MOBIUS ON CHANGING PARADIGMS OF INVESTING AND AVOIDING DIGITALLY DISRUPTIVE FIRMS
Mark Mobius and the Templeton Emerging Markets Group, an asset manager, made their largest investments in Sri Lanka during the years after the war ended. At their peak, Templeton had $800 million in government bonds, much of which, it held to maturity. By this time Mobius had burnished his reputation for his emerging and frontier markets investing, having led Templeton, which at its peak managed over $50 billion in emerging markets portfolios. Although they invested in Sri Lanka’s government debt, most of Templeton’s investments were in private companies.
Mobius admits that digitally disruptive companies have transformed the investment landscape. Now, these digital companies are driving growth in Asia. While he recognises their disruptive power, Mobius has largely steered clear of these growth companies that are often loss-making. He now leads Mobius Capital Partners and was invited to Sri Lanka by John Keells Propoerties recently. During an interview, Mobuis discussed the economic outlook and what it would take for funds he manages to be invested in Sri Lankan companies.
Excerpts from the interview:
I have many questions about what you’re doing right now. We’ll start with how the global economy is poised; there’s potentially a great opportunity in fixed income in emerging markets now? What are your views?
Mobius: Now particularly, because you have interest rates in the developed countries going into negative territory. Europe is negative, and America is heading down. Trump wants to be negative. So everybody’s looking for yield, which is one of the reasons why when I’m buying companies, I look at the dividend yield. So I think there’s an excellent opportunity to see yield appreciation from emerging markets.
U.S. politics have always been important for figuring where global interest rates will go. Do you think the political economy around the upcoming U.S. presidential election will be even more critical than those in the past?
Mobius: Definitely, it’s important because I believe that if Trump does not win, the U.S. economy will not do well, and that will impact global growth. Employment figures have been very good, and the U.S. is in a sweet spot. Any change in that will affects the rest of the world.
Are not the global trade tensions between the U.S. and China, a high risk for emerging markets and the world economy?
Mobius: I agree, but what I see is that people are very flexible. I’ll give you an example. I know one of the largest baseball cap manufacturers in the world. It’s run by a woman in China. Recently she moved her manufacturing to Bangladesh. China may be a loser, but Bangladesh benefits. What Trump is trying to force the Chinese to do is what they have to do anyway. China has got to move up the value scale, so I really am not too worried about this situation.
I have a new book coming out about inflation, in which I argue that inflation is a myth. Because productivity is going up so rapidly, the prices of things in real terms are going down. It’s true! People say, ‘there’s inflation, the price of chickens is going up,’. I say yes, but your wages are also going up. You have to weigh one against the other. We’re in a new era, and that’s why I started to advise people to hold at least 10% of your portfolio in gold because nobody knows what the money supply is. The US dollar is being printed, so is the Japanese yen printed at a crazy rate. As a result, all these currencies are being devalued. Take Bitcoin, for example. How do you value it? A coin is based on what you can buy with it, but this value can change.
The volatility is quite incredible. At the same time, what is blockchain? People are telling me that it is absolutely safe; it can never be violated. But I don’t believe that. I think it can be violated, and it must be possible because man created it. There must be a way to get into the chain to interrupt it. So much of this is big data and faith. People just say, ‘I believe that this is good, I’m going to invest in it’, so people are investing in Bitcoin, and all these other similar currencies. It’s a matter of faith at the end of the day.
You’ve been a contrarian all along. This must be a great time to be one?
Mobius: Well, you have to be careful because you can be a contrarian but be wrong. Just take this for example; my principle is to invest in companies that make money. That may not be a good idea, because you see all these other companies that are making high share price gains and I’m not making any money on that at all. We’re in a challenging and different environment for investors. We’re in a new investment paradigm.
You mentioned that your new book busts some myths about inflation. Your previous book, called Invest For Good, focused on sustainable investing. Is this also about investing in companies that make money?
Mobius: Not really, it’s more a reflection of a trend in investing. ESG, which is what the book is focused on, stands for environment, social and governance. When we started investing way back in 1987, we had to look at these factors because they were risks. You’ve got to understand and control risk. You’ve got to make sure that the company is not doing something that is illegal or harmful to the environment or treats workers poorly. You’ve got to make sure that they have an independent board of directors because if not, it’s a risk. Now, these are more formalised, in my view, mainly due to the increase in communication, more disclosure, and because environmental awareness is higher now. Global warming has become a very central issue. Big investors are looking at this very carefully because we’ve got to pay attention to what our clients are telling us.
You are trying to apply ESG in emerging and frontier markets. Surely that expectation must be more challenging in frontier markets than it is on Europe, for instance?
Mobius: Interestingly enough, we found a lot of receptivity on the part of these companies in emerging markets for two reasons. First, they realise that we’re pointing out to them certain risk factors that could hurt them. Second, their share price will probably perform better. And of course, research has shown that the stock price performs better at high ESG scoring companies.
How do companies in frontier markets respond to your hands-on approach as an investor?
Mobius: I’ll admit, some of them don’t like it. And those are the ones that we have to avoid. A colleague from Mumbai recently and one of my colleagues, who is in the fund management and also active in getting corporate governance changes, told me of a time he was meeting with a managing director, suggesting changes, including having independent board directors. While he was talking, the man picked up the phone and made a call. A few moments later, a security officer came into the room. The MD said, ‘Get this man out of my office!’ This sometimes is the reaction you get. We’re taking a small percentage in a company, so the company has to be receptive. The first thing we try to ascertain is, is the company willing to listen to us, not only for their benefit but for mutual benefit. Maybe one out of ten companies would make sense for us.
Corporate governance, social responsibility and environment, which of those are the toughest ones to fulfil for a company?
Mobius: Corporate governance is the first focus. If you can solve that, then you can begin to address some of the other problems. For example, one of the things we look at is board composition. How many independent board directors are there? Are there any women on the board, who bring perspectives that a man cannot? Another aspect I look at is the people behind the company. How is it being run, and who runs it? For family businesses you’ve got to see what kind of succession planning they have, because a lot of times the second or third generation is not interested in the business.
Have you looked at Sri Lankan companies to see if any can potentially fit your remit here?
Mobius: Yes, we’ve talked to a few, and John Keells is one. But we haven’t begun the engagement yet because one of the significant challenges we have is liquidity. We’ve got to have more liquidity in this market to be able to invest. That’s why I’m recommending to the government that they introduce state-owned enterprises to the market.
Where do you think the big opportunities are in frontier markets?
Mobius: Three factors are most important, starting with liquidity. The second is foreign exchange control. We want to be able to get money in and out whenever we want to. The third is the currency. Where’s the currency going? It doesn’t mean we will not invest if the currency is weakening because some companies will benefit from a weak currency. Taking these into account, Korea, Taiwan, China, Philippines, Vietnam, Thailand, Malaysia, Singapore, Indonesia, India and Sri Lanka, are more or less in that category where we can invest.
Do you have a specific view on Sri Lanka based on those three factors, particularly the currency factor?
Mobius: I think we’re pretty much over the big devaluation of the currency. Looking forward, it’s about the implementation of reforms. The currency will probably stabilise, there may be a weakness but not that much because you see inflows into the country. Market liquidity is a big problem. In terms of governance, we can engage here pretty easily. People are willing to talk. I think a lot of it has to do with the culture of people. They may not necessarily act, but then at least they are willing to talk.
Once you overcome the essential hygiene factors about the market like good corporate governance and company managers who are willing to engage, Sri Lankan stocks appear cheap. But is that an illusion for somebody like you? Does that even matter?
Mobius: It definitely matters. But you must remember this, the market looks forward. And up to now, the prospects of the Sri Lankan economy were not good. People expected flat earnings or even an earnings decline. They were unwilling to raise the valuation, the PE level. That should change. We will begin to see the market pick up on the back of the planned reforms, but I think the market is waiting to see how the implementation goes. They’re looking forward, but they’re going to be reacting as the implementation progresses, and then you’ll see a pickup.
When you are readying to make a decision based on a re- rating of valuations in a market, what are the leading signals you look for?
Mobius: We look at the macro factors. Firstly, taxation is very important. The tax reform is very important. Ease of entry and exit and ease of travel are essential. These are very important factors. Once that’s out of the way then we can begin to look at individual companies, and ask, are they going to be able to benefit from the reforms taking place? On ground research is very important.
When you look at how Sri Lanka is poised, do you wish you sometimes had a fixed income mandate also to work with here?
Mobius: Right now, it could be very interesting. Not just here, but in other parts of the world too.
Can I ask you to reflect on when you were investing in Sri Lankan government bonds as the manager of the Templeton Emerging Markets Group?
Mobius: It was a very good investment; it worked out very well. We held it to maturity, and it paid back.