Don't expect Jonathan Asante, joint deputy head of global emerging markets at First State Investments to bombard you with a spate of charts and figures on why you should invest in his fund - or emerging markets generally. For one he prefers to talk about people, not numbers. And, equally importantly, when it comes to investing in this volatile sector, paperwork and figures often don't count for much.
It's risky
"You can't count on the IPO [initial public offering] prospectus or company accounts to give you a true reflection of what is really going on when investing in companies in emerging markets. I can give you countless examples of where the paperwork only told a fraction of the true story," says Mr Asante, illustrating his point with a story of a company whose own accountant said the business was "not a going concern." Another, more disturbing account, he mentions, is that of a pharmaceutical company which provided drugs that led to a number of deaths.
These, rest assured, are not the type of companies, Mr Asante and the First State team of investors, based in Edinburgh, Singapore and Hong Kong, invest in. But these horror stories do stand as testament to the risk that comes with investing in emerging markets.
"It is extremely risky and you won't be protected if things go wrong. Political risk is ever present, while any development in these countries can give way to social risk - the divide between rich and poor can be dynamite. But for us, the biggest risk by far is owning the wrong company. The tide goes in and out a lot in emerging markets. If the tide goes out and you're caught owning the wrong company, you will lose, and end up selling at the bottom of the market. If you own the right company - you buy more," says Mr Asante.
A lot of effort goes into ensuring they buy the right company, not least because the investment team at First State has a vested interest in the funds doing well. "We eat our own cooking. The majority of my net worth is invested in the funds I manage. When it's your own money, you spend a lot of time thinking about how you could lose it in emerging markets," says Mr Asante.
With company reporting and corporate governance often questionable in the emerging market space, Mr Asante and his team engage with management on a one-to-one basis focusing on a number of factors to judge the soundness of an investment, as he says: "we don't believe in bits of paper".
Mr Asante sums up the most important criteria when deciding whether a company is a buy as follows: "integrity, alignment and a proven track record, both locally and globally." Often, he says, they will back a group of people who they trust in a specific country, who will introduce them to investment opportunities in the given country with the added benefit of local knowledge.
Examples of the type of people Mr Asante likes to work with include Ratan Tata, chairman of the Tata Group. He points out that Mr Tata comes from a long line of fire-worshippers, a religion which emphasises education, goodwill and integrity. "Most of his business is in charity. In fact, one of the reasons why he has his hands on Britain steel (Tata Steel paid £6.7bn for Corus Group in 2007) is because unlike many businessmen in India, he refuses to bribe people," says Mr Asante.
The people you deal with in emerging markets are important, and other individuals he singles out include Lee Shaukee, chairman of Hong Kong & China Gas, who is building a huge gas business in China - coinciding with the country's pledge for cleaner energy and Mark Cutifani, chief executive of Anglogold Ashanti, who has greatly improved safety in South African mines. "It is much easier for us to assess a company on its integrity than from fancy pictures. How it treats its workers and environment is usually a good indication of how it will treat its shareholders," says Mr Asante. "We are sceptical of accounts at all times and therefore focus on people, integrity and alignment as the key indicators of business risk and quality."
| JONATHAN ASANTE CV |
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Jonathan Asante joined First State Investments as senior analyst in November 2004 and in August 2006 was appointed joint deputy head of global emerging markets. His primary area of research is non-Asian emerging markets and he acts in the capacity of lead portfolio manager for a number of portfolios, including the top-quartile First State Global Emerging Markets Fund. Mr Asante joined from Framlington where he was global emerging markets fund manager and group economist. Prior to joining Framlington in 1995, he was employed by NatWest Group where he was an assistant researcher, analysing the UK economy and UK credit markets. Previous to this Jonathan taught at the London School of Economics while doing postgraduate research. |
On big brands and China
Turkish American businessman, Muhtar Kent, chief executive and president of the Coca-cola Company, is another individual Mr Asante works closely with. He also likes to buy companies with strong brands such as Coca-cola.
"Good brand owners - Walmart, Nike, Procter and Gamble, and Schlumberger - are already benefiting from the emerging market growth story," he says.
Breaking it down into countries, Mr Asante is less keen on China, saying that while it did offer diversification 10 years ago, it has now become a big part of the world - and emerging markets in turn, a big part of China. He is also struggling to find attractive valuations in the country at present. "Valuation matters. I hate owning fashionable, over-valued stocks, and that is why I find it difficult to hold stocks in China.
"Why would I buy a noodles company in China on a price-to-earnings (PE) ratio of 30, when I can buy Coke, a recognised brand with a loyal following, at a PE of 15?"
Mr Asante's view is that the BRIC (Brazil, Russia, India, China) countries on the whole, are too expensive, and consequently he has moved his funds away from this region. "Even if it is good quality, I don't like holding expensive stocks."
Mr Asante says he expects the argument that the emerging market banks were left "unscathed by the credit crunch" is the reason why the BRIC region remains so popular. But, he strongly rejects this this view.
"Brazil had a merger between its two largest private sector banks, the banking sector in Russia fell to piece, while China was held up by virtue of the fact that its banks are owned by the government," he says.
Countries that do have an interesting proposition at the moment include Thailand, which Mr Asante says was unique alongside Israel, in not getting involved in the credit binge, with stocks here cheap. "If they can get themselves together politically - things could go somewhere."
He views Vietnam as an interesting way to diversify away from China. "The country has given stock to managers of state-owned companies, which now operate very much like the private sector. We are very interested in these companies. It is important to us that managers are given the ability to affect your destiny as a shareholder."
