founding partner and chief investment officer of Kusana Capital.
Rob thank you for joining us today.
Speaker 3 (02:16):
Thanks David, it's a pleasure to be here.
Speaker 1 (02:18):
So let's talk about the Kasana's emerging market strategy. Your
sword and shield approach is really a unique framework you
kind of unpack how that philosophy shapes your portfolio decisions.
Speaker 4 (02:34):
I started investing in emerging markets in about nineteen ninety nine,
and at that point I was a chartered accountant beforehand,
and I just started investing it. I was a utilities
analyst Newton Investment Management now part of BNY Mellon, and
I was there at the very early stages of the
kind of the industrialization of China, and it was a
(02:55):
fascinating place to invest, and a lot of companies did
very well through that that industrialization boom, which led to
a commodities boom. I ended up being a mining analyst
as well, and as a time, you can make ten
times of money in mining sector. During my experience since
ninety nine, you know, I became progressively aware that there
(03:17):
were some very, very value generating companies in emerging markets,
but they were kind of being offset by a whole
bunch of companies which kind of go violently sideways or
even violently down. And so when you look at the index,
all you see is the combination of those two effects
going on. So the compound is being offset by the
value destroyers effectively, and Henry Besenbind has done some really
(03:39):
good work on that which highlights that in pretty much
any stock market over time, it's a relatively small number
of companies that generate most of the returns. And that's
something I kind of observed over my own experience, you know,
over the first ten years of investing globally, but with
you know, with a significant amount of emerging market experience
in twenty eleven, and I had the fortunate ability to
(04:03):
set up an emerging market strategy from scratch, having been
a global port value manager for the a number of
years before that, and because of my experience, and because
I didn't have any pre existing clown promises, I could
think hard about what I was trying to achieve. And
what I realized is you don't want to be tracking
the index. You don't want to be measuring the risk
(04:25):
relative to an index which is not your friend. So,
for example, if you've got thirty percent of the index,
which is state identities, which is broadly the number, those
companies are not run for shoeld of value creation. So unlike,
for example, the US market, which on the whole is
quite eva centric, that is absolutely not the case for
large swathes of emerging markets. So although you might have,
(04:46):
you know, for example, a commodity boom and things like this,
there are some parts of the market which are creating
value and a whole load of others which are destroying value,
even if they have good years every now and then.
So rather than chasing those ups and downs of the
oil price or whatever is driving those swings back and forwards.
It's much better to understand whether value creation is really happening.
And there are some great companies in emerging markets with
(05:08):
some very long, strong underlying growth pinnings. But it's understanding
what attributes you're looking forward doing that and then being
able to construct a portfolio which captures those without worrying
about all the swings in the index. So all that
kind of sign is kind of obvious, you know, where
if the crazy risks from state identities and olig ar
coned oil companies in Russia and those kind of things
(05:30):
at the same time as created, you know, for example,
investing in the brilliant consumer franchises in India. So you
think it's well, of course, you know, why doesn't everyone
do that? But the difficulty comes because everyone's kind of
weighed against an index on an annual basis. You get
annual bonuses within a large investment house. The market convention
from media and so on is to focus on the
(05:51):
last twelve or eighteen months or rolling three years even
and if you stand out from the crowd and do
something different, you can look really silly for a period
of time. So if all those state owned Chinese banks
rally by fifty percent like they did in mid twenty fifteen,
and you don't own them because you don't want to
earn them, then you look a little bit foolish for
a while. And the question is can you stomach looking
(06:12):
foolish for a while, or do you lose your job
or do you use your cliants because you haven't given
them reason to understand that you're going to do something different.
But stepping back, you know, over the period since twenty eleven,
the strategy that I started at that point and have
run since then and at Kusana since twenty two has
generated something like three or four times the index return
(06:34):
cumulatively over time. So the index has gone up a
little bit, you know, each year, but it goes violently
up and down on in a given calendar year. But
stepping back from that, you know, we've had stots which
have generated here multiples of return over a sustained long
term period with a much larger position size, and so
you actually generate a much higher return with a lower
(06:54):
level of absolute growth. So stronger corporate governance, high return
on capital, businesses, strong balance sheets. These are the things
that protect your capital. And it's a bit like when
we look at the US mag seven it's a similar
kind of effect. There are certain number of companies which
actually generating those returns.
Speaker 1 (07:12):
So if you know the majority of companies in the
index are value destructive, you know, how do you find
the ones that aren't? Like what is your process?
Speaker 4 (07:22):
It's having a clear idea on the attributes that you're
looking for and the warning signs or the kind of
not even the warning signs, just the you know what
mediocre looks like. Most businesses out there are not competitively advantage.
They'll have the moment in the sun. You know, it's
a steel company makes really good profits one year. Guess what,
(07:44):
someone comes to builds another steel plant next to you,
and supply demand corrects, and then you probably make really
bad returns the next year. That happens with shipping the
whole time, airlines. You know, that's the kind of the
lower quality businesses, and it's most of the businesses, to
be honest. Or in Brazil you have the corporate governance
set up. The incentive structures for most management teams are
(08:06):
focused on sales growth and EBITDAR growth, so They're focused
on P and L growth, not value creation. So if
I'm a manager in Brazil, what do I do? I
raise capital, I do lots of M and a lots
of roll ups. I get paid, and I'm not creating
any sustainable growth. So the shelters will go up and
down and up and down. Actually they don't, you know,
they don't have a long term good good journey.
Speaker 5 (08:28):
So what we look for is is well managed businesses,
normally founder lead, so I think sixty five plus percent
of our portfolio is founder led businesses in China and
India and.
Speaker 3 (08:40):
Brazil, et cetera.
Speaker 4 (08:42):
We look for high incrementalt on capital into a structural
growth opportunity. So we're looking for a long one way
for growth. We want to own stocks ideally for ten
years plus, and we want the compounding effect of reinvesting
in the growth at a high incremental return to be
the core dry of our returns over time. It's far
more predictable, it's lower risk. But you can find those
(09:05):
great business franchises which actually they don't have mean reversion.
They have something which is unique, which is their proposition
to their customers, which they're able to charge for often
with capitalized businesses with big barriers to entry.
Speaker 3 (09:19):
It could be network effects.
Speaker 4 (09:21):
So for example, we have make my Trip, which is
like the booking dot com of India. It has sixty
percent market share. The next peer is at ten percent.
But you have very strong network effects and a high
return business model. And that's when you can you can
start kind of banking on the kind of the sustained reinvestment.
And it is a completely different perspective on value. If
you think you've got a cash earnings per sure which
(09:42):
is companning at twenty percent, it's got a very different
value from the mediocre which is compounding at four or
five percent if you're lucky.
Speaker 1 (09:49):
So you mentioned governance, you know, and gave an example
in Brazil. You know, in emerging markets governance can be opaque.
So how do you vet the skin in the game?
You know, where managers have their interests aligned with other shareholders?
Speaker 5 (10:07):
Is behavioral?
Speaker 4 (10:07):
I mean, really you try and to judge companies over
as long a period as possible. You should buy IPOs
very very warily because you didn't have that kind of
track record. We look for alignment of interest. Sometimes it's clear,
sometimes it's a little less clear. You can have a
really good professional management team which is doing all the
right stuff. So, for example, TSMC was effectively a founder
(10:28):
led business and has become effectively a professional management but
they're reinvesting wisely for the long term. They're trying to
do the best for their customer base and the industry
as well as making very acceptable profits for themselves. So
that's a kind of a nice, you know, a nice
symbiotic relationship. We like founder led businesses, but ones that
(10:50):
don't rip you off, which is kind of in stark
contrast to you know, I don't know a Russian steel
company owned by an oligarch who will be buying a
shipping port for ten million dollars and then selling it
to the LISCO for one hundred million dollars, extracting value
at your expense. And the obvious thing to do to
look for that is look at return on capital and
(11:12):
return on equity and cashlow measures of that on a
through the cycle basis, so you can often see what
warning signs things that don't make sense. So we had
we looked at a fast moving consumer goods company which
made choco pies in South Korea, and we can't understand
why it didn't seem to be profitable enough, and it's
because they would make really nice cash flows, and then
(11:32):
every now and then they go and buy a related
party company an elevated valuation, so the effectively disenfranchising the
minority investors. So we're looking at a whole raft of
different things. We have what we call the investment checklist,
which is really all the learning points of my career
since nineteen ninety nine as an investor and actually even
before that was a chartered accountant, thinking about what are
(11:54):
the things that allow us to have confidence in those businesses?
What are the warning signs? We won't get over perfect.
But what we're trying to do is cut out nineteen
ninety five percent of the market and focus on the
top five or ten percent in order to identify the
best twenty five or thirty opportunities for us to invest
in with a five year horizon.
Speaker 1 (12:16):
So what does the typical holding period look like? You know,
how often do you reassess thesis?
Speaker 4 (12:22):
So the way we work is because we're trying to
give that compounding effect enough time to manifest itself, we
inherently go and win with a five year horizon.
Speaker 3 (12:31):
So everything we're doing in terms of.
Speaker 4 (12:34):
How we're assessing the backdrop, how we're thinking about the company,
how we're thinking about its reinvestment of earnings. We want
to have the ability for it to be recycling capital
through the business and understanding the power of that. So
we find that five years is a period which is
long enough to allow the compounding to become the material driver.
So you're a one year investor, it's kind of eighty
(12:55):
percent about the multiple, which is that kind of the
voting mechanism in Buffett's peak, versus twenty percent the kind.
Speaker 3 (13:01):
Of the earnings power. Whereas if you.
Speaker 4 (13:03):
Take the compounding of effect forward, then it becomes more
like twenty percent multiple move and eighty percent about the earnings.
So although you might think further out, it becomes less certain.
In many ways, it becomes more certain. The difference between
the good ones and the bad ones becomes clearer. And
so when we're we're valuing the companies, when we're assessing
the different scenarios that we see before us, everything we're
(13:27):
doing is with a five year view, and therefore, inherently
that tends to kind of tie in pretty well with
our typical holding period. Now, because in the real world,
share prices don't follow a nice classic compounding curve, even
of the earnings per share and the cash earnings per
shure moved in a perfectly smooth fifteen percent compound.
Speaker 3 (13:45):
Growth rate curve.
Speaker 4 (13:46):
There's always different stuff happening in the markets. There's always
a lot of noise around, which encourages people to trade
backwards and forwards, and that means the share price is oscillate.
So the kind of the anchor of the share price
is effectively that cash earnings perssure curve, but the share
price will re rate and derate depending on the views
on risk reward around the broader market, and that presents
(14:08):
us opportunities to trim backstocks which are done well and
ad to stops which are done less well. So we're
using a time advantage. If we're assessing things on a
five year view and everyone else is working on a
twelve eighteen month view, which is the kind of the
typical in our view in the market, and perhaps even
shorter in places like China. Then we find great stocks
(14:29):
on sale periodically, and sometimes they get bid up to
crazy prices, like internet companies did in late twenty twenty.
So we want to be taking money off the table.
The risk reward is less good than other.
Speaker 3 (14:40):
Opportunities that we have.
Speaker 4 (14:42):
So bringing all of that together, what we're trying to
do is optimize from today with a five year view.
Every single day we're trying to optimize our capital allocation
in terms of our view on the balance of risk.
Speaker 3 (14:52):
Rewards for the next five years.
Speaker 4 (14:56):
And so some stocks will be an eight percent position,
some might be a one position, some will be going
out sometimes. And actually, when we're performing very well, our
turnover tends to go up because we have to recycle more.
And when our performance is lagging the market, which actually
did earlier this year, then actually our turnover tends to
drop back. Because we're pretty happy with our positions, we
(15:18):
don't need to change much. We might concentrate it more
into our top holdings, for example, and that's a sign
of confidence and a sign of a steady temperament. Every
now and then there's a reason why you need to
change things more. So when we came to the end
of twenty twenty, it was we moved from an deflationary
period into an inflationary period. That does kind of cause
(15:38):
you to want to kind of make some adjustments. So
we shouldn't be afraid of managing. We don't manage to
a turnover level. But at our name term turnover, which
is kind of reflective of how we invest, is around
twenty percent. And then we have a kind of a
topping entailing within the portfolio, as I said, trimming the
kind of the strong performance and topping up some of
(15:58):
the weaker ones. And that is so the actual turnout
is more like forty or fifty percent.
Speaker 2 (16:07):
So rab bit upon the macro outlook. I mean, we've
talked about how em is having one of the best
years since you know, twenty seventeen. I guess the big
question now is it sustainable? And you know, how does
the FED outlook and expectations for you know, the race cycle.
Will that be the next catalyst for emerging markets in
(16:28):
the near term?
Speaker 4 (16:31):
Yes, I mean I think I guess I'm not the
kind of the ultimate expert on macro. I'm a stock investor,
but the macro is still is important in supporting the
best franchises. And I have some observations. So generally the
emerging markets tend to outperform in a very correlated fashion
(16:53):
against the Dixie so the trade weighted US dollar, and
of course that gets moved around by you know, fed
rates and and so on. So you see this year
with moving to more dissinflationy backdrop, and there's money exiting
the US dollar from very extended levels after a ten
year bill market. We're clearly seeing the dollar trading often.
(17:15):
That tends to be very good for emerging market relative
performance at the index level. Some of the reasons behind that.
So you know, when the currency drops, it improves the
kind of purchasing power within the emerging markets. Cost of
capital tends to drop. So we've seen bond yeals in
(17:36):
many emerging markets going way below developed market bond yeals.
It's a particularly interesting time actually, you know, I think
the developed world is sort of hitting the limits in
terms of fiscal affordability, you know, with aging populations and
immigration and excessive promises, and so the market is done
to call time on that by raising the cost of capital, just.
Speaker 3 (17:55):
Like we see in an emerging market.
Speaker 4 (17:57):
So like Brazil in twenty fourteen, things like this, you know,
the country lives beyond its means. The market will enforce
discipline through the currency and through the cost of capital.
And I think we see that happening in the US,
but also in Europe.
Speaker 3 (18:09):
And Japan.
Speaker 4 (18:11):
But if for emerging markets, you know, you have a
slightly different situation on the whole.
Speaker 3 (18:15):
So we have.
Speaker 4 (18:18):
A shift from an inflationary period into a disinflationary period.
We see that very clearly, and quite a lot of markets,
China really into kind of pretty much on the edge
of deflation, which is perhaps a little kind of worse
in a way, but it's just bright teetering on the edge.
But broadly, we seeing cost of capital going down and
bond yields moving down. That of course reduces the cost
(18:39):
of money for people, and it reduces the cost of
capital when you're valuing the equity market. It can stimulate growth,
that can stimulate investment, that can stimulate earnings growth. And
when you see more earnings growth coming through, particularly on
domestic oriented companies, then the multiples tend to go up
as well. So you end up having the current see
(19:00):
and the earnings growth and bond yules and hence multiples
all kind of moving together at the same time. So
most of the market is intend to have a very
short term memory, so everyone kind of thinks about what's
happened over the last ten years. When the US market's
done well and emerging market's done relatively poorly, But if
you look at the decade before that, people kind of
(19:21):
forget that emerging markets did a two hundred and fifty
percent dollars a turn in the ten years up to
twenty eleven, and then it's only since twenty eleven that
there's been a kind of a tougher relative period, whereas
the US market has done well where it did not
so well in the previous decades. So these things do
tend to go in kind of waves, and arguably, you know,
(19:42):
there's a there's a pretty strong possibility that we're in
kind of one of those ways of transition.
Speaker 1 (19:47):
Great.
Speaker 2 (19:47):
Yeah, So, I mean you mentioned, you know, China. China
has been one of the you know, market says has
divided investors over the past couple of years. I mean,
you know, it's been called an investible what's your take
on China and how do we find the value and
the opportunities in that market?
Speaker 4 (20:08):
Yeah, China is complicated, but it's got some amazing companies
as well. The way I characterize China is that the
market is probably eighty percent plus not very attractive, but
there's probably a ten percent or so core of very attractive,
you know, high quality growth companies, perhaps even more than that.
(20:31):
And given it's a very large, deep market, that presents
a very interesting opportunity set. And here I'm not talking
about the big banks or the big steel companies or
the property companies who should have been going pop. I'm
talking about the founder lad entrepreneurial growth companies, often technology
and scale and efficiency leaders that have been moving up
the value spectrum. And whereas historically China would import a
(20:54):
lot of high quality or high technology goods, these days
they're competing in the global market, so that Chinese are
really world classed. And I was at in Shanghai back
in January and just traveling around the Yangti Delta, you know,
two hundred and fifty million people, an incredible manufacturing complex.
It's very very hard for the Japanese or Koreans and
Europeans and US to compete. They're so efficient, they're so good.
(21:18):
And then going to Malaysia and finding out everything there's
a cost thirty or forty percent more. That's kind of
one of the China plus one places. They just they
kind of hold the Chinese in are in terms of
how good they are. So we tread carefully with China,
but we do see significant opportunities. It's worth kind of
bearing mind where we've come from. So you know, Chinese
(21:40):
starts presented a huge opportunity. Over the ten years to
twenty twenty, we did phenomenally well. Our holdings did really,
really well. So I'm thinking stops like ten Cent compounding
at thirty or forty percent for a ten year period,
so we have the same comparable value creation, in fact,
probably ahead of a lot of the US market up
to that point. And then I think you had something
(22:01):
of the power of large, large numbers, So likes of
ten per cent of Ali Barbar became very large, and
I think, you know, Jack Mark kind of overstepped the
mark and that led to something of a clampdown to
make sure they knew who was boss, you know, the
Chinese Communist parties in charge and president she kind of
you know, asserted that in the market, and I think
(22:21):
you had a hunkering down of certain companies. So the
likes of ten you know, ten Cent, for example, is
still a very good company, but its growth rate decelerated.
It it really kind of managed down its profitability. It
was less you know, it's competing less in the market
whilst it's trying to keep a low profile, and of
course the growth rates and profitability went down a bit
in the short term, so it's not the underlying businesses bust,
(22:44):
it's just that they decelerated, and at the end of
twenty twenty they've been overly you know, over highly valued
with an extrapolation of the twenty twenty kind of internet
technology boom that we saw through the COVID period. So
that led to you just plot a chart of the
Chinese market against other markets globally, they'll see China had
(23:05):
raced ahead and then are a very substantial pullback through
twenty one, twenty two to twenty three, so you had
a de rating period. We never thought China was oninvestable,
but we were quite selective through that period. In fact,
we invested a lot more in electric vehicle supply chain
and solar companies for example. And where we are today,
(23:25):
I think there's been market repair, so the government realizes
that it needs private enterprises to flourish, particularly as you're
coming out of a property market correction, which is quite
severe after a ten year bubble. So that property market
is steadily deflating. It's leading to a lot of excess
supply and all sorts of stuff, particularly basic materials and
(23:46):
basic manufacturing, which is then flooding the global markets. I'm here,
I'm thinking cement and stuff like that. So you don't
really want to be invested in those areas, and the
government's trying to kind of sort that out. But when
the government gets involved, you're probably best avoiding those kind
of areas. At the same time, you know, you've still
had these high quality, compounding businesses and they're being able
to function again, and that's why those companies are really doing,
(24:10):
you know, quite well. So they're being allowed to re
rate back to a more normal level from a very
depressed level. The currency is strengthening against the dollar and
against other things. You know, there's there's we're not expecting it,
you know, a huge kind of macro boom off to
the races, but it's there. There's certainly a market repair
story going on, and and and investors who've shied away
(24:35):
from China kind of are rethinking that one and have
been coming in at the margin, which is obviously been
driving prices up. And then of course that gets domestic
investors excited, and Chinese investors have a notorious casino mentality,
so they get overly pessimistic and overly optimistic as well.
So I don't think we're into the full over optimistic thing,
but the government's starting to get a little bit queasy
(24:57):
on that, so it might start doing a little intervention
to of hold the market back a little bit after
some very strong rebounds. So in that kind of context,
what do we do. We have something like twenty six
percent or something of the portfolio within a benchmark agnostic
strategy invested in China, but our holdings look very little
(25:17):
like the index. We're very select on the type of
companies that we hold.
Speaker 1 (25:22):
So what does a typical holding period look like? You know,
how often are you reassessing your thesis for different companies.
Speaker 4 (25:31):
So in order to allow the compounding effect, to which
we think is the core driver at value creation, for
our clients to actually manifest itself and for us to
make the right investment decisions, then we invest with a
five plus year horizon. So everything we do allows that
because most of the market operates on something like a
(25:52):
twelve eighteen month horizon. In certain markets like China, it's
arguably even shorter. You know, when we're in meetings with
Chinese investors, they're talking about the next month, maybe three months,
whereas we're looking at about how a company is going
to be changing and creating value over the next five
plus years. It gives a very different perspective on risk reward.
It gives us a huge advantage if we have the
temperaments and the process and the ability to understand value
(26:16):
by looking further ahead than the market, because everyone else
is kind of crowding around, making the short term very efficient,
but the long term is much less efficient, particularly in
emerging markets which are highly irritational. So if you're investing
in a one year of view, something like eighty percent
of your equation is about the multiple, which is, as
Buffett would say, a kind of a voting mechanism. So
(26:38):
share prices are wabbling up and down depending on sentiment
and perception on growth, Whereas if you're looking out five years,
the compounding effect for good companies can really differentiate them,
so you can grow through multiples quite quickly. So you know,
if you think back to Apple in two thousand and four,
it was training at one hundred times multiple. It turns
out that was cheapest chips. You know, if you bought
(27:00):
those shares and to sat with them. You've made four
or five yeah, something four hundred times your money since
then because it's compounded at a very high rate. But
the media at the time will be saying, oh, that
stops really expensive, there's a bubble, and all that kind
of stuff. But the key is what is the sustainable
growth rate of that business? Why will some companies go
up one thousand percent and somewhill go down fifty percent
from the same Starling multiple. And everything we're doing is
(27:23):
trying to understand which are the good ones, which ones
are going to be trying to invest in for the
next five to ten plus years, and which ones to
avoid like the plague. And so the attributes that we're
looking for are thinks like corporate governance, economic modes, the
things that give us conviction that the company is generating
a high return on capital when it's recycling its capital,
(27:46):
and everything we're doing in terms of valuation is consistent
with that. So we were trying to really understand the
evaluation scenarios the companning of cash earnings per share out
for the next five or ten years. What is the
market going to be thinking when it's looking at the
company in five years time, when it's looking forwards and
it's a different way of thinking, it takes a different approach.
(28:08):
It's actually much lower risk because we own good companies,
not rubbish companies we think are just going to bounce
over the next three months. We're never going to guess
what's going to happen over the next three months. Only
better than the market, we don't think. But we have
a dramatic advantage in understanding the difference in compounding rates
and understanding which of the great companies in that kind
of context.
Speaker 1 (28:29):
So in your materials you talk about you know there's
different buckets. You're looking at classic compounders narrowing in wide jaws.
Could you give our audience kind of an overview what
they are and how you size positions among them.
Speaker 4 (28:42):
Yes, So if you a classic compounder to us would
be a company like TSMC or Tencent, you know, a
stot that we might have held since twenty eleven when
we started the strategy, and a stop like TSMC we've
probably held in a five percent plus position through most
of that fourteen year period, when it's companning at twenty
twenty five percent year after year. Now there's still going
(29:02):
to be cycles through that, but it's the stain compounding
rate which is the real driver. A steady state business
which is generating say a twenty percent return on capital
or twenty percent ROE if it didn't pay any dividends out,
its sustainable growth rate is defined by that steady return
on equity, So the internal compounding of per share basis
(29:26):
would be around twenty percent. Now, you can use the
capital to buy back shares or pay out dividends and
things like that, but effectively, that's the internalized growth rate.
If a company starts at a twenty percent ROI and
goes to zero, you're going to lose a lot of money.
And if it starts at what is optically a low
return on equity and goes up a lot, you will
make dramatically more than that compounding rate. So and then
(29:49):
hopefully you're going to you know, tail off at that
companding you know that twenty percent in five years time.
So those will be the best return companies, but they
tend to be higher risk, so you might not want
to be sticking your neck out too far on some
of those situations. And in between, there's what we always
called the narrowing GRS company, So it might be a
ten percent row which is becoming a twenty percent hour awe,
(30:09):
or which has a wider range of different scenarios around it.
So historically, a fast moving consumer goods company like hindusan
Unilever something like that, like a Procter Ammal in the
US would be compounding get maybe ten to fifteen percent rate,
which is quite an attractive return for a very low
risk investment. I don't think those FMTG companies as attracted
(30:31):
these days. They've been structurally disadvantaged, but they would have
been a classic, classic steady compounder, but not vastly exciting
for everyone who's trying to make a quick buck. The
best compounders over the last ten years have really been
those online platforms, so Google and Meta and companies like that,
which have been capital like businesses with strong growth runways
and pretty well managed and that's a lot and wide
(30:54):
economic modes around them, and that's allowed them to protect
their profitability and just reinvest in growth. That a pretty
attractive incremental return. If you look to those more like
twenty years ago, they were much higher risk businesses. You know,
they were much less established, they had much more threat
to their business. AI might raise those threats back again
for them. You know, there's a bit of an existential
(31:15):
threat to some of those things, but if you can
pick them up early, you'll make a lot of money.
So what we want room from the portfolio is a
kind of a core of run you know, reasonably predictable,
very well entrenched businesses, high cash generation, quite predictable levels
of growth, strong balance sheets, good governance, those kind of things.
Speaker 3 (31:39):
And then we.
Speaker 4 (31:39):
Want to have space to have the ones which we
think are going to get there or a hart part
way there and therefore generator a better return, but perhaps
at a slightly high level of risk. And then there
might be some which might be, for example, more like
a billion dollar market cap business, a younger business with
a huge runway for growth where it's establishing itself.
Speaker 3 (32:00):
It's got all the right attributes.
Speaker 4 (32:02):
In place, but it's not the polished finished article yet.
And those are the stots you could make five, ten,
you know, even more times your money over the next
ten plus years. But there's a wide range of outcomes,
so you've got to try and judge what the level
of capital employed within the portfolio you're going to do
with those. So we're trying to have it like when
(32:23):
you plant a garden, you don't want all your flowers
to come through at the same time, and you want
the kind of the nice ones, the evergreens, but then
you want the nice flowers which come through at a
later point in time if you look after them. And
so that's really what we're trying to do. We're trying
to create the portfolio for the future. And as a boutique.
You know, we're going to be smaller than you know,
(32:44):
some of the very large investment managers out there, so
we can have larger sizes and some of the small
companies we think are going to be fabulous risk reward
but where they would really struggle to build a meaningful position.
Instead we can actually generate a more meaningful position size
you're investing.
Speaker 2 (33:00):
It's a longer kind of term horizon. But some of
the things that have popped up over the past years,
such as you know, terriffs, how are you factoring that
as a risk? You know, are we passed the peak
tariff tensions or or or do you think of this
as a one off impact to emerging markets or does
(33:22):
this kind of change the kind of global outlook going forward.
Speaker 4 (33:29):
I like the angle there because I think the tariffs
are the biggest issue potentially for the US. I think
it's a tax on the US consumer ultimately. But there's
a lot of as we go through this, and you know,
the Europe is arguably, you know, perhaps more impacted than
a lot of emerging markets. There's a lot of noise
around this because of the way the Trump administration determined
(33:49):
those travelers being such an arbitrary type of measure. They
basically tax the most successful exporters the most. That was
how they made the calculation. So inherently, if you're invest
in more successful emerging markets, you actually had a greater
tariff effect, and if you earn the less successful ones,
you've got less tariffs.
Speaker 3 (34:06):
Go figure.
Speaker 4 (34:07):
So Brazil got impacted less because itself was a tariff
protected economy which therefore didn't really feature in the international
traded market, whereas I don't know, Vietnam or things was
very very good. Therefore it got impacted more. So the
impacts for US is, you know, you had to be
a bit more careful on certain companies. So for example,
(34:29):
Vietnamese banks are potentially if they're lending against companies which
are a bit more impacted than it's a potential risk. Similarly,
you're almost kind of inversely, you know, if you look
at an economy like India. So it's in the news
about tariffs at the moment, but the tariff exposure of
the Indian economy is very low relative to the internal
growth engine. So India's a very well managed economy. It's
(34:51):
got very strong government, been doing the right things, investing
a lot in infrastructure, a very youthful population with relatively
low credit penetration, high productivity growth. So if I was Trump,
I wouldn't be trying to ostracize India. I'd want to
be friends and want to be you know, trading together
and developing alongside each other, and you know, and not
pushing them towards the Chinese, to be quite frank. But
(35:15):
that's not what he's done. But we do know that
Trump changes on a whim. You know, all these things
are very personal. They're not well thought out economic strategies.
You know, he's just a bit and a bit of
a huff with India because they didn't support him for
a Nobel Peace Prize against Pakistan, which would have probably
been ludicrous, to be honest. But so you know, we've
got a fifty percent tariff today. It doesn't mean to
(35:37):
say you can have fifty percent in a month's time,
So I wouldn't worry about it too much. Of your
companies are not too impacted. We think India's one of
the best, were probably the best of the major stock
markets to be invested in over the next ten years.
A lot of very high quality franchises, very well governed,
with huge growth runways. So if you think about Coca
(35:59):
Cola and Pepsi, the consumption of calbinated beverages in India's
about four liters peranum compared with about one hundred and
fifty liters peranum in Mexico and the US, So you've
got this long run growth runway. So if you have
a really good company patching into that, they can generate
some fantastic returns over the long term. And some of
the stots we've held, you know, we've held them since
(36:20):
twenty eleven, twenty fourteen and still hold them today and
they've generated amazing returns. But we see the prospects of
doing that for a long period to come. So tariffs
do impact, but we have to be a bit careful
about over discounting them or over extrapolating them. We have
to think just about trying to find the best companies
in the context of what's happening in the world. It
(36:41):
is a more fragmented world. We don't see that changing rapidly.
But we've also got to be careful about worrying too
much about TARIS, which can be really fickle.
Speaker 1 (36:51):
So we are running out of time, But I just
wanted to ask one more question before we go. Where
do you think the next big opportunities are in the
emerging market? It's region So if.
Speaker 4 (37:02):
You think about what's driven the US market over the
last ten years, actually, you know a lot of the
emerging markets, it's been the shift to online platforms. The
technology is everywhere, and AI is just another part of that.
You know, it is changing things quite rapidly, and it's
disenfranchising a lot of businesses. We're seeing that said with
(37:23):
you know, shampoo companies and food companies and things. They
have less brand power because people use social media, so
it's easier for a young brand to challenge. E Commerce
also disrupts the distribution advantages of a lot of FMCG
companies and so on, So there are there are changes
in you know, the relative competitiveness and where you can
find the the best compounds in the future, it's okay,
(37:45):
where are the barriers to entry? And often it's these
kind of network effects from online businesses. What we find
is there's a lot of companies in emerging markets which
must have you know, we're often either vastly expensive or
unprofitable or excessively priced IPOs back in twenty twenty one,
which are now really attractive businesses. So they consolidated those markets.
(38:06):
They've become profitable, but they're still early in their growth path,
and it's a bit like you know, you're picking up
the mag seven, ten, fifteen years ago in faster underlying
growth markets. So we quite like those kind of online
platforms that you know, monopoly doopoly businesses in frost growing
areas which are underpenetrated. It could be e commerce in
Southeast Asia or the Uber of Southeast Asia that we own,
(38:28):
and there's all sorts of these kind of businesses kicking
around there if you look for them, and we find
that far more attractive than just going owning the biggest
bank or the Samsung in career or something, just because
they happen to be big in the benchmark, so we
think we can do a lot better than the benchmark
over time.
Speaker 1 (38:45):
We have to end here, but this is great. Thank
you again Rob for joining us.
Speaker 4 (38:48):
Yeah, thank you so much. Really nice to talk to you.
Speaker 1 (38:51):
And Marvin. Thank you for being my co host today.
Speaker 2 (38:53):
Thank you, Bosh, and.
Speaker 1 (38:54):
I want to thank you for listening. If you liked
the episode, please subscribe and leave a review. Also, if
you'd like to see more of our research, go to
BI fund Go and b I stocks go on the
Bloomberg Terminal until our next episode. This is David Cole
with inside out of
Host
Gina Martin Adams
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