Emerging Market fund proposal


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Emerging Market fund proposal

  1. 1. Emerging Market Fund Manager Guy Rodwell April 2010
  2. 2. Contents <ul><li>Profile: Guy Rodwell </li></ul><ul><li>Investment strategy </li></ul><ul><li>Why an emerging market fund now? </li></ul>
  3. 3. Guy Rodwell <ul><li>British, age 38, currently based in Paris </li></ul><ul><li>16 years’ investment experience with Schroders, Edmond de Rothschild AM, Lloyd George Management, Sovereign AM </li></ul><ul><li>Managed Emerging Market, Latin American and Brazilian portfolios </li></ul><ul><li>Lived and worked in Hong Kong, London, Brazil, Argentina, Monaco and Paris </li></ul><ul><li>English mother tongue. Fluent in Spanish, Portuguese and French </li></ul>
  4. 4. Highlights <ul><li>1990-93: Cambridge University </li></ul><ul><li>1989, 90, 91: Lloyd George Management - Hong Kong / Asia Pacific </li></ul><ul><li>1993-2001: Schroders – Latin America and Europe </li></ul><ul><li>2002-03: Sovereign Asset Management – Monaco covering Asia, Latin America and US </li></ul><ul><li>2003-05: Aforge Gestion - Paris </li></ul><ul><li>2005-09: Edmond de Rothschild Asset Management – Global Emerging Markets, Brazil </li></ul>
  5. 5. Emerging market fund managed by Guy Rodwell Net performance Fund Fund Fund 3 years 1 year Year to date
  6. 6. Entrepreneurship <ul><li>2006 – Launch, marketing and management of Saint-Honoré Emerging Opportunités. Current size: €85m </li></ul><ul><li>2007 – Launch, marketing and management of Saint-Honoré Brésil. Current size: €157m </li></ul><ul><li>Numerous and varied investor presentations, interviews & client meetings in English, French, Spanish and Portuguese </li></ul>… je te remercie vivement pour ta contribution à cette prise de conscience forte du rôle des marchés émergents. En tant que fidèle client (à titres professionnel et privé) depuis de nombreux mois de Saint Honoré Emerging Opportunités, j'ai toujours suivi avec attention la gestion que tu mettais en œuvre sur cet univers complexe, hétérogène et plein de promesses… … I warmly thank you for your contribution to expanding my understanding of emerging markets. As a faithful client for many months of Saint-Honoré Emerging Opportunités (on a personal and professional basis), I have always closely followed your management of the fund in a universe that is complex, varied and full of promise… Emerging market client, 2009
  7. 7. Investment analysis – four pillars <ul><li>Franchise quality </li></ul><ul><li>Price momentum </li></ul><ul><li>Earnings momentum </li></ul><ul><li>Valuation </li></ul>
  8. 8. Observation over many years has taught us that chief losses to investors come from the purchase of low-quality securities at times of favourable business conditions. - Benjamin Graham
  9. 9. <ul><li>Good companies that appear overvalued in the short term are being priced by the market for earnings decades ahead. </li></ul><ul><li>Since these are impossible to forecast, we should understand the durability of the business model… </li></ul><ul><li>… and be ready to pay higher multiples </li></ul>Why franchise quality counts Based on study by Rob Arnott, Research Affiliates as highlighted in article &quot;Future tips from past clairvoyants&quot;, FT 10/8/09
  10. 10. Franchise quality <ul><li>Pricing power : market share, barriers to entry, tightening supply and demand, overall market growth </li></ul><ul><li>Balance sheet and returns : gearing, forex debt, cash flow, historic return on capital </li></ul><ul><li>Management quality : honesty, execution track record, openness, shareholder value, dividend policy </li></ul><ul><li>Country risk : banking system, current account deficit, fiscal deficit, currency, politics, corporate governance </li></ul>Is this a world-class business that can generate significant shareholder value?
  11. 11. Franchise quality <ul><li>Understanding the quality of the business… </li></ul><ul><li>… is vital in setting comparative valuation parameters. </li></ul><ul><li>Is this company a dog, cash cow, trailblazer or star? </li></ul>
  12. 12. Price momentum <ul><li>Trend-breaks: an early signal that the market is waking up to a new idea </li></ul><ul><li>Upward moves can be violent </li></ul><ul><li>Cross when the traffic lights turn red, not when the walk sign turns green </li></ul>
  13. 13. Those who have knowledge don't predict. Those who predict don't have knowledge. - Lao Tzu
  14. 14. <ul><li>Rising earnings estimates often drive stock prices </li></ul><ul><li>Pick stocks where estimates can increase further </li></ul>Earnings momentum
  15. 15. <ul><li>Valuation relative to sector peers and history can signal opportunities… </li></ul><ul><li>… but intrinsic value is the best guide </li></ul>Valuation – a holistic approach
  16. 16. <ul><li>Outliers can be overlooked opportunities </li></ul>Valuation vs peers
  17. 17. <ul><li>Very low value vs history either means this time it’s different… </li></ul><ul><li>… or a buying opportunity is close </li></ul>Valuation vs history
  18. 18. Valuation - intrinsic <ul><li>Does it “feel” right that a world class mobile telecom company should trade at 5x PE? </li></ul><ul><li>Can valuations over- or undershoot in the current climate? (Liquidity, risk tolerance, greed, exuberance, fear, despair) ‏ </li></ul><ul><li>If GEM country debt yields can contract further what effect will this have on discount rates? </li></ul><ul><li>Judgment and common sense count </li></ul>
  19. 19. Investment process summarised
  20. 20. Risks <ul><li>Business quality can change rapidly due to new regulations and/or entrants (Bharti, China Mobile, Redecard); the market can be merciless </li></ul><ul><li>Sometimes earnings and price momentum signals are premature </li></ul><ul><li>No magic formula, silver bullet or black box </li></ul>
  21. 21. Predicting rain doesn’t count; building arks does . - Warren Buffett
  22. 22. Conclusion <ul><li>“ Holistic” approach starting with stock specific risk control </li></ul><ul><li>Relatively low turnover and therefore transaction costs </li></ul><ul><li>Ready to go </li></ul>
  23. 23. Why an emerging markets fund? <ul><li>(For the moment) it's different – economies are healthier than ever before </li></ul><ul><li>China, &quot;South/South&quot; trade and commodities </li></ul><ul><li>Giant infrastructure needs </li></ul><ul><li>Consumption </li></ul>
  24. 24. The long term snapshot
  25. 25. Medium term winds are positive <ul><li>Explosive liquidity can lead to a massive bubble </li></ul><ul><li>In sweet spot for US recovery </li></ul><ul><li>No debt problem in core markets, unlike developed </li></ul>Emerging markets interest rates & GDP growth
  26. 26. Long term debt trends are very positive Source: Pimco
  27. 27. Risks to Emerging Markets <ul><li>Global market performance - emerging markets are still high beta </li></ul><ul><li>Chinese rates and an NPL crisis </li></ul><ul><li>US$ strength </li></ul>Market betas to MSCI World
  28. 28. Vale <ul><li>Pricing power : iron ore in short supply; world’s largest producer </li></ul><ul><li>Balance sheet : low net debt </li></ul><ul><li>Management : good management but political interference my become a threat </li></ul><ul><li>Country risk: structurally improving Brazilian macro fundamentals </li></ul>Business quality Value drivers <ul><li>China : massive infrastructure expenditure and industrialisation driving steel demand </li></ul><ul><li>Pricing: movement to spot pricing, normally at a premium to contract prices </li></ul><ul><li>Risks : government interference in investment decisions, government royalties </li></ul>Mining - Brazil 2009 2010 2011 PE 25.8 19.6 17.5 EV/EBITDA 12.3 9.7 8.8 PBV 2.4 2.2 2.0
  29. 29. Sberbank Business quality Value drivers <ul><li>Structural growth: loan/GDP only 38%, retail loans/GDP only 8% </li></ul><ul><li>Economy : recovering domestic demand should lead to better loan quality. However, a return to instability would hit banks hardest </li></ul><ul><li>Strategic plan: aimed at bolstering leadership position and raising efficiency </li></ul><ul><li>GDR listing in 2010 : should help liquidity and improve disclosure </li></ul><ul><li>Size : more than 50% of retail deposits, 31% of Russian loan market </li></ul><ul><li>Capital: capital adequacy ratio of 16.4% , an ample cushion in the event of macro instability </li></ul><ul><li>Management : generally good; has weathered economic crisis well. </li></ul><ul><li>Governance : Sberbank sometimes used as an instrument of state policy (Opel), although Central Bank ownership speeds up decision-making </li></ul>Bank - Russia 2009 2010 2011 ROE 1.5% 9.8% 20.9% PE nm 16.4 6.8 PBV 1.9 1.7 1.3
  30. 30. China Taiping Insurance Business quality Value drivers <ul><li>Growth : low life insurance penetration means can participate in a rapidly growing market. Offset in part by competitive general insurance </li></ul><ul><li>Ming An acquisition : synergies and cost-savings </li></ul><ul><li>Margins : rising agency productivity could be offset by expansion costs </li></ul><ul><li>Pension reform : well-positioned given pension licence </li></ul><ul><li>Margins : highly regulated life insurance pricing and therefore high margins for life insurers. Property & casualty high competition however </li></ul><ul><li>Life insurance is sellers’ market: scarce supply of agents & actuarial professionals, low penetration. Pension licence </li></ul><ul><li>Centralised back office and operating centres, capability of cross selling among business lines </li></ul><ul><li>Management : good </li></ul>Insurance - China 2009 2010 2011 ROE 14.8 11.6 12.9 PE 30.7 28.0 21.1 P/EmbV 2.7 2.3 1.8
  31. 31. Guy Rodwell [email_address] +33 642 12 25 04 2 avenue des Etats-Unis 78000 Versailles France
  32. 32. This presentation and the information (Information) herein represents the views and opinions of Guy Rodwell (the Author). The Information is based on publicly available sources gathered at the time of writing. The Information and views presented may change without notice. The Author has given due care and attention to the preparation of the presentation and the Information, but cannot guarantee its accuracy or completeness and accepts no responsibility for the accuracy of his sources. No steps have been taken to independently verify the Information. The Author is not obliged to make amendments or changes to this publication should errors be discovered or opinions or information change. Special attention should be given to the fact that projections can vary in both positive and negative ways and are subject to uncertainty and contingencies, many of which are outside of the control of the Author. The Information shall not be interpreted as advice on the purchase or sale of specific financial instruments. The Author bears no responsibility in any instance for loss which may result from reliance on the Information. The Author holds copyright to the Information, unless expressly indicated otherwise or this is self-evident from its nature. Express permission from the Author is required to republish the Information or to distribute or copy such information. This shall apply regardless of the purpose for which it is to be republished, copied or distributed. Transactions with financial instruments by their very nature involve high risk. Historical price changes are not necessarily an indication of future price trends. Investors are encouraged to acquire general information from the Author or other expert advisors on the nature of securities trading, investment issues, taxation, etc. in connection with securities transactions. Disclaimer