Bank Mandiri (BMRI) Is Indonesian Emerging Markets Stock Star: International Portfolio Manager Identifies All His Top Picks

Wall Street Transcript

67 WALL STREET, New York - October 24, 2011 - The International Investing and Investing Strategies Report offers a series of interviews with successful and experienced global stock portfolio managers for serious investors. The full issue is available by calling (212) 952-7433 or via The Wall Street Transcript Online. Topics covered: Global Urbanization and Infrastructure Investing - Investing in Emerging Markets - Qualitative and Quantitative Analyses - Valuations Before Investing Companies include: BHP Billiton (BHP); Alexandria Real Estate (ARE); American Campus Communities (ACC); Apple (AAPL); Asian Paints (ASIANPAIN.NS); Bank Mandiri (BMRI.JK); Burlington Northern (BRK-A); CCR (CCR03.SA); Canadian National Railway (CNI); Coca-Cola Company (KO); Colgate-Palmolive (CL); Credicorp (BAP); Digital Realty (DLR); and many more. In the following brief excerpt, an experienced portfolio manager discusses the outlook for selected international stocks. Lewis Kaufman, CFA, is a Managing Director and Portfolio Manager of the Thornburg Developing World Fund and Co-Manager of the Thornburg International ADR portfolio. He joined Thornburg Investment Management, Inc., in 2005 as an Associate Portfolio Manager. In 2006, he was promoted to Co-Portfolio Manager for the ADR portfolio and named Managing Director. Before joining Thornburg, Mr. Kaufman held various investment-related positions at Morgan Stanley (MS) and Citigroup ©. He holds an MBA from Duke University's Fuqua School of Business and graduated cum laude from Colgate University with a B.A. in English. TWST: What is your investment philosophy specifically as it relates to the Developing World Fund? Mr. Kaufman: Like most emerging markets funds, we are focused on long-term capital appreciation in an emerging markets context, but where we feel we differentiate ourselves a little bit is through an additional focus on risk-adjusted returns. I don't want to suggest in any way that the Thornburg Developing World Fund is a low-risk strategy. It's not, but we are focused on achieving good returns for the level of risk that we're taking. Let me describe a little bit how we try to do that. The first way is through a focus on financially sound, free-cash-flow-generative companies with business models not predicated on leverage. Why is that important? A few different reasons. First, volatility tends to be more pronounced in emerging markets. Certainly we've seen that recently, and if you have business models that are going to have to tap the capital markets during a period of duress, bad things can happen to shareholders. Let's say you have a company with a capital budget based on a certain level of cash generation and the fundamental outlook deteriorates for that company. It may be that they need to issue equity capital at a very low price and that they dilute shareholders on a per share basis. When you look at U.S. banks at the center 2008 global financial crisis period that trade for $5 versus previous highs of, say $50 or $60, that primarily reflects them having to issue equity at very unattractive prices because the business needed capital at exactly the wrong time. That is precisely the type of situation that we like to avoid. We like to focus on businesses that are going to generate capital in a way where they're not going to have to tap the equity capital markets in a period of duress. Second, if you have a debt-driven business, oftentimes you can borrow say at 7%, 8% in Mexican peso and you can borrow at 5% in the dollar bond market. If you are a Mexican company and you have a peso-denominated revenue stream and you incur liabilities in U.S. dollars, that's all fine and well until your currency depreciates - and in fact, that's exactly what's happened not only for some Mexican corporates but broadly across emerging markets. We've had perhaps on average a 15% to 20% decline in most major emerging markets currencies from the recent highs. And so if you're a company with a local revenue stream and U.S.-dollar-denominated borrowings, your interest payments just got 15% to 20% more expensive, and that again is a situation we would like to avoid. Finally, cost of funding. You might be a company that's dependent on tapping the debt capital markets every six months, every year, and that works well until it doesn't work well. Maybe you're accustomed to issuing debt at 5%, 6%, 7%. And if the market gets risk averse in general, it's going to get all the more risk averse about companies in the emerging markets and the rate that you pay might be prohibitive. Let me just give you a few examples of companies we prefer. We own four banks in the Developing World Fund at present: Sberbank (SBER03.ME), the largest bank in Russia; Garanti (GARAN.IST), we believe the best privately managed bank in Turkey; Credicorp (BAP), perhaps the best bank in Peru; and Bank Mandiri (BMRI.JK) in Indonesia. These four banks on average have assets to equity, which is a crude measure of financial leverage, of about 10 times. Much has been made about the crisis of confidence in European banking. One of the reasons is that European banks on average in general are levered about 25:1, so that's a pretty big disparity in leverage. Another real focus point in the debate about European banks has been funding. Most European banks have loan-to-deposit ratios of perhaps 120%. That is a crude way of measuring a bank's dependence on wholesale funding, and wholesale funding is less sticky, less robust particularly during periods of duress like we're experiencing now. The four banks that I mentioned have a loan-to-deposit ratio on average of maybe 80% or so, and so they're far less dependent on wholesale funding. You look at those measures of capitalization and those measures of liquidity that I just described, and they are far more attractive for the emerging markets banks in general. What does that all mean? The four banks that I mentioned are generally growing book value about 20% a year. They're doing that with lower levels of leverage, and they're doing that in a sustainable and durable way. The European banks really don't have the same consolidated market share position. In other words, there's a lot more fragmentation, a lot more competition, so in order to achieve double-digit returns on equity, they're having to lever themselves up to drive the return on equity for shareholders. And so when bad things happen, those banks are far less well capitalized to absorb that. Our emerging markets banks may experience share price volatility, but we don't expect them to issue equity. That's really the pond that we want to swim in. TWST: In which geographic areas do you see the best developing market investment opportunities, and what are the catalysts creating opportunities in those areas? The Wall Street Transcript is a unique service for investors and industry researchers - providing fresh commentary and insight through verbatim interviews with CEOs and research analysts. This special issue is available by calling (212) 952-7433 or via The Wall Street Transcript Online . The Wall Street Transcript does not endorse the views of any interviewees nor does it make stock recommendations. For Information on subscribing to The Wall Street Transcript, please call 800/246-7673

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