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Emerging Market Exposure Through Developed Market Exchanges - Jonathan P. Brodsky And Drew Edwards - Advisory Research, Inc.

67 WALL STREET, New York - February 14, 2012 - The Wall Street Transcript has just published its International Investing and Other Investing Strategies Report offering a timely review of market trends for serious investors and industry executives. This International Investing and Other Investing Strategies Report contains expert industry commentary through in-depth interviews with Money Managers. The full issue is available by calling (212) 952-7433 or via The Wall Street Transcript Online.

Topics covered: Latin American Strategy - Exposure to Emerging Markets - Asia Pacific Investment - MLPs

Companies include: Targa (NGLS); Adidas (ADS.DE); Altria (MO); Asian Paints (ASIANPAIN.NS) and many more.

In the following brief excerpt from the International Investing and Other Investing Strategies Report, interviewees discuss their portfolio focus, and market outlook.

Jonathan P. Brodsky is a Portfolio Manager for Advisory Research, Inc., and has 13 years of investment experience. Before joining Advisory Research, he served a nonpolitical appointment in the U.S. Securities and Exchange Commission's Office of International Affairs. Mr. Brodsky began his career in finance as an Investment Banker for J.P. Morgan Securities, Inc. He holds a B.A. in political science and an M.A. in international relations from Syracuse University and an MBA and a law degree from Northwestern University. Drew Edwards is a Portfolio Manager for Advisory Research, Inc., and has 13 years of investment experience. Before joining Research, he was an investment professional at Taiyo Pacific Partners LP, an activist fund backed by CalPERS and WL Ross & Co. that focuses on Japanese equities. Previous to Taiyo, Mr. Edwards worked as an Investment Banker at Lehman Brothers and as a Finance Executive in the health care industry. He holds a B.A. in international business from Sophia University, Tokyo, and an MBA and a law degree from Northwestern University.

TWST: What are some examples of your top investment picks?

Mr. Edwards: I'll highlight two Japanese paint-related companies that I think are indicative of the attractive emerging-market-oriented opportunities that we see. Tokyo-listed Kansai Paint (TYO:4613) is Japan's number one or number two paint manufacturer based upon market share. The company has generated impressive growth in emerging markets, which now account for over half of the company's earnings. Kansai Paint's publicly listed Indian subsidiary, Kansai Nerolac (KANSAINER.NS), dominates India's automotive paint market with over 50% market share.

This business is growing rapidly along with India's domestic auto sector. More recently, Kansai Paint made a hostile acquisition of a South Africa-listed paint manufacturer called Freeworld. Kansai Paint is growing rapidly primarily due to emerging markets exposure, but yet when you compare the valuation of this company to its emerging market equivalents, the valuation is far more attractive. For example, if you compare Kansai Paint to Asian Paints (ASIANPAIN.NS), which is India's leading paint producer, Asian Paints trades at over 10 times price to book, in excess of 30 times p/e, while Kansai Paint trades at about one times price to book and 13 times p/e. Kansai Paint's balance sheet is stronger and generates a slightly higher dividend yield than Asian Paints.

Chugoku Marine Paints (TYO:4617) is another Japanese paint manufacturer that is highly geared towards emerging markets. The company is a global leading producer of paint used in ship construction and maintenance - industries that are increasingly moving to the emerging Asian markets, where Chugoku appears to be particularly well positioned. Chugoku is also a leading manufacturer of industrial paints used on shipping containers, which are almost 100% manufactured in China. Chugoku's Chinese sales have been growing rapidly - 53% last year -and account for a third of the company's total revenue. Despite the company attractive business model and growth prospects, Chugoku trades at a very attractive valuation, a p/e of around six times, price to book of around 0.7 times versus a stable 11% to 13% ROE.

Mr. Brodsky: Another interesting example is Banco Latinamericano de Comercio Exterior (BLX). It's a Panamanian trade finance bank listed on the NYSE. BLX has positioned itself as a provider of financing between commodity producers in South America and commodity importers in Asia.

So this is an example of a company that's geared toward increased trade in emerging markets. It was originally founded by the governments of Central and South America as a trade finance platform, and those governments still own a meaningful stake of the company, but they do not play a role in its day-to-day activities. We think BLX is a well-run bank with strong growth opportunities in front of it. It appears to be well capitalized and under current market conditions having excess capital is unique. We believe that despite the attractive profile of BLX, it trades at reasonable multiples. It currently trades below book value, with a p/e below 10 times and a recently announced increase in its dividend which puts its current end around 5%. Over the next few years, BLX should be able to more efficiently put its capital to work to generate higher returns.

Another company I would mention that fits the criteria of an emerging market company listed on the developed markets is Yue Yuen (0551.HK). Yue Yuen is one of the largest manufactureof for Nike (NKE), Adidas (ADS.DE)and all the large athletic manufacturers - primarily European, U.S. and Japanese brands. It is a Taiwanese company, but it's listed in Hong Kong. All of its manufacturing facilities are located in the emerging markets. Most of the sales of its end clients are still in the developed markets, but the increasing role of emerging markets for firms like Nike and Adidas is increasing rapidly. In addition, the company a stake inthan 8,000 retail outlets in mainland China, where it sells a range of branded products. An important aspect of the investment case is increasing demand in emerging markets, as well as the limited penetration that emerging market brands have made vis-a-vis the large global brands that have been in place for a number of years.

So we think that there is an attractive growth opportunity for the company, although Yue Yuen does not appear to be priced for such growth. It trades around 10 times earnings, has a dividend yield of nearly 4% and trades at a modest premium to book value. We feel the next few months should be particularly busy for the company, as the Olympics and European football cup near.

TWST: Having talked about what you look for in investments, on the other side of the coin if you will, what would trigger a decision to exit an investment for you?

Mr. Brodsky: Certainly price targets would be a primary reason for us to sell. In addition, if we see any kind of management activity that doesn't fit with our investment philosophy, we would be inclined to sell. We have a strict Darwinian process. We run relatively concentrated portfolios, so oftentimes when we're buying something, we're also selling a company at the same time.

TWST: Very broadly speaking, why and how should investors approach including emerging markets in their overall investment portfolios? What advice would you offer?

The Wall Street Transcript is a unique service for investors and industry researchers - providing fresh commentary and insight through verbatim interviews with Money Managers. This International Investing and Other Investing Strategies Report is available by calling (212) 952-7433 or via The Wall Street Transcript Online.

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