Speaker 1: Welcome to Inside Active, a podcast about active managers that
Speaker 1: goes beyond soundbites and headlines and looks deeper into their processes,
Speaker 1: challenges and philosophies and security selection. I'm David Cohne, i
Speaker 1: lead mutual fund and active research at Bloomberg Intelligence. Today
Speaker 1: my co host is Marvin Chen, Senior Asia equity strategist
Speaker 1: at Bloomberg Intelligence. Marvin, thanks for joining me today.
Speaker 2: Thanks David, great to be here.
Speaker 1: So you published a note yesterday on emerging market signals
Speaker 1: for January. Can you tell us what emerging market investors
Speaker 1: could contend with this month?
Speaker 2: No published was basically a recap of em performance in
Speaker 2: twenty twenty four and what to watch out for as
Speaker 2: we kick off twenty twenty five. So the MSCI emerging
Speaker 2: market returned around five to six percent in twenty twenty four.
Speaker 2: You know, this was led by Taiwan and the semiconductor demand,
Speaker 2: but more surprisingly was that China was the second best
Speaker 2: performing market last year, and this was due to a
Speaker 2: surge at the end of the year from its stimulus blitz.
Speaker 2: Now this year, we think it will be critical year
Speaker 2: for China, which still needs to continue to stimulate demand
Speaker 2: to stem off prolonged deflationary pressures for the broader em
Speaker 2: We do think that headwinds are rising. You know, we
Speaker 2: haven't more a less clear FED rate path and a
Speaker 2: stronger dollar which may post challenges for EM fun flow,
Speaker 2: while the US tariff policy may impact global trade. So
Speaker 2: you know, we have Trump's inauguration inauguration later in January,
Speaker 2: and you know we're going to see if his tariff rhetoric,
Speaker 2: you know, turns into reality. So we think markets have
Speaker 2: a lot to contend with in the coming months, which
Speaker 2: can drive some volatility.
Speaker 1: Well, speaking of emerging markets, i'd like to welcome our
Speaker 1: guests today, Zuri Notodecker, who is lead for manager of
Speaker 1: the Polar Capital Emerging Market stars fund ticker po li X. Jerry,
Speaker 1: welcome to Inside Active.
Speaker 3: Thank you very much for having me pleasure.
Speaker 1: So we'd like to begin by learning more about your background.
Speaker 1: How did you get your start in the investment business.
Speaker 4: Well, I guess probably went all the way back to
Speaker 4: kind of a school when you were suddenly expecting that
Speaker 4: I planned to be an engineer. And then suddenly you
Speaker 4: started in your history lessons to get a lot about
Speaker 4: these kind of economic crisis and you suddenly got a
Speaker 4: bit fascinated by this idea how politics economic could also
Speaker 4: suddenly start to move something called equity market, and that
Speaker 4: definitely triggered a bit of interest. So I definitely decided
Speaker 4: that there's probably more for me to go to university
Speaker 4: to study economics and finance. And then during that time
Speaker 4: I was actually backpacking doing my bachelor and my master
Speaker 4: degrees in Asia, you know, just post the Asian financial crisis,
Speaker 4: and again that whole way society and markets and economics
Speaker 4: was changing there.
Speaker 3: It was quite fascinating.
Speaker 4: Of course, back then I was impressed with my back
Speaker 4: then Danish crowner how far they could get me after
Speaker 4: a lot of currency devaluation. But it was a fascinating
Speaker 4: development with the so called Asian Tigers economies and in
Speaker 4: the volatility they had there. And suddenly, when I was
Speaker 4: about to finish my master there was suddenly a smaller
Speaker 4: Danish Poutuguez, a manager called bank in West that had
Speaker 4: an analyst role for an Asian ecoity, aannalyst, and I
Speaker 4: just felt that job has to be mine, and I
Speaker 4: managed to get through the process and eventually managed to
Speaker 4: get the job.
Speaker 3: And as I say, rest is kind of history.
Speaker 4: So yeah, I went relative quickly from analysts to become
Speaker 4: a PM and running some smaller dedicated Asia funds, and yeah,
Speaker 4: in the end I ended up running some pretty sizable
Speaker 4: emergent market funds that I had created with my process
Speaker 4: around nice.
Speaker 1: So, for the listeners not as familiar with Polar Capital,
Speaker 1: could you give us an overview of the firm's investment philosophy.
Speaker 4: I guess the firm such do not have an investment philosophy.
Speaker 4: It is a so called boutique as a manager. There
Speaker 4: are around thirteen investment boutiques, and each boutique have a
Speaker 4: very you could say independent investment strategy, a lot of autonomy.
Speaker 3: Around how they want to do it.
Speaker 4: I guess the glue that really puts the Polar Capital
Speaker 4: together as a firm that is that every single of
Speaker 4: these investment boutique they are equity managers with focus on
Speaker 4: high alpha creating and really stock picking. So yes, again
Speaker 4: we use EVA valuation model, somebody else will using a
Speaker 4: DCA valuation model and so on, but generally everybody is
Speaker 4: a high conviction stock pickers really focusing on trying to
Speaker 4: be differentiated and beat the market. And I think that
Speaker 4: is really the differentiating point there, there's no kind of
Speaker 4: hooking the benchmark.
Speaker 3: Everybody is full alpha focused.
Speaker 1: That makes sense, and you know, the fun we're focusing
Speaker 1: on today, the emerging market Stars fund. How do you
Speaker 1: define star companies?
Speaker 4: We literally define it as companies that can sustainable create
Speaker 4: economic value added where it's mispriced by the market to
Speaker 4: do a firm definition there. So it's literally about finding
Speaker 4: these companies that are really good at taking capital, really
Speaker 4: accept there is a cost associated with capital, identify attractive
Speaker 4: growth opportunities, then deploy their capital, and hopefully as they
Speaker 4: monetize these growth opportunities that then create a strong level
Speaker 4: of return investic capital and they get that so called
Speaker 4: EVA spread and thereby they're really value creating companies. We
Speaker 4: all know that EPs numbers can be highly easily kind
Speaker 4: of manipulated and it doesn't really tell you about your
Speaker 4: value creation. But what we really believe tell something about
Speaker 4: your fundamental and value creation. That is literally that spread
Speaker 4: you can generate on your investing capital relative to the
Speaker 4: cost of capital.
Speaker 3: And you can say taking that point is that.
Speaker 4: We do believe over the longer term there is a
Speaker 4: strong link between your value creation and then your total
Speaker 4: shareholder of return.
Speaker 3: That you're generating.
Speaker 4: Because if you are a true value creating company, you
Speaker 4: can take that excess capital you can reinvest back into
Speaker 4: a people, technology, create IP, create brands, whatever it might be,
Speaker 4: to further enhance your growth opportunities, and hopefully the market
Speaker 4: will reward that. And there's no question we are growth
Speaker 4: manager and we would expect that most of our return
Speaker 4: to our shareholders would be coming in the form of
Speaker 4: capital appreciation. But what it also means if you're value
Speaker 4: creating companies and for some periods the market do not
Speaker 4: believe in the management team or there are other forms
Speaker 4: of risk measures that derail you from hitting your true
Speaker 4: fundamental valuation, then you can do share buy bags, or
Speaker 4: you are in a position where you can also do
Speaker 4: dividend with some of that excess capital.
Speaker 3: So the point we.
Speaker 4: Want to make is that over the medium to the
Speaker 4: longer term, we do believe there's a strong link between
Speaker 4: your real economic value creating and the level of total
Speaker 4: shareholder a term that you generate. And of course, as
Speaker 4: as so called a long only equity manager up against
Speaker 4: the benchmark, which clearly put some constraints you, we really
Speaker 4: focus on this idea about finding a so called ev
Speaker 4: eight delta, So finding that improvement in economic value added
Speaker 4: we believe on mispriced by the market. That is really
Speaker 4: the kind of alpha we try to identify. And you
Speaker 4: can say that isn't isn't part of that service for
Speaker 4: so called star companies is they have a strong delta
Speaker 4: in economic value added creation.
Speaker 1: So we know what you're looking for. Can we dig
Speaker 1: a little deeper into the process of you know, what
Speaker 1: is the starting point? You know, how do you approach
Speaker 1: looking for these companies?
Speaker 3: We start by defining growth.
Speaker 4: And you can say the way we define growth is
Speaker 4: to say, within a given economic area, we want to
Speaker 4: be able to identify some form of an imbalance between
Speaker 4: the domain side and the supply side. So put very simplicity,
Speaker 4: we can say we want some kind of steep growing
Speaker 4: demand curve or product or given service being it underpenetrated
Speaker 4: or have some kind of strong, longer lasting drive around it.
Speaker 4: And then on the supply side, we want there to
Speaker 4: be some form of a rigid structure such that there
Speaker 4: are limited amount of companies that can supply into that
Speaker 4: favorable domain environment, and thereby there's a decent chance that
Speaker 4: these so called companies on the supply side they have
Speaker 4: a chance to generate access return over an investment cycle
Speaker 4: and then not get competed away right away. So there
Speaker 4: need to be some form of competitive edge, some form
Speaker 4: of uniqueness. And that's also why you can say things
Speaker 4: where that you can call it barrass to entry or
Speaker 4: copycat products and on, or where your capacity is very
Speaker 4: easily added on, we do not tend to own a
Speaker 4: lot of companies in that area. So again take the
Speaker 4: classical example of telecom where it's very easily to add
Speaker 4: capacity whenever domains come up, or some other regulated industry
Speaker 4: where your edge is around understanding regulation, where bottom line
Speaker 4: is you probably hardly have.
Speaker 3: And it's then will ever be able to gain it.
Speaker 4: But then we try to focus more on the likes
Speaker 4: of you say technology like in the semiconductor space, or
Speaker 4: you can say consumer discrestionary or indostrial or something like that.
Speaker 4: The point being that if it's very very complex like biotech,
Speaker 4: we'll be very frank and say we do maybe not
Speaker 4: have the best toolbox and knowledge. I mean myself and
Speaker 4: most of my analyst in the team, we come with
Speaker 4: some kind of economic financial background. We do, of course
Speaker 4: in Polar have people with a biotechnology background, but we
Speaker 4: would probably be a little bit lighter to put it
Speaker 4: easily on that side, because there's a little bit out
Speaker 4: of our comfort zone. As to say, when it comes
Speaker 4: to the likes of utility tile, it comes whatever. We
Speaker 4: don't really think we cannot build an edge then be differentiated.
Speaker 4: So trying to find that combination where you think you
Speaker 4: can still be differentiated, but you with your toolbox have
Speaker 4: a chance to be a little bit more right in
Speaker 4: terms of direction and magnitude of these development versus the market,
Speaker 4: and you really try to put your effort in there.
Speaker 4: Acknowledging that finding alpha is dame heart these days, so
Speaker 4: that is where we try to find our niche areas
Speaker 4: and focused there.
Speaker 2: We have been kind of looking at you mentioned earnings
Speaker 2: and growth, at earnings estimates and growth. We've kind of
Speaker 2: been looking at consensus for this year, and you know,
Speaker 2: we're noticing a bit of growth inflection in Latin America
Speaker 2: and emerging Europe next year a while Asia growth still
Speaker 2: looks to be quite high, but it looks to be slowing.
Speaker 2: I'm just wondering, how are you thinking about the different
Speaker 2: em blocks this year?
Speaker 3: Again, we try as a starting point where we really.
Speaker 4: You can say going back to the question before, I mean,
Speaker 4: we do really kind of try to focus on these
Speaker 4: kind of unique growth areas and then I think whether
Speaker 4: it's it services or and then we'll say a fan
Speaker 4: of is the best company like a globe and which
Speaker 4: is a bit based out of Latin America, or do
Speaker 4: we find that it service company places like India or Vietnam,
Speaker 4: and then try try to to kind of understand the
Speaker 4: dynamics there. So clearly, for a number of the areas
Speaker 4: there is more like a global dynamics. And then of
Speaker 4: course for the one where there is a more kind
Speaker 4: of domestic driver, then it's more into the nitty greedy
Speaker 4: of the domestic than it is a SOT at the
Speaker 4: regional level, if I can put it that way, because
Speaker 4: that is very much how I think the emergent market
Speaker 4: as a class has been developing over the last decade.
Speaker 4: That we still like to talk a little bit about
Speaker 4: the regional blocks. And I'll be very frank and say,
Speaker 4: even our research structure is a little bit with analysts
Speaker 4: coming some region. But what we're also seeing there are
Speaker 4: increasingly huge differences whether you are in Asia and whether
Speaker 4: you talk India or you talk Korea. I mean the
Speaker 4: underlying dynamics there political growth wise, society wise, they are very,
Speaker 4: very different. And it's a bit the same with the
Speaker 4: likes of Latin America. I mean, we have seen again
Speaker 4: the difference between the likes of Brazil and Mexico, and
Speaker 4: now even in Argentina suddenly also changing a lot. So
Speaker 4: I'd probably say we are probably more when we take
Speaker 4: our more top down head on, we're probably a bit
Speaker 4: more on the countryside then we actually think about regions
Speaker 4: with it, if I can put it that way. We
Speaker 4: do though, also feel and I guess I'll be bad
Speaker 4: for I say, I do not have the hard evidence here,
Speaker 4: but my feeling is that we have over the years
Speaker 4: been getting a little bit more cheated by you can say,
Speaker 4: consensus growth numbers from cellside in Latin America. Then we
Speaker 4: probably feel has been the case in Asia. Not saying
Speaker 4: you cannot get cheated in Asia if you do go
Speaker 4: and look at these numbers, but I think there's probably
Speaker 4: a little bit more you can say, a sygnical element
Speaker 4: and a little bit more swing in something like the
Speaker 4: risk premiums that move there. So you can say from
Speaker 4: that perspective, smaller changes you can say let's my Marria
Speaker 4: can maybe looking slightly better than than Asia, that would
Speaker 4: to be framed not really at an early stage kind
Speaker 4: of be enough for us to think, oh, we really
Speaker 4: need to reassess the structure here.
Speaker 2: Okay, Yeah, totally understand your your point on you know,
Speaker 2: earning exstin is sometimes being cheated or or or not
Speaker 2: not not as accurate as we wish. Just getting back
Speaker 2: you mentioned you know you're more countries or you know,
Speaker 2: country specifics matter perhaps a bit more. One one country
Speaker 2: you didn't mention was China. Just wondering what are your
Speaker 2: thoughts on China going into this year? Can you know
Speaker 2: the domestic stimulus kind of offset the rising geo political tensions?
Speaker 4: There's no question. Uh, and that is what they call
Speaker 4: a good question. And uh and and and China is
Speaker 4: of course a very triggery one. I should mention that
Speaker 4: we even have a small officing in Shanghai, so we
Speaker 4: do have you can say, one of my analysts do
Speaker 4: sit in Shanghai. So we do generally feel we have
Speaker 4: a pretty decent understanding what's going on there. And I
Speaker 4: have most of myself been investing in China for many,
Speaker 4: many years. But there's no question in China is what
Speaker 4: you go call between a rock and a hard place.
Speaker 4: Right now, I think it's clear that you.
Speaker 3: Could call it.
Speaker 4: The business model for China are being a little bit
Speaker 4: caught out on the wrong foot now, and the question
Speaker 4: is how quickly can and will they kind of change
Speaker 4: the dynamics the solution we see for China. It's hard
Speaker 4: to land there, but I guess that's the only way
Speaker 4: China can go. So there's no question that as we
Speaker 4: see it, that we work a lot with us now,
Speaker 4: which we call a new multipolar world, and it isn't
Speaker 4: is that again, I've been doing emergent market investing for
Speaker 4: more than twenty years and there's no secret. At least
Speaker 4: up till two thousand and eighteen, take a gift emergent
Speaker 4: market and Asian investing. It was very very China biased.
Speaker 4: China heavy, I mean it, and you will see the
Speaker 4: benchmark wasting. China was so heavy, and yes that was
Speaker 4: also not only was there a lot of weight, a
Speaker 4: lot of companies, a lot of GDP growth, but there
Speaker 4: was also some quite amazing strong investment cases back there
Speaker 4: again think Tents and Alibaba. These was kind of the
Speaker 4: absolutely big darling names and the heavy names in the benchmark,
Speaker 4: and that was kind of driving it. And I think
Speaker 4: from twenty eighteen, when you could call the real kind
Speaker 4: of trade war started to kick out, you clearly start
Speaker 4: to see a change there. And when we talk about
Speaker 4: a multipolar world, we think that is something that are
Speaker 4: really going to accelerate over the next years and that
Speaker 4: will really transformed the narrative for emergent market over the
Speaker 4: coming decade. And put very simplistic, we do believe there's
Speaker 4: a very big you would call it negative delta to
Speaker 4: keep on using that word coming out of China in
Speaker 4: the form of FDI are not going into China, even
Speaker 4: Chinese own company are starting to invest outside of China,
Speaker 4: manufacturing capacity are moving and so on. And of course
Speaker 4: it's not China collapsing over night, but the direction of
Speaker 4: travel is very clear that that dominant manufacturing role is
Speaker 4: starting to come under pressure. And at the same time
Speaker 4: the domestic domain picture is very very weak. But you
Speaker 4: would say that negative delta coming out of China that
Speaker 4: is not going back to US or to eurofrom that matter,
Speaker 4: as we're see in it, we do believe that a
Speaker 4: lot of these new manufacturing hobs, they will move to
Speaker 4: the likes of India, Vietnam, Indonesia and Mexico and so on,
Speaker 4: and particular in the four countries are mentioned here, but
Speaker 4: particular the three as one. They coincide with already relative
Speaker 4: favorable demographics urbanization dynamics, and we do believe that create
Speaker 4: a pretty powerful kind of you can say, cocktail for
Speaker 4: growth to come and be more spread out. So we
Speaker 4: think in a way it is in many way again
Speaker 4: we are stock piggers, and of course we are very
Speaker 4: biased in our view, no secret there, but we think
Speaker 4: actually this new multipolar world and the narrative we see
Speaker 4: for emergent market over the next decade is actually really
Speaker 4: really bullish because I think, let's be frank, we all
Speaker 4: and we're probably guilty of underappreciating the political risk in
Speaker 4: China that end up being too much capital allocated into China,
Speaker 4: and suddenly that concentration risk, we suddenly saw the flip
Speaker 4: side of that. I think in a new multipolar world, besides,
Speaker 4: as stock piggers, we can hopefully find a lot of
Speaker 4: great return opportunities from these new manufacturing and consumption opportunities,
Speaker 4: but we can also spread our risks a lot better.
Speaker 4: We can diversify them on political system, on monetary cycles,
Speaker 4: and on investment cycle. So think if you are international
Speaker 4: and investor, I actually think that this is it feels
Speaker 4: a bit painful now when you look at the index
Speaker 4: performance that we've been seeing the last few years. And
Speaker 4: again I acknowledge that twenty twenty five there's a lot
Speaker 4: of moving parts. I'll be happy to elaborate on that,
Speaker 4: but I think if we allow ourself to keeck to
Speaker 4: look a few years ahead, I actually think the emergent
Speaker 4: market universe actually has a lot to offer and it
Speaker 4: will come in a much better repping, if I can
Speaker 4: use that word this time around, the way we can
Speaker 4: diversify and spread our risk. So for that reason, I
Speaker 4: do remain quite upbeat about the opportunities in emergent market
Speaker 4: for this multipolar development. And as I say, we are
Speaker 4: significant underweight in China, and I think China's a role
Speaker 4: in this new multipolar world. And let me be very frank,
Speaker 4: we are not forecast in the collapse in China anything
Speaker 4: like that, but it's clearly you can say these deflastionary trends,
Speaker 4: they are very strong and it could easily be some
Speaker 4: form of a Japanization kind of version of China we're
Speaker 4: witnessing now, though admittedly at a lot lower GDP level
Speaker 4: capita than what we saw equivalent of Japan back in
Speaker 4: the late eighties or early nineties. But I think the
Speaker 4: future for China that is DRIMA as the exporter of
Speaker 4: capital goods and consumer goods to you can say, the
Speaker 4: rest of the emergent market. Yes, I think the export
Speaker 4: growth to the likes of viewers in Europe, we should
Speaker 4: not put our hopes too high there and if anything,
Speaker 4: they'll probably deteriorate. But I mean it's not that long
Speaker 4: ago since I was traveling a lot around in Asia,
Speaker 4: as I do quite regular, and when you are around
Speaker 4: in places like Southeast Asia, you are really seeing these
Speaker 4: China products, whether it's mobile phones or its car and
Speaker 4: they are really being adopted by the consumer there. And
Speaker 4: I think that is really the role. And in a way,
Speaker 4: I think that if you are producing iPhones at razor
Speaker 4: things margin versus you are exporting your own mobile phone
Speaker 4: brands where you control the IP and you get a
Speaker 4: lot higher margin that margin, uplift can actually come say
Speaker 4: a lot of volume deslis. So I think that I
Speaker 4: still think that the strategy China are on it in
Speaker 4: a kind of makes sense to try to go more
Speaker 4: higher value added, really control the brand, and then really
Speaker 4: try to drive export markets outside the US and Europe.
Speaker 4: Will it be enough for China? And I guess that
Speaker 4: is the big question, and I do probably believe that
Speaker 4: it will not be fully enough. It can keep them
Speaker 4: afloat if I can use that ext question, But you
Speaker 4: do also need to get some form of domestic demand.
Speaker 4: And I only really see the domestic domain story comeback
Speaker 4: when you start to get some comfort back into the
Speaker 4: Chinese society, and that goes around mister Shei and his policies,
Speaker 4: and it's clearly also go particular in connection with that
Speaker 4: what the China US relationship will be. As saying, if
Speaker 4: you are a Chinese consumer and you know there is
Speaker 4: not a big social network catching you, and you are agent,
Speaker 4: and your young child that was supposed to really take
Speaker 4: care of you when they grow up and get education
Speaker 4: fighting with really getting a good job, then your propensity
Speaker 4: to consume is clearly pretty low, and it will remain
Speaker 4: so in particularly if you have a feeling that you're
Speaker 4: about to get a trade war or other form of
Speaker 4: of tension that can cost the job and so on.
Speaker 4: So I think until we get some form of clarity
Speaker 4: on policies, I think that the consumption will still be
Speaker 4: pretty suppressed in China. But I definitely think again if
Speaker 4: once you try to say what is really the task there?
Speaker 4: In my view, it is really for the leadership in
Speaker 4: China to get some form of really clear deal and
Speaker 4: agreement with yous about the role and then you can
Speaker 4: actually go back and start to fix your economy. I
Speaker 4: find it hard to believe you can fix your economy
Speaker 4: before there's some clarity on the international scene. Even China
Speaker 4: is in many ways a big domestic economy, it is
Speaker 4: still manufacturing heavy, and a lot of that manufacturing is
Speaker 4: linked with the international environment, and that's why I think
Speaker 4: it is quite essential that China get that part fixed
Speaker 4: and create some kind of comfort with the outlook, and
Speaker 4: I think that would then bring the consumer back. You
Speaker 4: can say saving rates are unbelievable high in China at
Speaker 4: this point, so that there is opportunity for penned up
Speaker 4: demaind there is opportunity for structural higher level of consumption
Speaker 4: versus investment level and so on. But right now you
Speaker 4: are I guess if you are in the like the
Speaker 4: Austrian school of economics believing in that form of economic theory.
Speaker 4: I guess they call it the second order depression is
Speaker 4: literally where no matter what's happened, you will just tend
Speaker 4: to save more simply because you are uncertain about the future.
Speaker 3: And breaking that structure it is very hard.
Speaker 4: You really need to see a lot of comfort, and
Speaker 4: I think what we are seeing right now is probably
Speaker 4: not creating that comfort. So to your earlier point, yeah,
Speaker 4: I think that the China consumer story, at least for
Speaker 4: the first half still look at tough, and we will
Speaker 4: see whether Trump's terriff threat it is and you can
Speaker 4: say bargaining Chip or we will really go a lot
Speaker 4: deep on the tension before some form of new steady.
Speaker 3: States kind of arrives. Of course, there's no question.
Speaker 4: I think we're all hopeful that it is a great
Speaker 4: bargain and we will get a structure that can work
Speaker 4: for for for everybody.
Speaker 3: But that is clearly the risk.
Speaker 2: Yeah, you mentioned you know the FDI and capital still
Speaker 2: kind of flowing to the rest of emerging markets and
Speaker 2: the rest of Asia. You mentioned India. You know, the
Speaker 2: growth story is very compelling India. You know this year
Speaker 2: we've been talking about China versus India, but evaluations are
Speaker 2: looking a bit stretched in India at this point. Do
Speaker 2: you think, what are you are you guys still investing
Speaker 2: in China and looking that as a overweight or is
Speaker 2: that going to change this year or how are you
Speaker 2: guys looking at.
Speaker 4: I mean, we, uh, we're quite significantly underweight on the
Speaker 4: on the China side, and I would expect to remain
Speaker 4: that way. And as say, we have some really key
Speaker 4: niss position there to your focus on on on India,
Speaker 4: we have I'll call it decent a location. I mean
Speaker 4: we are not like we have to be over underweight
Speaker 4: and and so on, but it's a little bit more
Speaker 4: driven by the stock picking. However, when that is said,
Speaker 4: we do these days run with a small overweight in
Speaker 4: in in India I ADMD. If you go a few
Speaker 4: years back, we had a significant overweight in India and
Speaker 4: again there would be something like the eight nine percent
Speaker 4: overweight along these lines. It has come down and part
Speaker 4: of it has also been because we have been allocating
Speaker 4: slightly more back into technology seemiconductors and so on over
Speaker 4: the last few years. But to your point is it's
Speaker 4: definitely always been driven by valuation. We had a number
Speaker 4: of cases where we have been taking our profit and
Speaker 4: when we have been taking profit in some specific names
Speaker 4: due to reaching our target price, we did find it
Speaker 4: difficult to redeploy that capital back into India giving kind
Speaker 4: of the valuation level. So we will absolutely acknowledging that
Speaker 4: it is an expensive market within an EM context. However,
Speaker 4: if you do put the engine market on a comparison
Speaker 4: to like the S and P five hundred, I think
Speaker 4: it's only Marktel more expensive and more less trading line
Speaker 4: at least last time we did that kind of calculation.
Speaker 4: So my point is also that you maybe have one
Speaker 4: of the best long term growth story anywhere on the
Speaker 4: globe in India, and you're more or less paying the
Speaker 4: same as you're paying for the broad US market, and
Speaker 4: you get structurally much higher growth, and you, if I
Speaker 4: remember correctly, even also get slight a higher kind of
Speaker 4: return profile. So I think in a global context, I
Speaker 4: think you could you can justify it for sure without
Speaker 4: any trouble at allocating capital there as you seem to
Speaker 4: be not too different from what you're already most investors
Speaker 4: are willing to pile into. As I say, yeah, in
Speaker 4: an EM context, it is clearly a bit more on
Speaker 4: the expensive side. But clearly, as I say, genly, I
Speaker 4: find most management team being of high quality. They have
Speaker 4: over significant amount of volatile cycles, be it economically, politically regulatory. Again,
Speaker 4: a lot of them have proved they can really navigate
Speaker 4: these environments and they are generally still able to generate
Speaker 4: a relative good which on their capital. So we do
Speaker 4: find it a structurally quite attractive margam, but no question,
Speaker 4: we try to be very selective and for ages we
Speaker 4: are not been owning a single you can say, classic
Speaker 4: engine consumer company, as we simply find them way too expensive.
Speaker 4: The same again, like these days, there are some amazing
Speaker 4: small cap industrial companies, but they are unbelievable expensive, so
Speaker 4: again we are not investing there. So it's trying to
Speaker 4: nap on the a and find the unique stock picks
Speaker 4: and then when you find them, kind of back them.
Speaker 4: And at least that has been working well for us
Speaker 4: over the last many years. But I will say that
Speaker 4: if you take our portion of Indian companies in our
Speaker 4: portfolio versus I think a lot of peers, I do
Speaker 4: believe we are quite differentiated on quite a number of
Speaker 4: companies we own. It in India as we do really
Speaker 4: try to be still valuation aware when it comes to
Speaker 4: investing in India.
Speaker 1: I kind of want to have a follow up to
Speaker 1: your process a little bit you had mentioned at the beginning.
Speaker 1: You know, very high conviction and you know if you
Speaker 1: look at the portfolio it's between fifty and sixty securities.
Speaker 1: I believe, how do you handle concentration risk?
Speaker 4: Yeah, I mean we really have a mindset that we
Speaker 4: aim to have and of course we want to deliver
Speaker 4: a great high absolute return. It is risky as a class.
Speaker 4: You should be there because you can get a great return.
Speaker 4: And I'll be the first to acknowledge that they have
Speaker 4: been a pretty dis pointing experient in the last few years,
Speaker 4: but we still believe you'll get it longer term. We
Speaker 4: are also a long only manager and we are aware
Speaker 4: that in ninety nine of one hundred cases with a client,
Speaker 4: we are part of a larger as a location framework
Speaker 4: and we are playing some form of a risk structure
Speaker 4: we need to be aware of. So what we normally
Speaker 4: say when it comes to that understanding about the portfolio
Speaker 4: structure and construction, We aim for having something like an
Speaker 4: informature ratio around point five to zero point six, And
Speaker 4: you say, how do we get to that kind of
Speaker 4: informator ratio? What is our excess return targets? What is
Speaker 4: our kind of excess risk level? And we are aiming
Speaker 4: to do three to four hundred basis point average excess
Speaker 4: return and I acknowledge that we are not being able
Speaker 4: to do that the last few years, but again, we
Speaker 4: have a fourteen years track with this strategy, and if
Speaker 4: you look at it from that perspective, we have actually
Speaker 4: been able to deliver will in that range. So we
Speaker 4: feel comfortable that will also be the case going forward.
Speaker 4: And we're gearly being able to deliver that level of
Speaker 4: every excess return over the longer term with a tracking
Speaker 4: era as a measure for excess return around five to
Speaker 4: say seven percent on an x ender level. And I
Speaker 4: guess if you put these two together, then you roughly
Speaker 4: get that kind of level of informature ratio. And the
Speaker 4: point is that we think if you can deliver that
Speaker 4: level of an informator ratio, then you are a credible
Speaker 4: partner for a larger sl locator and you can be
Speaker 4: that building block, which is really our ambition level that
Speaker 4: we can within a decent wisk framework still deliver a
Speaker 4: decent level of alpha there so, and sorry that was
Speaker 4: slightly drifting a little bit on your questions to say,
Speaker 4: how do we then handle that on consecration. Normally, what
Speaker 4: we say that we have an active share roughly around
Speaker 4: eighty percent, take a give and as I say, but
Speaker 4: still able to keep that tracking era within that kind
Speaker 4: of five to seven percent from an exender perspective. So
Speaker 4: typically what we do is that we can go up
Speaker 4: to four hundred basis point overweight a relative to the
Speaker 4: benchmark on our highest conviction stock ideas, and we will
Speaker 4: generally not own something where we are you can say
Speaker 4: underweight or not as least minimum seventy five basis point.
Speaker 3: Oh waight.
Speaker 4: So there that every single position should be an active position.
Speaker 4: That worked very well until TSMC was shooting to the
Speaker 4: ten percent limit, where we hit a lot of blinking lights.
Speaker 4: So TSMC as an individual stock is a little bit
Speaker 4: problematic from that perspective, but you can say beyond that
Speaker 4: individual case, then every single company is an active weight.
Speaker 3: But there's a.
Speaker 4: Very firm structure around what kind of weighting do you have?
Speaker 4: And generly, the way we then decided that waiting is
Speaker 4: as a starting point.
Speaker 3: It is the conviction level.
Speaker 4: And going back to our process, we do absolutely acknowledge
Speaker 4: that nobody has perfect foresight and we will not claim
Speaker 4: that other but we still believe in fundamental valuation from
Speaker 4: the perspective that there will be a likely distribution curve
Speaker 4: of EVA creation ow and investment title. So we try
Speaker 4: in our evaluation work to focus a lot on that
Speaker 4: distribution curve and then will say, the more favorable that
Speaker 4: risk reward look in terms of what is the upside
Speaker 4: versus a downside risk, the higher the conviction label we
Speaker 4: will build up to that four hundred basis point overweight.
Speaker 4: We will then make some adjustment for liquidity because we
Speaker 4: still want a liquid portfolio so we can move around,
Speaker 4: and of course we also want to provide liquidity for
Speaker 4: our clients. And then the third pillar in that portfolio construction,
Speaker 4: that is you can say microeconomic and bigger industry kind
Speaker 4: of risk management trends. And that is precisely when you
Speaker 4: can say cases like yeah, we can maybe find some
Speaker 4: interesting cases in China, but we will still feel more
Speaker 4: comfortable running a big underweight in China, and that means
Speaker 4: we will scale some of our weighting in the China
Speaker 4: companies a bit down to make sure we get a
Speaker 4: little bit more comfortable level and again lugging cases. And
Speaker 4: let's maybe use the example again on the likes of
Speaker 4: India and Taiwan, where we say we are pretty bullish
Speaker 4: and positive right now. Again we feel comfortable adding a
Speaker 4: little bit more waiting into some of these companies to
Speaker 4: make sure that that top down view is also to
Speaker 4: a last degree reflected at the portfolio level, though admitting
Speaker 4: that the driving factor is the sock selection, but of
Speaker 4: course if you can have them go hand in hand,
Speaker 4: so the stock picking will also get well reflected in
Speaker 4: a top down view. That is, of course, what we're
Speaker 4: really into to do, and I think we've been able.
Speaker 3: To do that.
Speaker 2: Just following on, that's kind of related to risk management.
Speaker 2: How do you guys think about the currency risk and
Speaker 2: you know the fed out look, a stronger dollar dollar levels,
Speaker 2: multi year highs, how do you think this will impact
Speaker 2: emerging market assets?
Speaker 4: I must admit I kind of draw the pragmatic card
Speaker 4: here and say that if you know somebody who can
Speaker 4: forecast councies, please give me the number. I'll like to
Speaker 4: go in contact with them. So I think we have
Speaker 4: gently been trying to be pretty pragmatic when it comes
Speaker 4: to forecasting couruncies, at least in the short So again
Speaker 4: we try to take that relative simplistic approach within emergent
Speaker 4: market that if you are well sold out growing economy
Speaker 4: and you can even drive an export sector, then the
Speaker 4: likelord of having some stability in your currency is probably
Speaker 4: relative high. We're on the other hand, if you have
Speaker 4: a very weak political system, or you really have weakness
Speaker 4: on your balance of payments, then we probably assume that
Speaker 4: also massively we should factor in some depreciation on a
Speaker 4: kind of pretty constant going basis. So we say it's
Speaker 4: a relative simple, kind of a microeconomic approach to doing it,
Speaker 4: and they can say, then we try to then keep
Speaker 4: that in mind when we look at the specific companies,
Speaker 4: and you can say, if we take some example, yes,
Speaker 4: I think we have definitely also been aware that the
Speaker 4: strong dollar was a trend, and you can say, in
Speaker 4: many way we have been navigating around that with literally
Speaker 4: a lot of our technology companies in Korea and Taiwan,
Speaker 4: as their revenue line is literally or last degree in dollars,
Speaker 4: and again their local cost base is in local you
Speaker 4: can say currencies, and I think they have not really
Speaker 4: been having that hard hit, where clearly some of the
Speaker 4: more weaker economies we have generally been fully avoiding them.
Speaker 4: And there's no question if you look over the last
Speaker 4: many many years, we have had literally no exposure to
Speaker 4: the likes of Turkey or South Africa, or been pretty
Speaker 4: courses around Brazil and so on. So some of these
Speaker 4: countries that typically have some of these structural issue we
Speaker 4: try to be very aware about that that underlying risk.
Speaker 4: When that is said, I do think that like most
Speaker 4: emergent market managers, I may be software from a little
Speaker 4: bit of a buyers and think that the dollar just
Speaker 4: look remarkable strong and probably also too strong, and that
Speaker 4: the underlying currency are extremely undervalued.
Speaker 3: And and if one.
Speaker 4: Go with the equivalent of like a let's say, a
Speaker 4: big macindex, and I do happened to of course travel
Speaker 4: a lot in emergent market economies, but I do also
Speaker 4: end up traveling quite a bit in the state. And
Speaker 4: I think if you do that as some kind of
Speaker 4: anecdotical evidence, I mean, my god, us is expensive. I
Speaker 4: mean you can be in some I don't want to
Speaker 4: say something too bad, but I really let's call it
Speaker 4: tier three or tier four UIs city and you're still
Speaker 4: blown on the back of your mind. But you have
Speaker 4: to pay for a mediocre hotel, and when you see
Speaker 4: that what that equivalent money will give you somewhere else
Speaker 4: in emergent market that they're.
Speaker 3: Just kind of out of proportion.
Speaker 4: So yeah, it does feel like the dollar are very
Speaker 4: very expensive. But I do get the idea about right now.
Speaker 4: You can call it a tina as I think some
Speaker 4: people come up with that catchphrase there is no alternative.
Speaker 4: I mean, let's be frank that up till this point,
Speaker 4: US has been the only big economy where they could
Speaker 4: demonstrate productivity, growth, safe harbor for capital where you can
Speaker 4: even get a good return, and you have that safety
Speaker 4: level in in a gayo political uncertain world. So you
Speaker 4: can say, looking into next year, I do think fundamentally
Speaker 4: the dollar look very strong, but I'll definitely say I'm
Speaker 4: not building a strong thesis around that they will get
Speaker 4: a collapse in the dollar or anything like that, So
Speaker 4: I would probably have also been the point. I find
Speaker 4: it hard to see the dollar further rerating from here on,
Speaker 4: But again I do not see the dollar collapse more
Speaker 4: from the point that there's literally no really alternative to
Speaker 4: take all that that that capital. I think that again,
Speaker 4: if I have to be a little bit political, and
Speaker 4: I will stake out my neck, I'll say one of
Speaker 4: the reasons that we have this kind of teen effect,
Speaker 4: and there's no alternative to you, is that is you
Speaker 4: can say, I think a lot of the dollar has
Speaker 4: been driving by this idea that you could pile a
Speaker 4: lot of capital into the market, and not only into
Speaker 4: the likes of the treasury market, but also into the
Speaker 4: equity market. And we all know the stories that even
Speaker 4: the Switch National Bank are buying into US equities and
Speaker 4: so on as this kind of way of relocating capital.
Speaker 4: And you do that because lesbi frank it has been
Speaker 4: the only pure capitalist market with breadth and depth over
Speaker 4: the last long period. I think what's happening with Trump now,
Speaker 4: I think that it's maybe too early to say that
Speaker 4: it's going downhill, but we are seeing I'll say, the
Speaker 4: first element of what you could call chrony capitalism, where
Speaker 4: you can say the way all kind of a big
Speaker 4: tech leaders have to show up at mar Laka and
Speaker 4: literally donate money into a fund and so on. And
Speaker 4: I guess if that had happened in an emergent market country,
Speaker 4: I can assure you the headline would have been everything
Speaker 4: about a corruption, bribery, uninvestible, and here in this case
Speaker 4: in US, the money just keep piling in on the
Speaker 4: back of that. And of course, as an emergent market manager,
Speaker 4: I can only sit there and say this smells like
Speaker 4: what we see when it's bad in the emergent market,
Speaker 4: and you literally get a slap over your on that one.
Speaker 4: But somehow US seem to be getting getting away with it.
Speaker 4: But the point I want to make is that when
Speaker 4: we start to see these development, whether we are saying
Speaker 4: is this the beginning of chrony capitalism and so on
Speaker 4: moving in, I think it is where you probably start
Speaker 4: to see rich to us from a longer term perspective,
Speaker 4: because as there's one thing that is sure, the second
Speaker 4: you really get chrony capitalism, I think it's start to
Speaker 4: impact your productivity, your return, your risk profile. And again,
Speaker 4: don't get me wrong here, I'm not saying that US
Speaker 4: is changing overnight or anything like that, but it's just
Speaker 4: saying it is. In my mind again, been looking at
Speaker 4: and investing for more than twenty years, it's probably one
Speaker 4: of the most significant changes I have been witnessing in
Speaker 4: my investment career this way. The political system in US
Speaker 4: are changing these days, and I think there is down
Speaker 4: the line at risk if this trend continue. And I
Speaker 4: guess in in many ways, at least on a relative level,
Speaker 4: some key emergent market countries again like Indians on actually
Speaker 4: starts to look a little bit more safe on a
Speaker 4: relative level versus what we're seeing in US. So hopefully
Speaker 4: it can help drive this NARTI around a new multipolar
Speaker 4: world that deserves some capital still early days. I absolutely
Speaker 4: acknowledged that and hopefully we do not go down that
Speaker 4: that that route, but it is just something that is
Speaker 4: worth mentioning.
Speaker 2: Yeah, so you know, you meant you know, you mentioned
Speaker 2: the US market. You know, tech AI has been a
Speaker 2: key driver of the US market, but it also had
Speaker 2: you know, lifted Taiwan over the last year, you know,
Speaker 2: due to chip demand. But more recently, I think we're
Speaker 2: seeing some momentum slow in the chip sector, some rotation
Speaker 2: into software and AI services UH have picked up. You know,
Speaker 2: do you do you think chip them in is still
Speaker 2: solid going into next year or or is it kind
Speaker 2: of time to move to the next phase of AI
Speaker 2: album or because I think this question is you know,
Speaker 2: kind of important for emerging markets going forward.
Speaker 4: Yes, I think it's a very good question, and there's
Speaker 4: no question we have been heavily loaded over last couple
Speaker 4: of years in technology, particularly in Taiwan, and it's just
Speaker 4: definitely of the driver for our performance over the last
Speaker 4: couple of years. I would say we are definitely been
Speaker 4: getting more cautious on memory. So also on back of
Speaker 4: that kind of first indication over the summer, we did
Speaker 4: also trim some of our memory exposure down. I'll also
Speaker 4: be very frank and say part of that reduced exposure
Speaker 4: there was also disappointment on Samsung Electronics and their execution
Speaker 4: skills and just generally what's going on there. So I
Speaker 4: think it was not purely a memory story. There was
Speaker 4: also there was an internal Samsung story that was making
Speaker 4: us a bit vary, and to be frank, we've been
Speaker 4: a little bit disappointed there. So we did take some
Speaker 4: capital away there for sure, But I'll say where we
Speaker 4: still believe there is a quite excitement story then, and
Speaker 4: that's you can say even before you have the Las
Speaker 4: Vegas a big event and Nvidia as a rockstar boss
Speaker 4: suddenly saying we are now moving beyond the data center
Speaker 4: we're going to computers and laptops and mobile devices, and
Speaker 4: we can really spread around which by the way, should
Speaker 4: be the pullus. And we've actually seen quite good performance
Speaker 4: in in Asian take the last two days on these
Speaker 4: kind of leak stories, but you can say going back
Speaker 4: to you can say, pre the last two days fast,
Speaker 4: the key story has must been on what you call EESIC.
Speaker 4: So these application specific integrated circus where you can say
Speaker 4: clearly this idea that if you want to run an ailgorithm,
Speaker 4: this idea to do a bit like a chat GPT
Speaker 4: where you literally take put very simplistic all the information
Speaker 4: in the world and try.
Speaker 3: To run an algorithm on it.
Speaker 4: It is very energy intense and probably for a lot
Speaker 4: of industrial applications on that is probably not optimal and
Speaker 4: what you do so see a lot more of these
Speaker 4: kind of very application specific design and we actually think
Speaker 4: that the run rate there where it's at application devices
Speaker 4: or you can say what goes into the data centers,
Speaker 4: we still think there's a quite good long growth rate
Speaker 4: there and we definitely see a couple of key companies
Speaker 4: in Asia being very well positioned to.
Speaker 3: Deal with that.
Speaker 4: So you can say in a way we definitely still
Speaker 4: feel an un selected basis that we can add a
Speaker 4: capital there and feel that we're really buying into a
Speaker 4: quite attractive valuation relative to the expected growth level. And
Speaker 4: again we are still buying companies that are generating very
Speaker 4: high returnal bastic capital and even a number of them,
Speaker 4: even though are still in that growth mode, are still
Speaker 4: able to pay out actually quite handsome dividend and they
Speaker 4: run with a very clean balance sheet. So again in
Speaker 4: an em context, if you kind of do like a
Speaker 4: three dimensional structure between the turn on basic capital, sharing
Speaker 4: that total turn capital and then also still have a
Speaker 4: strong balance sheet, a lot of these Taiwanese companies they
Speaker 4: are really tacking the box there and do come out
Speaker 4: as some of the best allocators of capital at the
Speaker 4: same time as they can run extreme clean balance sheet.
Speaker 4: So that is clearly also what we are attracted to,
Speaker 4: and we believe they can keep doing that in the
Speaker 4: foreseable future. As I say, we still believe we're in
Speaker 4: a pretty big structural op trend. From a technology perspective,
Speaker 4: We still think the way the world will look like
Speaker 4: five years from now in terms of aidops in data center,
Speaker 4: faster connectivity, etc. There is a long runway there, and
Speaker 4: we do actually this time around, we're not claiming for
Speaker 4: a second that you still not have some of the
Speaker 4: leading companies in the form of the likes of Nvidia
Speaker 4: or the software side, the big kind of the superscalar
Speaker 4: companies in US. But when it comes to that IC
Speaker 4: design manufacturing side, a key component side, this time around,
Speaker 4: we actually believe that a number of these Asian companies
Speaker 4: actually have a very key role to play and they
Speaker 4: are clearly shifting to that you can say you as
Speaker 4: supply chain side, and we think it will give them
Speaker 4: a very good lift in the years to come. So
Speaker 4: for that reason, we do actually remain quity upbeat going
Speaker 4: into twenty twenty five, and we acknowledge that maybe first
Speaker 4: half is a little bit on the soft side, at
Speaker 4: least for a few selected names, but we are probably
Speaker 4: already now seeing that the second half should be pretty
Speaker 4: pretty okay and going into twenty twenty six. The interesting
Speaker 4: thing about some of this ESSEIC or some of these
Speaker 4: design project is that you actually have some form of
Speaker 4: visibility because you can say the manufacturing capacity with the
Speaker 4: likes of TSMC, in particular their cod capacity for advanced
Speaker 4: packaging that is very very tight, so you literally need
Speaker 4: to book your capacity way ahead. And again we've seen
Speaker 4: the likes of of Amazon literally already having booked a
Speaker 4: project with al Chip for their data center chips with
Speaker 4: the YEA I have tape out in twenty twenty six,
Speaker 4: so we do actually have some pretty decent visibility for
Speaker 4: a number of companies. So when we look the next
Speaker 4: two years ahead, we actually think that not saying we
Speaker 4: cannot get a little bit of disappointment quarter here and there,
Speaker 4: but we think the structural trend is actually pretty compelling
Speaker 4: and giving. We had quite a bit sell off in
Speaker 4: takeover the summer, and I think it was also one
Speaker 4: of the months here in the later half of the
Speaker 4: year we also saw a bit of weakness. Valuation level
Speaker 4: still pretty pretty fair and attractive, so it's not like
Speaker 4: this is super high valuation. So I still think that
Speaker 4: valuation versus growth is pretty compelling, for particular the Taiwanese cases.
Speaker 4: Korea is also very very cheap, but I guess the
Speaker 4: issue of course with Korea is you are often getting
Speaker 4: a bit cheated by that. You can say that the
Speaker 4: sechnicality in the market that is for memory or is
Speaker 4: some of the equipment makers, and they are not totally
Speaker 4: a bit more signical. And then of course you have
Speaker 4: to bear the governance risk, and of course lately we
Speaker 4: could even add the political risk. Even when that is said,
Speaker 4: I think that in a way and in a rational way,
Speaker 4: the TIC sector has not been reacting particular as significant
Speaker 4: to all the political noise in Korea, which I actually
Speaker 4: also think is correct. I think that there will not
Speaker 4: be big changes in their outlog or operational environment, giving
Speaker 4: what's happening on the political scene. But yeah, of course
Speaker 4: on the margin, is not helpful that you have all
Speaker 4: this noise going on in Korea.
Speaker 1: Well, this is great. We are unfortunately running out of time.
Speaker 1: But Jerry, thank you so much for joining us today.
Speaker 3: Thank you very much for having me.
Speaker 1: And Marvin, thank you for being my ghost today.
Speaker 2: Thank you, thank you, Jory.
Speaker 1: Until our next SEP episode, This is David Khane with
Speaker 1: Inside Active