Speaker 1: Bloomberg Audio Studios, Podcasts, radio News. This is Masters in
Speaker 1: Business with Barry Ritholts on Bloomberg Radio.
Speaker 2: This week on the podcast, I have another extra special guest,
Speaker 2: Christine Philpotts of Acial Investments, has specialized in emerging markets
Speaker 2: and frontier markets for most of her career. She has
Speaker 2: been around the world, and if you name a hotspot
Speaker 2: investing place, she's been there. South America, Asia, Africa, Sub
Speaker 2: Saharan Africa, and Middle East, as well as Southeast Asia
Speaker 2: and Asia. She's a boots on the ground type of
Speaker 2: investor who focuses and specializes in emerging market value. What
Speaker 2: makes that style of investing so interesting and different is
Speaker 2: simply market inefficiencies. You know, the US markets are so
Speaker 2: efficient large cap tech stocks, it's really hard to have
Speaker 2: an edge in that space. But when you look at
Speaker 2: emerging markets and when you look at value, the opportunity
Speaker 2: for alpha is much much greater than it is in
Speaker 2: traditional large cap growth stocks in the US, and a
Speaker 2: lot of managers in that space actually beat their benchmark.
Speaker 2: You can't say the same for US large cap stocks.
Speaker 2: I thought this conversation was really informative and fascinating, and
Speaker 2: I think you will also with no further ado aurial investments.
Speaker 2: Christine Philpotts, thank you for having me. So that's a
Speaker 2: really fascinating background. I'm curious. I didn't even talk about
Speaker 2: the grass roots business fun. We'll get to where you
Speaker 2: work at JP Morgan. But economics bachelors from Columbia, NBA
Speaker 2: from Harvard. Was finance and investing always part of the plan.
Speaker 3: The quick answer is no, So I pretty much tripped
Speaker 3: into finance when I was in middle school. In high school,
Speaker 3: I wanted to be a concert pianist. So actually, oh really, yeah,
Speaker 3: So I spent probably ninety percent of my time outside
Speaker 3: of school on the piano, practicating and playing at concerts. Wow,
Speaker 3: And essentially decided to pivot from that original plan because
Speaker 3: it became clear to me as I got older that
Speaker 3: to really make a living as a concert pianist, you
Speaker 3: need to be the top one percent in the world.
Speaker 2: And I was good. That might not be my name
Speaker 2: point one point.
Speaker 3: One exactly, And so I was told that I was
Speaker 3: very good. But that's a pretty high bar.
Speaker 2: So do you still play?
Speaker 3: I don't, actually, but my kids are taking piano lessons,
Speaker 3: so I'm being inspired to kind of restart. So then
Speaker 3: I decided to explore other options, but finance was not
Speaker 3: one of them because I just had no exposure to
Speaker 3: finance whatsoever. And so the way it came across finance
Speaker 3: is when I was in high school, I was applying
Speaker 3: for scholarships for college and I came across the Thomas
Speaker 3: Kila Breck Smart Start Scholarship that was run by Chase Bank.
Speaker 3: So it's a program that selects New York City high
Speaker 3: school students who are going to university in New York City,
Speaker 3: and it offers a four year, full tuition paid scholarship
Speaker 3: to college as well as a paid internship full time
Speaker 3: during the summer part time during.
Speaker 4: The school year.
Speaker 2: Wow.
Speaker 3: So I came across that opportunity, I applied and I
Speaker 3: was lucky enough to get it. And then I said, Okay,
Speaker 3: now I need to figure out what finance is actually
Speaker 3: all about. And luckily, as I started my internship when
Speaker 3: I was eighteen, over the years, you know, throughout college,
Speaker 3: I learned more and more about the different areas of
Speaker 3: the bank and became really intrigued with investment management specifically.
Speaker 3: But if it was not for that program, I may
Speaker 3: not be in this industry.
Speaker 2: Huh. Really, interesting, and I noticed in your background you
Speaker 2: spend some part of your undergraduate playing around in the
Speaker 2: psychology department. Tell us a little bit about the thinking there.
Speaker 4: Yeah, that's right.
Speaker 3: So I decided to become an economics major and a
Speaker 3: psychology minor. I always had this interest and just understanding
Speaker 3: how people think and what drives just people's reactions, emotions, behaviors.
Speaker 3: That was just always a side interest of mine, and
Speaker 3: in particular as a psychology minor, I had an opportunity
Speaker 3: to work with a Columbia professor on an independent study
Speaker 3: specifically focused on cognitive psychology, and I found that sub
Speaker 3: segment really interesting because we did studies on kind of
Speaker 3: decision making biases, human biases like loss, aversion and other
Speaker 3: biases that impact otherwise what should be rational decisions and
Speaker 3: make them less than rational. And so doing that in college,
Speaker 3: that independent study really opened my mind up to what
Speaker 3: eventually I learned to be the behavioral economics and finance area.
Speaker 3: But I didn't even know what it was called or
Speaker 3: that that was an area back then. So the interestect
Speaker 3: of psychology and economics became really interesting.
Speaker 2: Very much.
Speaker 1: So.
Speaker 2: The fascinating thing is when I was in college, even
Speaker 2: when I was in grad school, there really wasn't an
Speaker 2: need such thing as behavioral finance, but it was pretty
Speaker 2: clear economics had a fundamental flaw, like the base concept
Speaker 2: of humans as rational, profit maximizing decision makers. Hey, that
Speaker 2: doesn't seem to be what happens in the real world.
Speaker 2: I think they've kind of squared that circle. Now, do
Speaker 2: you get to use any of your the work of
Speaker 2: behavioral economics in your day job?
Speaker 4: Absolutely so.
Speaker 3: As an investor, we constantly need to be aware of
Speaker 3: our own human biases because we're humans, so we are
Speaker 3: prone to the risk of making irrational decisions as well.
Speaker 3: But it's also really interesting to think about how these
Speaker 3: biases at the market level really creates interesting opportunities. Right,
Speaker 3: it's because of these biases that we have inefficiencies in
Speaker 3: the market that we can then exploit as active investors.
Speaker 3: So if the markets were perfectly rational, arguably there'd be
Speaker 3: no opportunities. So it's just interesting to think about again,
Speaker 3: as an investment or, how do you handicap your own biases?
Speaker 4: And we do that through several ways.
Speaker 3: For example, we use some quantitative tools and approaches to
Speaker 3: help offset those natural biases, but also thinking about at
Speaker 3: the market level as a whole. I was thinking about
Speaker 3: the aggregate market participants, how we can exploit some of
Speaker 3: those biases to generate.
Speaker 2: Offham really really interesting. To round out your background, you
Speaker 2: spend time at Alliance Spernstein, JP, Morgan Asset Management, and
Speaker 2: Morgan Stanley. Were you at Morgan right heading into the
Speaker 2: financial crisis? Is that right?
Speaker 3: I was, yes, So that was a very fascinating experience.
Speaker 3: So I participated in an MBA fellowship program at Morgan Stanley.
Speaker 3: So when I resigned from JP Morgan to pursue my
Speaker 3: MBA at Harvard, I applied to and got accepted into
Speaker 3: Morgan Stanley's NBA Fellowship within the Investment Bank. So that
Speaker 3: involved two years full tuition paid for business school as
Speaker 3: well as a summer internship within the investment bank. And
Speaker 3: so I'm an investor through and through, but I thought
Speaker 3: it was an interesting opportunity to look at the other
Speaker 3: side of the house and to join the cell side
Speaker 3: and kind of see how the other side operates, you know,
Speaker 3: from the inside. And so I decided to join the
Speaker 3: Capital Markets group, and specifically I was part of the
Speaker 3: Convertible Debt group, which was interesting because I actually started
Speaker 3: my career at Jpmortonesset Management in the high yield and
Speaker 3: investment grade credit research team, and then I moved on
Speaker 3: to the equities team afterwards. So it was kind of
Speaker 3: an interesting way to combine my debt and my equities experience.
Speaker 3: And I did a lot of options math, which I
Speaker 3: that was interesting and I just learned a tremendous amount.
Speaker 3: But summer of two thousand and eight, as you can imagine,
Speaker 3: was a really interesting time, particularly for the convertible bond desk,
Speaker 3: because we were the busiest desk as other parts of
Speaker 3: the market were close literally shutting down. The convertible debt
Speaker 3: market was one of the last ones to remain open
Speaker 3: before September two thousand and eight, and so that's we
Speaker 3: ended up. I ended up working on about a billion
Speaker 3: dollars worth of new issues, so I actually got a
Speaker 3: chance to work on a lot of new convertible debt
Speaker 3: deals before that window closed. So it was just a
Speaker 3: really interesting timing and learning experience.
Speaker 2: I have a vivid recollection of the summer of eight
Speaker 2: and I remember saying to one of the traders I
Speaker 2: was working with, I just kind of channeled Robert Duval
Speaker 2: from apocalypse now, where he turns to Martin Sheen and says,
Speaker 2: you know, son, someday this war is going to be over.
Speaker 2: And uh, because you were in the middle of just
Speaker 2: the craziest market experience you can have, and I wanted
Speaker 2: people to just remember what's going on now because this
Speaker 2: ain't ever happening again in your lifetime. And uh, like
Speaker 2: I assume you had a very similar experience at Morgan Stanley.
Speaker 2: It had to be just bonkers.
Speaker 4: Yeah.
Speaker 3: It was just literally there were headlines coming out on
Speaker 3: a daily basis.
Speaker 2: Tick by tick, every minute.
Speaker 4: It was.
Speaker 2: It was it seemed like every every time you turn
Speaker 2: around there was some other insane news and it just
Speaker 2: built and built.
Speaker 4: Snowballed absolutely.
Speaker 3: And so by the time I got back to Harvard
Speaker 3: in September eight, right, I mean, obviously the Lehman collapse occurred,
Speaker 3: and really just the bottom fell out, and we're all
Speaker 3: kind of looking at each other saying, well, on the
Speaker 3: one hand, I guess it's good that we're in school
Speaker 3: as opposed to, you know, being on the street and
Speaker 3: having just been laid off. But I vividly remember later
Speaker 3: that year the dean of Harvard Business School indicating to
Speaker 3: us that comparing us the class that graduated during the
Speaker 3: Great Depression, and his message was basically like, they turned
Speaker 3: out just fine eventually over time. And we were like, okay,
Speaker 3: well this puts it into perspective.
Speaker 2: Well thanks for the cheerful, you know, halftime speech to
Speaker 2: get everybody enthusiastic. Hey, just think about it, the folks
Speaker 2: and the Great Depression, they turned out just fun. Yeah,
Speaker 2: oh my god, let's talk a little bit about International
Speaker 2: Finance Corporation. Tell us about the fund that you help
Speaker 2: them establish.
Speaker 4: Yeah.
Speaker 3: So I graduated from HBS in summer of two thousand
Speaker 3: and nine, and I was fortunate enough to join the
Speaker 3: Grassroots Business Fund, which had been a division of the
Speaker 3: International Finance Corporation and literally spun out first half of
Speaker 3: two thousand and eight. So what was really unique about
Speaker 3: that is is one of the few funds that actually
Speaker 3: had a fresh pool of capital to deploy.
Speaker 2: Aw so they weren't dealing with legacy things that were
Speaker 2: upside down.
Speaker 3: No, they were able to enter a pretty compelling time
Speaker 3: in terms of having fresh capital to deploy. And so
Speaker 3: that fund's focus is on businesses, small and medium sized,
Speaker 3: privately held companies that not only have good growth prospects
Speaker 3: and could generate healthy financial returns, but that are also
Speaker 3: providing economic opportunities to the base of the economic pyramid,
Speaker 3: so providing affordab goods and services to customers, incorporating individuals
Speaker 3: in supply chains and productive manners. So it was an
Speaker 3: impact oriented private equity private credit fund.
Speaker 2: And where was that focus? What geography did they focus in?
Speaker 3: So the focus was on emerging markets more specifically Sub
Speaker 3: Saharan Africa, Latin America, India, and Southeast Asia.
Speaker 2: So are you traveling all of the world to kick
Speaker 2: tires of these private companies or what's that like?
Speaker 4: Yeah?
Speaker 3: Absolutely, So during my time there, I was probably employee
Speaker 3: number four or five. So I joined soon after the
Speaker 3: spin out to help really establish our investment processes as
Speaker 3: an independent entity, provide the game plan for where we're
Speaker 3: going to invest, and ultimately help recruit other investment professionals
Speaker 3: as we were building out the team, and ultimately investigate
Speaker 3: deals and structure deals and invest in portfolio companies. So
Speaker 3: my original focus was Sub Saharan Africa. I did spend
Speaker 3: a summer between JP Morgan and HPS in Kenya with
Speaker 3: a microfinance organization, so I had some experience in Africa
Speaker 3: that was able to leverage for this role. And so
Speaker 3: to answer your question, I spent probably three to four
Speaker 3: months out of the year on the ground. So I
Speaker 3: was based in DC as a member of the management team,
Speaker 3: but I would go for a month at a time,
Speaker 3: really working with the entrepreneurs that we had invested in,
Speaker 3: looking at diligence, working with partners, kicking the tires, as
Speaker 3: you said, which really provided a great experience to understand
Speaker 3: emerging markets on the ground and a lot of the nuances,
Speaker 3: particularly for smaller and medium sized companies.
Speaker 2: And give us the timeframe. What years were you doing this,
Speaker 2: because I want to put you a text of what
Speaker 2: was going on in the US at the time.
Speaker 3: Yeah, So I joined in August two thousand and nine,
Speaker 3: and I loved to join Layin Spernstein in late twenty twelve.
Speaker 2: So what were emerging markets like in that post financial
Speaker 2: crisis period?
Speaker 3: Well, what was interesting is particularly for the segments of
Speaker 3: the markets the fund was focused on, which because really
Speaker 3: smaller mid cap private equity and private credit, they were
Speaker 3: pretty unaffected by the global financial crisis. Because these are
Speaker 3: companies and in some cases countries that were never really
Speaker 3: fully integrated into the global financial system, and so as
Speaker 3: the global financial markets were in a tailspin, they were
Speaker 3: actually very resilient, and so we had really attractive opportunities.
Speaker 3: For example, that was a time period where mobile banking
Speaker 3: and mobile payments was starting to emerge, So we had
Speaker 3: a couple of investments in that arena. We had off
Speaker 3: grid clean energy investments. We had really interesting agribusiness and
Speaker 3: agroprocessing companies, consumer product companies, so companies that really were
Speaker 3: targeting the local markets and customer bases and supply chains
Speaker 3: that just were not at all impacted by the global
Speaker 3: financial crisis. So to me, that was the definition of
Speaker 3: uncorrelated asset.
Speaker 2: Yeah, to say the very least. So it's interesting the
Speaker 2: theme across all of your work, or most of your
Speaker 2: work is is emerging markets in frontier markets. What led
Speaker 2: you to that particular focus.
Speaker 3: Yeah, So when I was at JP Morgan, I was
Speaker 3: covering US tech stocs. I was a research associate on
Speaker 3: the by side, working with senior analysts looking at software
Speaker 3: the two thousand Yeah, from basically four up until I
Speaker 3: went to business school, which was seven.
Speaker 2: So the recovery following the dot com implosion had already
Speaker 2: begun already started, yes, right, but we hadn't quite run
Speaker 2: into the bus of oh eight or nine exactly.
Speaker 3: So basically by the time I mean looking back, I
Speaker 3: left at the peak of the market. Obviously I didn't
Speaker 3: perfectly time it, but when I was leaving close I
Speaker 3: remember my colleagues telling me, well, why are you going
Speaker 3: to business school? That's going to be a waste of time.
Speaker 3: I mean, the markets are doing very well. Why why
Speaker 3: are you doing this to your career? And let alone
Speaker 3: you're going to Africa to do micro finance, Like, what's
Speaker 3: going on?
Speaker 4: They thought? I think they thought I'd a quarter life crisis.
Speaker 2: So get high sight sair life crisis. I love that, but.
Speaker 3: Hindsight, it's twenty twenty. But what's interesting is to answer
Speaker 3: your question about the pivot to emerging markets, what really
Speaker 3: drew me was a couple of things. So one is
Speaker 3: the idea of being focused on less efficient part of
Speaker 3: the capital markets was very compelling. I tend to be
Speaker 3: the type of person that if everyone's going in, you know,
Speaker 3: Route one, I want to go into Route two, three
Speaker 3: and four just to kind of not be with the
Speaker 3: herd and to see what else is happening that people
Speaker 3: may be overlooking, and you know, with large cap tech stocks,
Speaker 3: if the CEOs caught a cold, there'll be twenty cell
Speaker 3: side notes about the fact that the CEO caught a cold.
Speaker 3: That's very well covered markets, whereas in emerging markets and
Speaker 3: pritulian markets like Africa, they were just not really being
Speaker 3: talked about. And so I was very interested to look
Speaker 3: behind the hood, see what's happening and be in an
Speaker 3: arena where I could. I thought I could add more
Speaker 3: value you and have more of an edge by doing
Speaker 3: research and areas that other people ignored. From a personal standpoint,
Speaker 3: my parents are originally from Haiti, so I was born
Speaker 3: and raised in New York, but I'm first generation, and
Speaker 3: so there was a lot of conversations around the dinner
Speaker 3: table around why are poor countries poor? What could be
Speaker 3: done about it? Talks about economic development and the intersection
Speaker 3: with you know, political reform and just how that affects
Speaker 3: developing countries more broadly. And so that was also, from
Speaker 3: a personal standpoint, a really strong interest of mine that
Speaker 3: led me to want to pursue emergent markets.
Speaker 2: So I'm hinting at a question that's going to come
Speaker 2: a little later, but my general senses. You know, develop
Speaker 2: mature economies have fairly efficient markets, very hard to generate
Speaker 2: alpha because markets are so efficient, I'm going to assume
Speaker 2: the same is not true in either em and especially
Speaker 2: in frontier markets. Yeah, what do you thought?
Speaker 3: That's that's absolutely the case and the data proves it out. So,
Speaker 3: for example, if you look at the last ten years
Speaker 3: of returns, the media and active e manager across style
Speaker 3: so value growth and core has outperformed the benchmark or
Speaker 3: passive strategies over the last decade. That is not the
Speaker 3: case when you look at US large coop.
Speaker 2: One hundred percent. In fact, I think the number is
Speaker 2: NETA fees ten years out, it's like ninety three percent
Speaker 2: underperform the benchmark in US, not even big cap, just
Speaker 2: US period. It's pretty amazing. So let's talk a little
Speaker 2: bit about what you did before you joined Ariel. You
Speaker 2: were Alliance Bernstein, a very well regarded firm for about
Speaker 2: ten years, and you managed a couple of different projects
Speaker 2: and funds. Tell us a little bit about your experiences
Speaker 2: at Alliance.
Speaker 3: Yeah, absolutely so essentially decided to leave grossroots business fund
Speaker 3: really to be able to go back into the listed
Speaker 3: equity space and to join a larger investment platform, and
Speaker 3: so at the time that I was considering potential opportunities,
Speaker 3: I came across the team that I joined and the
Speaker 3: fact that they were interested in launching a frontier and
Speaker 3: small emerging markets equity fund, which really paired well with
Speaker 3: my experience in small and frontier funds, and so I
Speaker 3: joined in early twenty thirteen and specifically joined initially to
Speaker 3: cover Sub Saharan African stocks and also to help launch
Speaker 3: this new fund, which was called the Next fifty Emerging
Speaker 3: Markets Equity Strategy, and the idea was to have a
Speaker 3: fund that specifically focused on frontier and small emerging markets
Speaker 3: that were even less efficient, So one of the least
Speaker 3: efficient markets in an already inefficient part of the caval markets,
Speaker 3: which is emerging market.
Speaker 2: So let's just define some terms a little bit. I
Speaker 2: think listeners know what developed markets are a developed x US,
Speaker 2: which would be things like Europe and Japan. What's the
Speaker 2: difference between frontier funds and emerging markets? Like, how do
Speaker 2: you just define those two geographies?
Speaker 4: Yeah, that's a great question.
Speaker 3: A lot of times the lines can be blurred and
Speaker 3: countries could go from one to the other and back.
Speaker 3: So we use the MSCI benchmark definition, so they have
Speaker 3: specific criteria on differentiating between what's in the emerging markets
Speaker 3: benchmark and what's in the dedicated frontier benchmark. So parameters around,
Speaker 3: for example, liquidity, market mechanisms, and other criteria depth of
Speaker 3: the markets that will determine what's emerging what's frontier. But
Speaker 3: I think the broader sense that we focus on is
Speaker 3: really again around this notion of efficiency or lack thereof,
Speaker 3: and opportunities and markets in which we can get an
Speaker 3: edge through active management. And I would say the benefits
Speaker 3: of the inefficiencies and emerging markets are that much more
Speaker 3: magnified for frontier markets.
Speaker 4: But there are.
Speaker 3: Reviews icicles in which countries get upgraded to emerging markets
Speaker 3: or downgraded to frontier markets depending on how some of
Speaker 3: those market characteristics evolve.
Speaker 2: So let's let's put some specific geographies to test. Where
Speaker 2: does China fall into this? Is it still emerging not
Speaker 2: quite developed? What about South Korea?
Speaker 4: That's a great question.
Speaker 3: So South Korea, for the MSCI definition, is emerging, is
Speaker 3: that it should be developed?
Speaker 4: I mean south guest.
Speaker 2: If Japan is obviously a developed nation, is South Korea
Speaker 2: all that far behind Japan? In terms of their maturity
Speaker 2: of their markets.
Speaker 4: So there's I guess there's two parameters there.
Speaker 3: So one is, you know, from the economic standpoint, if
Speaker 3: you look at economic characteristics and criteria, that's one layer
Speaker 3: within which to categorize countries between developed and emerging. The
Speaker 3: other is really around just how the equity markets function,
Speaker 3: the depth in terms of depth, liquidity market rules, and
Speaker 3: other criteria. That will then cause another layer of differentiation
Speaker 3: between emerging and developed and frontier.
Speaker 2: So when I think about let's say the Middle East,
Speaker 2: you have Egypt, you have Saudi Arabia, you have Dubai
Speaker 2: and Qatar and the Emirates. Are these all still considered emerging?
Speaker 3: Yes they are, So they're except Egypt, for example, would
Speaker 3: be categorized as frontier.
Speaker 4: Oh really yes, But Saudi is emerging right because.
Speaker 2: You think again, you think Saudi is like a fairly
Speaker 2: develop I mean, granted, it's a kingdom and a lot
Speaker 2: of there's a lot of poverty as well, there's a
Speaker 2: lot of wealth there.
Speaker 4: Yeah.
Speaker 3: So I think for us, the way we think about
Speaker 3: it for our emerging market strategy is we have the
Speaker 3: ability to invest across emerging and frontier markets, So.
Speaker 2: It doesn't matter what we label them exactly.
Speaker 3: We do have a limit on what percentage of the
Speaker 3: portfolio could be in what's classified as frontier, but ultimately
Speaker 3: we're looking across all of these markets. I mean, there's
Speaker 3: fifty plus countries in the emerging markets world that have
Speaker 3: listed equity markets, so that's a big pool to draw upon,
Speaker 3: and ultimately we're looking for the sixty stocks that we
Speaker 3: think have the best upside potential toake into account liquidity
Speaker 3: and other parameters of risk.
Speaker 2: So I was going to ask about the structural differences
Speaker 2: between emerging markets and front team markets, but it sounds
Speaker 2: like it's a pretty technical definition. So let me go
Speaker 2: to what you just referenced. In terms of selecting stocks.
Speaker 2: Do you approach that process from a top down country
Speaker 2: by country basis? Is it a bottom up analysis company
Speaker 2: by company or a little bit of both.
Speaker 3: So we're bottoms up investors at the end of the day,
Speaker 3: we're picking stocks. If you look at our sources of
Speaker 3: active risk, about fifty to sixty percent of that consistently
Speaker 3: is from idiosynchronic or stock specific drivers. That being said,
Speaker 3: and just to put that in context, country would contribute
Speaker 3: about ten to fifteen percent. That being said, neighborhood matters,
Speaker 3: particularly in emerging markets, and so we cannot disentangle top
Speaker 3: down considerations from our bottoms up analysis because as we
Speaker 3: determine what discount rate to discount the free casualows of
Speaker 3: specific company, we need to think about the risk premium
Speaker 3: of that country, how the sovereign yields are likely to unfold,
Speaker 3: what are the currency risks. As we think about the
Speaker 3: growth potential of a specific stock, we need to put
Speaker 3: that in the context of the growth potential of that country.
Speaker 3: And so these top down considerations are ultimately really critical
Speaker 3: to consider as we look at specific individual stock opportunities. So,
Speaker 3: like real estate, neighborhood matters, and it also helps determine
Speaker 3: where we lean into or out of in terms of
Speaker 3: where we place our focus. We want to make sure
Speaker 3: that we have an alignment of interest, particularly as minority shareholders.
Speaker 3: That alignment is not just relevant to the specific stocks
Speaker 3: in terms of the management teams and the equity holders
Speaker 3: or the majority shareholders of the companies we invest in.
Speaker 3: We also think about alignment at the country level. What
Speaker 3: is the government looking to achieve, how is that evolving,
Speaker 3: how is that changing? And our very simplistic criteria is
Speaker 3: to not get in the way. If there's a country
Speaker 3: where we think the economic direction is moving in the
Speaker 3: wrong direction and where there's not that alignment with what
Speaker 3: the government's looking to achieve, we don't need to be
Speaker 3: invested in that country. There's other places for us to fish.
Speaker 2: So I look around the world and I think about
Speaker 2: the various hotspots. I mean, hold aside Russia, which is
Speaker 2: essentially become uninvestable. But Argentina and Venezuela went through their issues.
Speaker 2: In Turkey obviously has had some problems, and to say
Speaker 2: nothing of what's going on in the Middle East. Do
Speaker 2: you have to have boots on the ground. You have
Speaker 2: to actually go visit these countries and get a sense of,
Speaker 2: hey the headline are overblown or hey this could be
Speaker 2: potentially worse than we realize. How often are you traveling
Speaker 2: to different places to get a feel for risk factors there?
Speaker 4: Absolutely so we travel quite often. So our team.
Speaker 3: Just to talk about our team structure, six of us
Speaker 3: have been working together, have moved from Alliance Burnstein to Ariel,
Speaker 3: and our team has been working together for over a decades,
Speaker 3: so no less than twelve years specifically, and throughout that time,
Speaker 3: even though we're based in New York, we understand the
Speaker 3: importance of visiting all the different countries were actively invested in,
Speaker 3: and so to that point, for example, last year, I
Speaker 3: spent in aggregate four weeks in China to really not
Speaker 3: only meet with the management teams of listed companies, but
Speaker 3: to meet with their competitors privately held and publicly held,
Speaker 3: To meet with local contacts, to meet with domestic investors,
Speaker 3: to meet with other key contacts and players, where you
Speaker 3: can get more insights by having a face to face
Speaker 3: conversation oftentimes than you may be able to get on
Speaker 3: Zoom or even via text. And even doing site visits
Speaker 3: right going to the malls, visiting real estate sites, going
Speaker 3: to the auto manufacturing plants, visiting battery plants, really gives
Speaker 3: you a more concrete sense of what is occurring and
Speaker 3: to your point, what is beneath the headlines and what
Speaker 3: the market could be missing really interesting.
Speaker 2: You know, I haven't brought up China partly because it
Speaker 2: feels like China has become sort of uninvestable to outside
Speaker 2: companies because of their A shares and their foreign B shares.
Speaker 2: I'm curious, as a professional EM investor, how do you
Speaker 2: look at the opportunity and risks in China. Can we
Speaker 2: have a legitimate fair investment in China given the way
Speaker 2: things are structured, or how do you think about China?
Speaker 3: So we think the opportunity in China today is meaningful
Speaker 3: largest country weight in our portfolio, it's about thirty percent
Speaker 3: of our portfolio today, and we think that the opportunities
Speaker 3: are very attractive. I think there's a couple of reasons
Speaker 3: for that. And by the way, we didn't always have
Speaker 3: such a large weight in China. For many years were
Speaker 3: underweight China, but we moved to an overweight position last
Speaker 3: year in large part because from a bottom up standpoint,
Speaker 3: we were seeing companies that started treating at single digit
Speaker 3: multiples so six to eight times forward pe, that can
Speaker 3: generate double digit earnings growth, and that are returning more
Speaker 3: capital to shareholders, that are actually improving their capital allocation
Speaker 3: for the first time in decades. That is not being
Speaker 3: reflected in valuations from a top down standpoint, even though
Speaker 3: the macroeconomic situation in China is challenged, we're not debating that.
Speaker 3: For us, we're less interested in the absolute level and
Speaker 3: more in the second derivative. So, for example, for the
Speaker 3: real estate sector. What is the directionality of inventories. There's
Speaker 3: still too much inventory, but is it going up or
Speaker 3: is it going down? And we're seeing evidence of inventories declining.
Speaker 3: Just as an example, new starts have declined over sixty
Speaker 3: five percent from the peak, So even though demand has declined,
Speaker 3: new starts has declined even further. In the latest data,
Speaker 3: we're saying for secondary prices and primary prices there's still
Speaker 3: a decline, but the level of decline is lower than
Speaker 3: it had been. So we think the evidence indicates that
Speaker 3: when looking at cycles, looking at that second derivative tends
Speaker 3: to be more correlated with how equity prices perform as
Speaker 3: opposed to focusing just on the absolute levels.
Speaker 2: Really interesting. You know, you mentioned you were underweight China
Speaker 2: for a while. When we look at the returns dating
Speaker 2: back to an't I want to say the early nineties
Speaker 2: hasn't really stinguished itself despite incredibly rapid economic growth, which
Speaker 2: really raises an interesting question. Do we invest in emerging
Speaker 2: market countries because their economies are growing, or do we
Speaker 2: invest in those countries because their companies are generating growth
Speaker 2: in profits at a rapid clip.
Speaker 3: I think that's a really critical point specifically with China. So,
Speaker 3: as you pointed out, if you look at the history
Speaker 3: over decades, despite very strong GDP growth, EPs growth lag
Speaker 3: that GDP growth, partly because of management decision making, equity issuance,
Speaker 3: and capital location decisions.
Speaker 4: We're starting to.
Speaker 3: See the reverse now happen, where GDP growth is slowing
Speaker 3: and it's never going to match what the GDP growth
Speaker 3: has been like for the last decades, and BPS growth
Speaker 3: is going to actually exceed that GDP growth because of
Speaker 3: some of the behaviors I mentioned of a steep exc
Speaker 3: toleration and share repurchases, more judicious use of capital exiting
Speaker 3: non core businesses, redeploying that in higher incremental returns generating ventures,
Speaker 3: and so the relationship between EPs growth and GDP growth
Speaker 3: in many cases there's a strong correlation, but in other
Speaker 3: cases you really need to pay attention to the company
Speaker 3: specific drivers for the EPs growth and free casual generation
Speaker 3: because that's ultimately what determines share price moves, not overal
Speaker 3: GDP growth.
Speaker 2: Really fascinating, what about the risk I have a vivid
Speaker 2: recollection of a couple of years ago when some of
Speaker 2: the senior executives at big tech companies fell into disfavor
Speaker 2: from the let's be blunt, the Central Communist Planning Group
Speaker 2: and folks disappeared for a while. The head of ten Cent,
Speaker 2: the head of Ali Boba, the head of a couple
Speaker 2: of other companies just suddenly disappeared, or at least temporarily.
Speaker 2: How much of a risk is there when you're investing
Speaker 2: in China that you don't know what the Chinese government
Speaker 2: is going to do? And to be fair, hey, I
Speaker 2: have no idea what the American government's going to do either,
Speaker 2: but it seems to be a very specific risk that's
Speaker 2: foreign to American investors.
Speaker 3: Yeah, and I think that goes back to this idea
Speaker 3: of trying to understand the incentive structures of the government,
Speaker 3: having a view on what they're looking to achieve, and
Speaker 3: not getting in the way. So to use the example
Speaker 3: of the tech crackdown, and I'll extend that to also
Speaker 3: the education sector crackdown that preceded it. He Heeping had
Speaker 3: been I would argue pretty clear on some of the
Speaker 3: issues he had with private sector, with private education, with
Speaker 3: how tech companies had evolved and the role, the disproportionate
Speaker 3: role they were playing in the economy, and the relationship
Speaker 3: with merchants and ultimately some of the concerns around and
Speaker 3: common prosperity or that going against the common prosperity agenda.
Speaker 3: And so I think there was that tension already in place.
Speaker 3: It was a surprise about how the government decided to
Speaker 3: go about resolving that tension, but the tension was there.
Speaker 3: And so I would argue based on our framework of
Speaker 3: really trying to understand what are the problems the government's
Speaker 3: looking to solve and lead into the companies that could
Speaker 3: be solutions to those problems, as opposed to the companies
Speaker 3: they're viewed as obstacles to solving those problems. Is a
Speaker 3: way to reduce the resk. So you want regulatory intervention, You.
Speaker 2: Want to align your investments with things that the central
Speaker 2: planners are in favor with, and so when you're investing
Speaker 2: with a company that also has the backing of the government,
Speaker 2: you're much less likely to have those sort of kind
Speaker 2: of surprising one off risks that we saw a few
Speaker 2: years ago.
Speaker 3: Yeah, and I think just going to the big tech
Speaker 3: companies today, they are now proactively managing how they engage
Speaker 3: with merchants and making sure, for example, that the split
Speaker 3: of value is I would argue more favorable to merchants
Speaker 3: today than it was during the period of the crackdowns.
Speaker 3: There's also an element of making sure that the entrepreneurs
Speaker 3: are not outshining party officials. And so there's a lot
Speaker 3: of different elements that are being explicitly taken into account
Speaker 3: that one needs to be aware of as we think
Speaker 3: about again, what are those potential risk and pressure points,
Speaker 3: how do we mitigate them? And ultimately, we're looking to
Speaker 3: build a sixty stock portfolio across twenty plus different markets,
Speaker 3: So we don't have to be in all countries, and
Speaker 3: we certainly don't have to be in a whole sectors
Speaker 3: if we think that that misalignment exists.
Speaker 2: So final question about this topic. Now, you know, pretty
Speaker 2: much the past decade, everybody lagged what the US did,
Speaker 2: and I've been hearing lots of people throwing the towels
Speaker 2: and saying, hey, if you can't beat them, join them.
Speaker 2: Is now the wrong time to capitulate? Is now the
Speaker 2: wrong time to give up on emerging markets? In frontiers?
Speaker 2: Tell us what opportunities are out there looking forward?
Speaker 3: Absolutely so, if you look at the history of EM
Speaker 3: equity performance relative to US equities performance, there's a clear
Speaker 3: pattern over the last couple of decades of very long
Speaker 3: cycles of outperformance and underperformance, and clearly we're in a
Speaker 3: very long cycle of over a decade of EM and
Speaker 3: quite frankly, anything outside of the US underperforming the US.
Speaker 3: The reason why I think now is the wrong time
Speaker 3: to capitulate is for a couple of reasons. One is,
Speaker 3: if you think about EM equity valuations versus the S
Speaker 3: and P, the EM index's trading at ten to eleven
Speaker 3: times forward PE, the S above twenty times, so the
Speaker 3: discounts from a price to book standpoint is over sixty
Speaker 3: percent price to earnings about forty percent discount. That's the
Speaker 3: widest discount we've seen ever. But key valuations are necessary,
Speaker 3: but not sufficient condition for an opportunity to be attractive.
Speaker 4: Right.
Speaker 3: You also want to see what is the catalyst to
Speaker 3: that valuation discount closing, and we see several of those
Speaker 3: catalysts and emerging markets. One is emerging market's earnings this
Speaker 3: year and for the next few years are expected to accelerate.
Speaker 3: EPs growth for some of the reasons I mentioned earlier
Speaker 3: is expected to accelerate and be higher than the arguably
Speaker 3: lofty EPs growth expectations. Out of the US, and that's
Speaker 3: written by nonway economic drivers, but also fundamental company specific drivers.
Speaker 3: I think the other standpoint you think about is in
Speaker 3: terms of flows, the US dollar is at close to
Speaker 3: twenty year highs in a period where the US deficit
Speaker 3: running at six percent arguably is going to widen at
Speaker 3: a period where rate policy is TBD. Our thesis is
Speaker 3: not premised on the US dollar massively weakening, but we
Speaker 3: think that there's increasing probabilities of dollar weakness given the
Speaker 3: starting point that we're in, and that from a flow standpoint,
Speaker 3: should be an additional upside driver to flows into emerging markets.
Speaker 2: Huh really really interesting. So after a decade at Alliance Bernstein,
Speaker 2: you land at Ariel about a year ago. Tell us
Speaker 2: what that transition was like from what's a giant investment
Speaker 2: house to something that's a little more of a boutique.
Speaker 3: Yeah. Absolutely, So Ariel was seeking to launch a dedicated
Speaker 3: emerging market equity strategy. Ariel has a forty plus year
Speaker 3: history of value investing in equity markets, starting in the
Speaker 3: small and mid cap segments in the US. The firm
Speaker 3: launched in international and global strategies about twelve years ago,
Speaker 3: and so emerging markets was actually a natural extension as
Speaker 3: Aerial focuses on investing in the less efficient parts of
Speaker 3: global capital markets, because you imagine US small cap is
Speaker 3: also relatively less efficient compared in the context of the
Speaker 3: US equity markets. Our team had an opportunity to join
Speaker 3: to help build the emerging markets business at Aerial, and
Speaker 3: this is really extremely exciting opportunities. I mentioned, our team
Speaker 3: has been working together for no less than a decade.
Speaker 3: We've had an investment process, an investment style that has
Speaker 3: been deployed for decades, and to me personally, it was
Speaker 3: really exciting to have the opportunity to be an entrepreneur
Speaker 3: and to really launch a new business with the backing
Speaker 3: of such an established and well respected platform like Ariel.
Speaker 3: And I had been following Ariel and John Rodgers and
Speaker 3: Melodie Hopson since my analyst days at JP Morgan, so
Speaker 3: I was particularly excited to join a firm just given
Speaker 3: the really strong track record and reputation.
Speaker 2: One of the things I find interesting about Ariel is
Speaker 2: the insignia of the firm, which is a turtle holding
Speaker 2: a trophy, and like the sash says slow and steady
Speaker 2: wins the race. What does that say about their philosophy
Speaker 2: of investing and their emphasis on long term goals.
Speaker 3: Well, that's one of the many elements that made joining
Speaker 3: Ariel so incredibly attractive. First of all, in terms of
Speaker 3: their investment philosophy. It really is across all of the
Speaker 3: investment strategies at Ariel having a fundamental, bottoms up value
Speaker 3: oriented style that really thinks about the long term. So
Speaker 3: we're not looking to call quarters. We're really thinking about
Speaker 3: the longer term trajectory of a business and owning businesses
Speaker 3: that are treating at meaningful discounts to their intrinsic value.
Speaker 3: We're able to look at that longer term horizon and
Speaker 3: take advantage of market dislocations that often focus too much
Speaker 3: on short term noise as opposed to long term trajectory,
Speaker 3: and we take advantage of that discrepancy. But it not
Speaker 3: only reflects how they invest, it also reflects how Aerol
Speaker 3: thinks about building the business and growing the business. So
Speaker 3: we were strategy number four at Aerial. This firm started
Speaker 3: in the early eighties, so you could say that Aerial's
Speaker 3: adding a new strategy once a decade. That's very different
Speaker 3: than other firms, particularly larger asset management firms. Where there's
Speaker 3: often pressure to add more and more new strategies in
Speaker 3: a much more diversified fashion. And so I think the
Speaker 3: focus on value investing, the discipline to really just focus
Speaker 3: on expanding and adding strategies where it's a fit with
Speaker 3: the culture and the investment philosophy of the firm is
Speaker 3: really attractive. And for us as a new team, their
Speaker 3: longer term horizon is also attractive because they're thinking about
Speaker 3: emerging markets in the long haul. They're not saying, Okay,
Speaker 3: we need this to work after six months. They're thinking
Speaker 3: about building this business from a longer term horizon, which,
Speaker 3: again as a team, was extremely attractive for us.
Speaker 2: If you go to the website today, it specifically says
Speaker 2: active patients. Yes, So a new strategy once a decade
Speaker 2: that seems fairly patient approach to investing. What was it
Speaker 2: like rolling out their fourth strategy.
Speaker 4: It's been incredible.
Speaker 3: I think going in, we clearly had high expectations going in,
Speaker 3: or else we wouldn't have made the move. But our
Speaker 3: experience there's been a lot of upside surprise to use
Speaker 3: the term of an investor, relative to the already higher
Speaker 3: original expectations. So it's been incredible. I think the port
Speaker 3: we've received from the organization has been phenomenal. And again
Speaker 3: I'm talking about from the you know, from the leadership on,
Speaker 3: you know on throughout the organization, because ultimately we are
Speaker 3: the fourth strategy.
Speaker 4: We're not one of two hundred strategies.
Speaker 3: And so what also made makes it a very exciting opportunity,
Speaker 3: and it really scratches my entrepreneurial itch, is that we
Speaker 3: are really able to have a meaningful impact on the firm.
Speaker 3: We're not a drop in the bucket. So if we succeed,
Speaker 3: which I know we will, we can really move the
Speaker 3: needle and that has a lot of impact and that
Speaker 3: does an incredible amount to increase level of motivation.
Speaker 2: One of the strategies that you guys manage is Emerging
Speaker 2: Markets Value X China. Tell us a little bit about
Speaker 2: that strategy.
Speaker 3: Yes, So what's interesting is the impetus for launching that strategy,
Speaker 3: which we launched a month after our Emerging Markets Value strategy,
Speaker 3: was because several allocators indicated that they had an interest
Speaker 3: in an ex China strategy, not because they don't want
Speaker 3: to invest in China, but because they already have dedicated
Speaker 3: China allocations. China is a very large and an efficient
Speaker 3: market where allocators. Some allocators decide to invest in local
Speaker 3: managers and have dedicated China allocations.
Speaker 4: So for those.
Speaker 3: Managers, some of them have decided, you know what, I
Speaker 3: want my global emerging markets equities manager to focus on
Speaker 3: everything else outside of China, to not necessarily double up
Speaker 3: my China exposure. But it is not to date, has
Speaker 3: not been a reflection of a desire to not invest
Speaker 3: in China.
Speaker 2: So we've talked about lots of different parts of the world.
Speaker 2: The one area we haven't spoken about is India, which
Speaker 2: has had some pretty good, pretty robust performance over the
Speaker 2: past few years. Give us an update what's going on
Speaker 2: in India? How attractive is that? Has that gotten ahead
Speaker 2: of it it self? Share your thoughts on the subcontinent
Speaker 2: of India.
Speaker 4: Yeah, absolutely, So.
Speaker 3: India has been the standout outperformer within emerging markets, and
Speaker 3: I think that it's a market that will continue to
Speaker 3: have a strong economic growth outlook. That started with the
Speaker 3: rise to power of Modi, who implemented a number of
Speaker 3: reforms that really helped unlock economic growth. We see the
Speaker 3: growth being powered by infrastructure investments which will unleash some
Speaker 3: productivity improvement by consumer, by credit growth. So there's a
Speaker 3: lot to like with the India economic story. The challenge
Speaker 3: is that we think that's already priced in to the
Speaker 3: equity markets. So the market trade is above twenty times.
Speaker 2: For pees not cheap at all.
Speaker 3: We think it's price to perfection, and so for us
Speaker 3: as value investors, we prefer to invest in a market
Speaker 3: like Southeast Asia, which has similarly attractive economic growth six
Speaker 3: to seven percent real GDP growth over the next few
Speaker 3: years at a fraction of the multiple. You know, Vietnam
Speaker 3: and Philippines are training at tental eleven times.
Speaker 2: For specifically, as so it's it's Vietnam, It's Philippines, Indonesia,
Speaker 2: uh huh.
Speaker 4: Yeah.
Speaker 3: And we think it's a really interesting time in the
Speaker 3: emerging markets universe because we think it's one of the
Speaker 3: few opportunities I've seen in the last few decades where
Speaker 3: you don't have to choose between.
Speaker 4: Value and growth.
Speaker 3: You can get growth at extremely compelling valuations. India is
Speaker 3: not one of those markets in our opinion, but there
Speaker 3: are plenty of markets that fit that criteria.
Speaker 2: So help me understand how you guys come up with
Speaker 2: a way of waiting the various geographies you're exposed to.
Speaker 2: We've talked about the Middle East, South America, various parts
Speaker 2: of Asia. Is it a function of the specific companies
Speaker 2: that you find in each region, or do you approach it, Hey,
Speaker 2: I think we should have some Southeast Asia and try
Speaker 2: and ramp that up to x percent. How does that
Speaker 2: balance out?
Speaker 3: Yees? So it's really a bottoms up approach. So ultimately,
Speaker 3: we're looking for stocks that we think can deliver meaningful upsides.
Speaker 3: So today, for example, we're not going to invest in
Speaker 3: a new opportunity that doesn't give us at least thirty
Speaker 3: percent absolute upside in dollar terms. We think there's just
Speaker 3: a lot of really great opportunities in the market, and
Speaker 3: so we start with that bottoms up approach where we're
Speaker 3: looking for those opportunities that can deliver that. And our
Speaker 3: investment philosophy is really anchored around value with a catalyst,
Speaker 3: So we're value investors. Valuations in price matter, but it's
Speaker 3: not the only criteria. We also want to make sure
Speaker 3: that we're focused on companies where there's a stabilization and
Speaker 3: an inflection point at hand in the underlying business momentum.
Speaker 3: And we think that discipline focusing on value with a
Speaker 3: catalyst helps make sure we're focused on the value opportunities
Speaker 3: as opposed to the value traps. And so with that
Speaker 3: in mind, we're picking stocks that meet that criteria. And ultimately,
Speaker 3: as a mentioned, we can lean into or maybe put
Speaker 3: higher focus on countries where we think the top down
Speaker 3: environment is fruitful and lean out of countries that are
Speaker 3: we think heading in the wrong direction. But ultimately the
Speaker 3: country overweights and underweights are really driven by that stock
Speaker 3: selection approach.
Speaker 2: Huh really interesting, you know, I read this data point
Speaker 2: on Ariel that I had to ask about because it's
Speaker 2: so interesting. Employees in board members own almost ninety five
Speaker 2: percent of the firm. What does this mean to you
Speaker 2: as an employee and what does it mean to your clients?
Speaker 3: So, just as I as an investor focus on alignment
Speaker 3: of interest with the companies I'm investing in and with
Speaker 3: the countries we're investing in, I think our clients are
Speaker 3: equally asking similar questions of what is the alignment of
Speaker 3: interest with the investment managers I do business with? And
Speaker 3: so with that statistic, it's very clear that at Aerial
Speaker 3: there is that strong level of alignment. Not only do
Speaker 3: the Aerial employees a majority of Aerial employees, compensation is
Speaker 3: tied to stock. It's also tied to the performance of
Speaker 3: the strategies you're responsible for managing. So we're eating our cooking.
Speaker 3: And at a firm level, because it's such a focused firm,
Speaker 3: when I own shares an Aerial as a Portfoli manager
Speaker 3: in the emerging markets division, I can move the needle
Speaker 3: of that broader Aerial share price in a way that
Speaker 3: is hard to do when you're at a six hundred
Speaker 3: billion or one trillion dollar asset management firm, where if
Speaker 3: you get equity in that company, your contribution just mathematically
Speaker 3: is a lot lower.
Speaker 2: And historically, you were at Alliance Barnstein, you were JP Morgan,
Speaker 2: you were at Morgan Stanley. You could shoot the lights out.
Speaker 2: It's not going to impact the bottom line all that
Speaker 2: much because they're just such behemoths exactly.
Speaker 4: So it's just a different structure and a different model.
Speaker 3: But I think with this model and I see it
Speaker 3: with our team, it's clear we've always been an extremely
Speaker 3: hard working, diligent, motivated team, but it got kicked up
Speaker 3: a thousand knachas when joying Aeriel. And so it's just
Speaker 3: incredible case study and what strong alignment of interests can
Speaker 3: do in terms of just shaping your day to day
Speaker 3: behavior and how you interact at work and ultimately how
Speaker 3: aligned you are with the clients you're investing money for.
Speaker 2: I think I have an interview coming up at future
Speaker 2: Proof Citywide Miami with Melody Hobson, who you work with.
Speaker 2: She's a legend in the industry. What's it like to
Speaker 2: work with Melody?
Speaker 4: She's incredible.
Speaker 3: As I mentioned, I've you know, been following her since
Speaker 3: I was a junior analyst at JP Morgan Asset Management.
Speaker 3: Getting to work with her and John Rodgers has been
Speaker 3: just unbelievable and incredible. And one thing I think about
Speaker 3: Melody is that he is really funny, very down to earth.
Speaker 3: I mean, I was surprised how down to earth she
Speaker 3: is and just very passionate and diligent about her work.
Speaker 3: And so you know, the fact that she is out
Speaker 3: there actively advocating for and fundraising for our emerging market strategy,
Speaker 3: I'm just so incredibly grateful for. But it just shows
Speaker 3: that level of focus and dedication and the fact that
Speaker 3: Melody can do that because we are a firm that
Speaker 3: is focused and not trying to be you know, all
Speaker 3: things to all people. So that's just been a really
Speaker 3: incredible and inspiring experience.
Speaker 2: And let me throw you a little bit of a
Speaker 2: CURVEBA before we get to our favorite questions. You serve
Speaker 2: on the board of directors of the Small Enterprise Assistance Fund, Yes,
Speaker 2: tell us a little bit about what that impact fund does.
Speaker 4: Yeah, absolutely so.
Speaker 3: I recently stepped off of the board, but I had
Speaker 3: been on the board for a number of years. And
Speaker 3: the SEAF Fund is an impact investing fund that actually
Speaker 3: I had a chance to co invest with and work
Speaker 3: alongside when I was at Grassroots Business Fund. So it's
Speaker 3: the fun I'm very familiar with that really focuses on
Speaker 3: private equity investing amongst small and mid sized companies as
Speaker 3: a tool of grassroots bottoms up economic development.
Speaker 2: So impact not merely looking to generate a return solely.
Speaker 4: You want to have looking at both.
Speaker 3: Yeah, So what I guess we would call a double
Speaker 3: bottom line fund exactly. So the fund has experience from
Speaker 3: China to Tanzania, to Peru to Ukraine. I mean that
Speaker 3: they've worked in They've worked not only in emerging and
Speaker 3: frontier markets, but I would call horizon markets, which are
Speaker 3: kind of the level I guess below Frontier markets. They've
Speaker 3: worked in really challenging but interesting places, and so it's
Speaker 3: a fun that even though I recently stepped off the
Speaker 3: board after a number of years, I have a tremendous
Speaker 3: amount of respect for the work that they do.
Speaker 2: Huh, really really interesting. All right, Let's jump to our
Speaker 2: favorite questions that we ask all of our guests, starting
Speaker 2: with what's keeping you entertained these days? What are you
Speaker 2: watching or listening to?
Speaker 3: So it's interesting. I tend to in terms of streaming
Speaker 3: and TV, I tend to lean towards dystopian scripted dramas,
Speaker 3: So think Squid Game, Black Mirror, Three Body Problem.
Speaker 4: I love those shows.
Speaker 2: I love three Body Problems.
Speaker 4: It's incredible.
Speaker 2: Did you start the new season?
Speaker 3: I did not, because now I'm on squid Game. Oh yeah,
Speaker 3: I did start Squid Game version two.
Speaker 2: I just saw the preview for it.
Speaker 4: It's increasing. I love it. I love it.
Speaker 3: It has mixed reviews, it has the second season has
Speaker 3: mixed reviews, but I'm really enjoying it so far so
Speaker 3: that I would say is my core. But I also
Speaker 3: really enjoy Below Deck.
Speaker 2: So below Deck? What is below Deck? Oh? You mean
Speaker 2: the Star Trek.
Speaker 3: Animated No No Below Deck is literally a reality show
Speaker 3: on Bravo. It's the only reality show that I watch.
Speaker 3: But it's basically about crew that work on yachts, okay,
Speaker 3: And what I love about the show it's I mean,
Speaker 3: it's the typical reality show where there's drama and all
Speaker 3: this other stuff. But what I love about it is
Speaker 3: because they're actually working. There's a lot of kind of
Speaker 3: managerial lessons of leadership, the relations between the captain and
Speaker 3: the bosin, the relationships between different departments like the interior
Speaker 3: versus the exterior of the boat, hiring and firing decisions.
Speaker 3: There's a lot there that I find to be absolutely fascinating.
Speaker 3: And beyond that, they're in mega yachts in incredible locations
Speaker 3: around the world.
Speaker 2: So it looks great. I bet.
Speaker 3: I think Harvard should do a case study on it
Speaker 3: at some point, But it's it's a fun show.
Speaker 2: Huh. I'm gonna I'm gonna drop a footnote with you
Speaker 2: on squid Games. Do you know the background of the
Speaker 2: guy who wrote squid Games? So there was a Wall
Speaker 2: Street Journal article like write in the early part of
Speaker 2: the pandemic when squid Games had blown up. It turns
Speaker 2: out that this guy had been trying to sell the
Speaker 2: script for Squid Games for a decade and could everybody
Speaker 2: this is crazy, a competition for money where people die.
Speaker 2: This is nobody would believe this. This is too crazy.
Speaker 2: And Netflix, as they tend to do, they just buy
Speaker 2: stuff in mass and then go through the process of
Speaker 2: seeing what they can develop. Like they they don't just
Speaker 2: buy something from Fred over there. It's like, let's just
Speaker 2: scoop up all this and see what we can find.
Speaker 2: And at one point in time, the guy who wrote it,
Speaker 2: who developed it, how to sell his laptop because he
Speaker 2: was that broke. And it just goes to show you
Speaker 2: like nobody wanted anything to do with this, and it's
Speaker 2: the single most successful show in the history of Netflix.
Speaker 2: It's just it's just wild.
Speaker 3: And it's fascinating to me too, because it's also just
Speaker 3: part of this surge of Korean the globalization of Korean culture, right,
Speaker 3: whether it's k pop in movies, television, even food is cosmetics.
Speaker 3: So it's really interesting to think to put Squid Games
Speaker 3: in the context of this huge resurgence in Korean culture globalization,
Speaker 3: which quite frankly, I think people wouldn't have predicted, you know,
Speaker 3: a decade ago.
Speaker 4: So it's really interesting.
Speaker 2: I think Netflix just spent another billion dollars over the
Speaker 2: past three years since squid Game buying more South Korean product,
Speaker 2: which is which is pretty pretty amazing. Next question, tell
Speaker 2: us about your mentors who helped shape your career.
Speaker 3: So I've been tremendously lucky that over the course of
Speaker 3: my career, I've had incredible mentors and also sponsors. And
Speaker 3: I like to put the point on the sponsors piece
Speaker 3: because I like to think that mentors, you know, get
Speaker 3: you into the building, but sponsors put you on the
Speaker 3: express elevator to the top, and so they're the ones
Speaker 3: who are pounding the table for you when you're not there.
Speaker 3: And so I've been lucky to have incredible, you know,
Speaker 3: relationships in both dimensions. People would call out specifically. I
Speaker 3: mean there's a lot, there are a lot of people
Speaker 3: who have been very helpful. But I would say if
Speaker 3: I think about my JP Morgan days, you know, particularly
Speaker 3: you know earlier on at JP Morgan, individuals like Kahr,
Speaker 3: who you know, was an equities analyst now he's actually
Speaker 3: in fixed income at JP Morgan Asset Management. He really
Speaker 3: when I was just a college student, that didn't know
Speaker 3: anything about emergen about investment management, really took me under
Speaker 3: her wing and and really encourage me to actually pursue
Speaker 3: credit research before equity research because there's no opening in
Speaker 3: equity research. And she said, you know what, credit research.
Speaker 3: I know that's not what you want to do right now,
Speaker 3: but this will help you build the skill set that
Speaker 3: you will need in equity research in terms of assessing companies,
Speaker 3: et cetera. And I'm so glad you gave me that
Speaker 3: advice because that really was the starting point of my
Speaker 3: career in securities analysis. You know, other individuals include Professor
Speaker 3: Andre Parold, who was my finance professor at HBS, who
Speaker 3: I'm still in touch with. He's been a really great
Speaker 3: advisor and mentor to me and really has helped counsel
Speaker 3: me through, you know, different stages of my career. And again,
Speaker 3: I feel bad because there's a lot of people I'm
Speaker 3: not naming, but there's just been you know, I've been.
Speaker 4: Very speech I know, I want to thank everyone, but.
Speaker 3: I've just been very fortunate to have incredible mentors still
Speaker 3: in my life and I just hope that I can
Speaker 3: pay it forward for that next generation and in the
Speaker 3: process of mentoring kind of more junior talent to again
Speaker 3: try to forward.
Speaker 2: Let's talk about books. What are some of your favorites?
Speaker 2: What are you reading right now?
Speaker 3: So I just finished The Obstacle is the Way Holiday.
Speaker 4: Yeah, that really I found to.
Speaker 3: Be an incredible book because it essentially talks about how obstacles, challenges,
Speaker 3: problems are not things to be avoided but embraced and
Speaker 3: sought after, which seems very counterintuitive because we're cassanally trying
Speaker 3: to optimize our professional and personal lives to you know,
Speaker 3: avoid stumbling blocks. And this is saying no, embrace the
Speaker 3: stumbling blocks because that's ultimately how you learn. And for
Speaker 3: me in particular, as a recovering perfectionist, it really resonated
Speaker 3: with me to kind of hear that message and I
Speaker 3: actually find myself referring back to it in my personal
Speaker 3: and professional life that you know what, the obstacles are
Speaker 3: a good thing and you learn from them and that's
Speaker 3: how you become stronger. And he just points to so
Speaker 3: many different examples from history, philosophy, current events that really
Speaker 3: ties and brings to life that concept. So it's a
Speaker 3: book I really really enjoyed and what I'm reading right
Speaker 3: now I'm kind of twenty five percent of the way
Speaker 3: in is on jiji Ping, written by Kevin Rudd, who's
Speaker 3: the former Australian ambassador who has decades of experience living
Speaker 3: and working with China and with politicians in China. I
Speaker 3: read The Avoidable War, which was an incredible book that
Speaker 3: talked about US China relations and the outlook for that.
Speaker 3: On Jijiping specifically focuses on jijiping thought and how what
Speaker 3: the basis for that thought, what's the basis for the thinking,
Speaker 3: what are the incentives and how those could evolve? And
Speaker 3: my friends who work and are based in China, different
Speaker 3: different individuals separately have told me that he's probably the
Speaker 3: top Westerner who has the best understanding of Chinese Chinese
Speaker 3: politics today and of China, and so I take their
Speaker 3: word for it that he has a lot of good insights.
Speaker 2: Huh. Really kind of interesting. As a side note, I
Speaker 2: am not a perfectionist, but I have noticed we've all
Speaker 2: heard the expression don't let the perfect be the enemy
Speaker 2: of the good. Yes, I could tell you from my
Speaker 2: personal experience it doesn't matter if you're shopping for a
Speaker 2: house or any time you're making a consumer choice. I
Speaker 2: have a tendency to go down a rabbit hole and
Speaker 2: let the perfect be the enemy of the good. And
Speaker 2: it's been a process to kind of learn how to
Speaker 2: get around that. How did you learn how to manage?
Speaker 2: And by the way, I am not a professionist. I'm
Speaker 2: gonna just get it done. Doesn't matter if it's not perfect,
Speaker 2: we'll fix it later. In most things, but in like
Speaker 2: that sort of big consumer choice, the perfect has always
Speaker 2: been the enemy of the good for me. And I
Speaker 2: look back at choices I made, I'm like, gee, you know,
Speaker 2: I should have done that house, which has appreciated more
Speaker 2: than because you don't end up in a perfect time, yes,
Speaker 2: and what you sometimes give up. So I'm curious, how
Speaker 2: did you manage that? Personally?
Speaker 3: I am still managing it, so I'm still you're going
Speaker 3: to be I'm always working on it. And so I mean,
Speaker 3: it's it's actually interesting talking about real estate. I mean,
Speaker 3: as a side note, my husband and I have been talking.
Speaker 3: We live in Brooklyn now we've been talking about moving
Speaker 3: closer to our kids school, which is on the Upper
Speaker 3: East Side. I'm talk to my commute, et cetera, et cetera.
Speaker 3: We've been talking about this for maybe six years.
Speaker 2: Now watching prices just go up, and.
Speaker 3: To your point, well, I want this and we want that,
Speaker 3: and this is like our perfect dream home and it
Speaker 3: needs to be two blocks away from the school. And
Speaker 3: so this is literally an active conversation now as we
Speaker 3: enter twenty twenty five, like at some point we just
Speaker 3: need to to do it. It's not gonna be perfect,
Speaker 3: and so for me, I think in terms of opportunity
Speaker 3: cost right, So what are we giving up by not
Speaker 3: doing this now?
Speaker 2: Right?
Speaker 3: And which is what you alluded to as well in
Speaker 3: terms of pricing appreciation, ETCEA, and also just understanding that
Speaker 3: there is no perfect anything. It's trade offs.
Speaker 2: You're one hundred percent right. I have a quick funny
Speaker 2: story to share. A couple of years ago. I'm trying
Speaker 2: to remember if it was pre or post pandemic. No,
Speaker 2: I think it was right after the pandemic. I gave
Speaker 2: a presentation to the International Luxury Real Estate Alliance and
Speaker 2: it was an Aspen, Colorado. So it's beautiful there, and
Speaker 2: you know, and it's a few one hundred real estate
Speaker 2: agents and each of them represent the highest performing realtor
Speaker 2: in their town. And it's not you know, po dunk
Speaker 2: it's it's Veil, and it's Nashville, and it's New York,
Speaker 2: and it's Seattle, and it's London. It's just crazy, the
Speaker 2: sort of sort of like top real estate producers all
Speaker 2: around the world, and we're having you know, there's a
Speaker 2: bunch the dinner that night, or a bunch of separate
Speaker 2: tables of six or eight, and there's an older woman
Speaker 2: from Palm Beach, Florida, Ritzy part of Florida, and uh.
Speaker 2: She takes a phone call and she's like, I apologize,
Speaker 2: I have to take this. She's gone for thirty seconds.
Speaker 2: She comes back and she goes, oh, deal is done.
Speaker 2: Oh would you sell Palm Beach on the Water one
Speaker 2: hundred and ten million dollars? And I say one hundred
Speaker 2: and ten million dollars. That house has to be perfect
Speaker 2: and I'll never forget her response. She's like, man, I'm like,
Speaker 2: wait a second, one hundred and ten million dollars. What
Speaker 2: are you talking about? And she goes, well, it's a
Speaker 2: part of Palm Beach. I like, but I don't love
Speaker 2: three blocks in either direction. I like better, it's a bulkhead,
Speaker 2: not a sandy beach. You go two doors over and
Speaker 2: it's Sandy Beach. They have a dock, but it's not
Speaker 2: a deep water. Like she starts clicking stuff off, and
Speaker 2: I'm like, do you mean to tell me that? Not
Speaker 2: that I have a hundred and ten million dollars, but
Speaker 2: if I did, the house I'm buying is really a
Speaker 2: series of compromises. And she said, every house at every
Speaker 2: price point is a compromise. That's very true, how insane,
Speaker 2: but you would think at a certain point.
Speaker 4: Right, like it needs to nail most of the right.
Speaker 2: And it's like, but she'd like clicked off, like wait,
Speaker 2: one hundred and ten and you don't love it. She's like,
Speaker 2: it's all right, Like, come on, you gotta be I'm
Speaker 2: sure there are lots of houses that most listeners would say,
Speaker 2: you know, for five million dollars, I would love that place. Yeah,
Speaker 2: and at twenty times that amount. It's like she was
Speaker 2: just so Now, granted she's been doing real estate and
Speaker 2: Palm Beach for forty years, she's seen everything, but still
Speaker 2: to just kind of shrug and say, eh, you know,
Speaker 2: it's all right, that's mind blowing. So and that's kind
Speaker 2: of what you know. Whenever I'm like I like this place,
Speaker 2: but it doesn't have this and this and this, it's like,
Speaker 2: well it's one hundred and seven million, then the met
Speaker 2: place cheaper than the met place bomb Beach. So deal
Speaker 2: with some trade.
Speaker 3: Offs like exactly, and like what do you prioritize because
Speaker 3: you're not going to get everything right are we trying
Speaker 3: to solve? For?
Speaker 2: So what once you adapt the attitude that right, I'm
Speaker 2: never going to get into everything, what's the bigger price? Hey,
Speaker 2: I don't really love this kitchen, and I you know
Speaker 2: where the driveway comes in. I don't love that, but
Speaker 2: you could always change if it bothers you that much,
Speaker 2: you can eventually change it. But it's shocking that even
Speaker 2: at that price point, that is there's some trade offs
Speaker 2: that has stayed with me for forever that I mean,
Speaker 2: it's only been a couple of years, but it stayed
Speaker 2: with me because when the perfect is the enemy of
Speaker 2: the good, Like at what point? What? At what point
Speaker 2: is it perfect? If it's not perfect at one hundred
Speaker 2: million dollars, well, I think you have to give up
Speaker 2: the idea exactly. But that that's been an issue that
Speaker 2: I've always kind of wrestled with. And the sooner you
Speaker 2: accept it's always a series of trade offs. Yeah, if
Speaker 2: you are. But that's an absolutely true story and it
Speaker 2: stayed with me to this day. All Right, our last
Speaker 2: two questions, what sort of advice would you give to
Speaker 2: a recent college grad who was interested in a career
Speaker 2: in either investing or emerging markets and value?
Speaker 3: Yeah, so I think it relates to what we're just
Speaker 3: talking about about not being a perfectionist, because as an investor,
Speaker 3: you are knocking out of the park. If you're right
Speaker 3: sixty percent of the time, even that's a high level right,
Speaker 3: you're going to be wrong a lot, and particularly in
Speaker 3: listed equities, Unlike when I was doing private equity, private credit,
Speaker 3: where there wasn't a mark to market every single minute,
Speaker 3: you know whether you're adding or detracting value on a
Speaker 3: real time basis, and so letting go of the idea
Speaker 3: that and I think sometimes young people feel this pressure
Speaker 3: when they start in this business that you know, I
Speaker 3: need to get it right one hundred percent of the time,
Speaker 3: and that leads to a lot of risk aversion as
Speaker 3: a result, because they're afraid of making a mistake. They're
Speaker 3: afraid of making the wrong call, and that could help
Speaker 3: stein me decision making and decisiveness. I try to tell
Speaker 3: people who are starting this business. You need to let
Speaker 3: go of that and just kind of understand.
Speaker 4: You will be wrong.
Speaker 3: Ideally, you want to be right slightly more times than
Speaker 3: you're wrong, and when you're right, ideally, the upside is
Speaker 3: greater than the downside when you're wrong. But that's the
Speaker 3: game we're trying to play. We're not shooting for one
Speaker 3: hundred percent. So I would say that's the biggest piece
Speaker 3: of advice. I would say the other broader advice is to,
Speaker 3: as someone put it earlier in my career, you know,
Speaker 3: lead with a yes. And so if there's projects that
Speaker 3: come up, if there's new opportunities, not over analyzing or overthinking, well,
Speaker 3: am I one hundred percent ready to do this? Just
Speaker 3: say yes, and then you'll figure it out. And I
Speaker 3: think that's where you grow, that's where you learn, that's
Speaker 3: where you can really stretch yourself and kind of step
Speaker 3: out of your your comfort zone, particularly in emerging markets
Speaker 3: where there's a lot required to kind of step out
Speaker 3: of comfort zones in terms of cultural differences, in terms
Speaker 3: of you know, other dynamics just being comfortable or embracing that.
Speaker 2: And yeah, really really interesting. And our final question, what
Speaker 2: do you know about the world of investing today you
Speaker 2: wish you knew twenty or so years ago when you
Speaker 2: were first starting out.
Speaker 3: I would say that the concept of it goes back
Speaker 3: to the importance of the mosaic theory, and particularly in
Speaker 3: less efficient markets like emerging markets. You know, all the
Speaker 3: data is not going to come in a neat package,
Speaker 3: and so needing to be creative with how you get information.
Speaker 3: It's almost like being a detective in some ways. How
Speaker 3: do you get information, how do you piece how do
Speaker 3: you put the pieces of the puzzle together, how do
Speaker 3: you think outside of the box, Because oftentimes I think
Speaker 3: when you know, when I was in school, you have
Speaker 3: an agenda, a textbook, you're learning things, you're doing the test,
Speaker 3: you get an A plus, and then you kind of
Speaker 3: move on. Right In the world of investing, it's just
Speaker 3: so much more nebulous, and so it just requires you
Speaker 3: to stretch and have more creativity than just expecting things
Speaker 3: to come at you in a cleaner fashion, which, to
Speaker 3: be honest, was my experience in you know, US large
Speaker 3: cap tech investing, where data was abundant and widely available
Speaker 3: and much more efficient. But even with that type of investing,
Speaker 3: I think thinking more along this, being creative and putting
Speaker 3: the mosaic together more proactively is probably a lesson that
Speaker 3: I would want to tell myself, you know, my twenty
Speaker 3: year old self.
Speaker 2: Hmm, really interesting. Thank you Christine for being so generous
Speaker 2: with your time. We have been speaking with Christine Philpotts
Speaker 2: of Aerial Investments, where she is a portfolio manager for
Speaker 2: emerging market value strategies. If you enjoy this conversation, well,
Speaker 2: be sure and check out any of it our more
Speaker 2: than five hundred previous discussions we've had over the past decade.
Speaker 2: You can find those at iTunes, Spotify, Bloomberg, YouTube, wherever
Speaker 2: you find your favorite podcast, And be sure and check
Speaker 2: out my new book, How Not to Invest The Bad ideas,
Speaker 2: numbers and behaviors that Destroys Wealth publishing on March eighteenth.
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