Wall Street Transcript Interview with Lou Gerken of Gerken Capital Associates: Emerging Markets Investment Overview, Where Do You Invest Today?

Wall Street Transcript

67 WALL STREET, New York - August 24, 2012 - The Wall Street Transcript has just published its Investing in Emerging Markets Report offering a timely review for investors. This special feature contains expert industry commentary through in-depth interviews with public company CEOs, Equity Analysts and Money Managers. The full issue is available by calling (212) 952-7433 or via The Wall Street Transcript Online.

Topics covered: Investing in Emerging Markets - Investing in China - Natural Resources - Emerging Middle Class

Companies include: Mongolia Energy Corporation Limited (0276.HK), Wal-Mart Stores Inc. (WMT), Disney (DIS), and many others.

In the following excerpt from the Investing in Emerging Markets Report, expert asset manager Lou Gerkin picks the up and coming emerging markets:

TWST: In terms of approaching emerging markets investments, how would you describe your overall strategy and philosophy?

Mr. Gerken: The key drivers are those that shape our top-down macro views, and then those that relate to our bottom-up assessment of how we pick specific investment ideas at the micro level and go about our investment processes. The top-down, long-term view is very positive, but the challenge is to navigate through the near and intermediate terms, where we are very concerned. As such we need to adapt with the appropriate asset mix to match the prevailing investment climate.

We have been quite positive about the emerging markets since the year 2000, which we felt was the inflection point for an alignment of the stars for the emerging markets. In the 1970s, 1980s and 1990s you could have done well in the emerging markets, but you regrettably gave most of it back just because of the inherent volatility. But I think around 2000 there was a secular change reflecting the infrastructure buildup and the fundamental positive underpinnings at the macro level for the emerging markets. A piece of anecdotal evidence was Wal-Mart (WMT), for example, which had no operations in China prior to 2000. In a relatively short period, just one decade, China is now the leading source of inventory for Wal-Mart's international operations. When you have the arrival of multinationals and significant investment by these corporations in the emerging markets as defined by FDI, foreign direct investment, and that builds year by year in a very significant manner, that is a very positive development. So that's something that we watch closely.

As we in 2000 felt comfortable about building a significant footprint in the emerging markets as defined back then by the BRICs, in the last couple of years we have become very comfortable with making investment commitments to the frontier markets, specifically sub-Saharan Africa; the MENA region, which is Middle East and North Africa; Southeast Asia; and areas like Mongolia. So we have a significant allocation as well to the frontier markets as part of the overall emerging markets footprint.

Bottom up, I think what separates our view towards investments/ideas is that we believe in taking a very active approach towards managing the assets. We sit on the board or the advisory board of every fund or company that we invest in. We typically are only involved with on-the-ground, locally managed funds or companies, so we're not investing in the emerging markets or frontier markets via London or New York. We also like to invest in companies that are 100% independent rather than a fund that's 50% owned by a bank, and the reason for that is that is to assure the integrity of our investment decision so that it's not compromised by other interests.

At present, our view about the emerging markets is interest in the SME-sized sector, the small to midsize enterprise. We're not proponents of early stage venture capital; we're not proponents of large cap, but rather the SME space. That's where, in fact, the preponderance of exits have occurred over the last five years and where we think they will continue to occur over the prevailing investment climate, meaning the next three to five years. And in fact that's what, for the most part, is the key economic driver for many of the emerging markets - the small to midsized space, and certainly the key driver for export growth for many of the emerging markets.

China alone has more than 43 million registered small to midsized enterprises, as defined as companies with less than 1,500 employees, which in the U.S. would qualify as a large company. So the SME space is something that we're keen on, and the strategies we look at are those that are more geared toward growth and expansion, distressed, mezzanine, and importantly, infrastructure. I would highlight infrastructure enabling rather than traditional infrastructure, meaning companies that, if you will, sell the picks and shovels to infrastructure projects rather than companies that are building the toll roads or the dams or the power plants.

TWST: Would you give us a few examples of current investment ideas and discuss how they exemplify what you look for in a particular company or how they fit into a broader investment theme?

For more from this interview and many others visit the Wall Street Transcript - a unique service for investors and industry researchers - providing fresh commentary and insight through verbatim interviews with CEOs, portfolio managers, and research analysts. This special issue is available by calling (212) 952-7433 or via The Wall Street Transcript Online.

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