In Emerging Markets, What Scares Most Investors Entices Others

Courtesy of the New York Times, a look at Justin M. Leverenz, who runs America’s largest emerging markets mutual fund:

Justin M. Leverenz in Istanbul. Since 2009, the assets in his emerging market fund have soared to $41 billion.Jodi Hilton for The New York TimesJustin M. Leverenz in Istanbul. Since 2009, the assets in his emerging market fund have soared to $41 billion.

The day has been long for Justin M. Leverenz, who runs America’s largest emerging markets mutual fund at Oppenheimer Funds.He has been up since 4 a.m., poring over annual reports, racing through traffic to make company meetings and finally, in the soft air of an Istanbul evening, a bit of book browsing and pickle tasting in this city’s old European quarter.

Now, a glass of excellent Turkish red wine in hand, comes the day’s most challenging task: persuading a small group of hyper-secular Istanbul elites that the country will thrive under its polarizing Islamist prime minister, Recep Tayyip Erdogan.

“My rich Turkish friends don’t agree with me about this,” Mr. Leverenz said as he soaked up the old world splendor at the bar of the Pera Palace Hotel, a favorite watering hole for these very same elites. “But I really think Erdogan and the AKP party are going to win election after election.”

That is a bullish signal for Mr. Leverenz, who is looking to increase his $41 billion fund’s stake in Turkey.

After a brief panic earlier this year, many money managers have been putting cash back to work in such unpredictable markets, lured by cheap stocks and strong measures taken by local policy makers. But few are committing significant funds to Turkey, spooked by the autocratic tendencies of Mr. Erdogan and the economy’s dependence on volatile investment flows.

Mr. Leverenz, however, is convinced that his biggest investment successes — from Internet stocks in China and Russia, to housing finance companies in India — have sprung from his ability to ignore the passing wisdoms of the market. So he is buying Turkish stocks, convinced over the long term that Mr. Erdogan’s radical reform ambitions will transform Turkey.

It is part of Mr. Leverenz’s broader credo that emerging nations like China, Brazil, Russia and especially India after the victory of Hindu party leader Narendra Modi — are experiencing economic and social change that won’t be reversed.

“I truly believe that these countries are in a period of significant progress,” said Mr. Leverenz. “It will be dynamic, chaotic even, but the developed world really needs to watch its back.”

Such sweeping optimism — or cheerleading as some would have it — has been a central tenet of the decade-long boom in emerging markets. Assets of emerging market equity funds in the United States exploded to $388 billion now, from $89 billion in 2008, according to Thomson Reuters.

One such surging fund is Mr. Leverenz’s developing markets fund. Since 2009, assets have soared to $41 billion, from a low of $3.9 billion, making it among the largest actively managed international equity funds.

“It’s pretty unusual to see a fund grow like that,” said Karin Anderson, an analyst at the fund tracking company Morningstar.

Since 2010, Mr. Leverenz’s fund is up 27 percent, outpacing more than 90 percent of his peers. This year, the going has been a bit rougher. While the fund is up 2 percent, two-thirds of his peer group is faring better.

The explosion in fund assets is beginning to worry regulators, though. Investors in emerging markets tend to act like lemmings, buying — and more dangerously selling — the same stocks in the same countries, creating distortions as funds become too large for the markets they are investing in.

In a nod to such worries, Oppenheimer closed Mr. Leverenz’s fund to new investors last year. Even so, Mr. Leverenz’s fund can still attract as much as $600 million a month from existing investors and he says putting that money to work remains one of his biggest challenges.

Which is why he is pushing himself harder to uncover companies that both meet his exacting investment criteria and that are large enough to make a difference in his $41 billion fund.

“This is where my nervousness helps me,” he said. “Just like at a party where you can make observations about people when you are not hanging out with them, you can do the same in the stock market. You can see patterns that are emerging and then you can pounce.”

Mr. Leverenz, who turned 46 recently, does not fit the mold of the classic emerging markets guru. Unlike the pioneering emerging markets investor Mark Mobius of Templeton, he keeps out of the television studio and does not rely on a small army of analysts sprinkled around the globe. Nor is he one for transforming his globe-trotting experiences into a lofty tome, in the vein of Ruchir Sharma at Morgan Stanley.

Instead, Mr. Leverenz prefers a more understated, behind-the-scenes approach. He is slight, almost waiflike, with thinning hair, thick glasses and a soft voice that one strains to hear in conversation.

“I am not a social person,” he admits, sniffing broadly at the clubby atmospherics of emerging markets investing.

He eschews investment conferences and often ignores the quarterly earnings of his biggest holdings. Recently he walked out of a meeting with one his largest portfolio companies because the broker who arranged it had invited another investor to participate.

It is this tune-me-out discipline, Mr. Leverenz argues, that has allowed him to find the type of companies he craves: cash generators with a special edge that makes them market leaders.

Internet companies such as Baidu and Tencent in China and Magnit, the Russian retailer, fit the bill in this regard.

As political leaders like Mr. Erdogan and Mr. Modi are transforming their societies, these companies are accomplishing something similar — harnessing and monetizing change at the corporate level. Baidu, for example, runs the leading search engine in China, the world’s biggest Internet market.

Right now, he’s weighing an investment in Ulker, Turkey’s largest food company, which also exports cookies, chocolates and other food items to more than 100 countries. Like many of his portfolio companies, Ulker has a very strong brand that extends beyond its home country.

But Mr. Leverenz also has some worries that intense competition is hurting Ulker’s pricing power.

In a meeting at the company’s Istanbul headquarters, Mr. Leverenz peppered executives with queries about the company’s pricing and distribution strategies that had the three executives in the room flipping frantically through their pitch books.

Although they did not say as much, their expressions betrayed them: Aren’t big-shot portfolio managers supposed to stick to broad questions about politics and the economy and leave the nitty-gritty for the underlings?

“I really don’t have a large pool of analysts,” Mr. Leverenz explained. “I am just a one-man band.”

From the start, Mr. Leverenz has gone his own way. At the University of California, San Diego in the late 1980s, he studied Mandarin as opposed to the more fashionable Japanese. Upon graduating, he took off for Hong Kong — leaving behind his new wife and a job offer at a major investment bank.

After a successful run as a technology analyst, he joined Goldman Sachs in Asia and soon realized that while he may have a talent for analyzing companies, he had little ability to thrive among the supersize ambitions and egos of his peers.

“It was the worst experience in my life,” he said. “And I really don’t mind you saying that.”

His time at Goldman also made him realize that the more time he spent reading annual reports and the less time he spent managing professional relationships, the better off he would be. So he turned to the buy side and joined Oppenheimer in 2004.

Many of his breed like to advertise themselves as being above the fray, primed to snap up undervalued gems, à la Warren Buffett of Berkshire Hathaway. But few go as far as Mr. Leverenz.

Even when Mr. Leverenz is home in the New York suburbs with his three children, solitude calls. He keeps an apartment in SoHo where he can escape distraction and read.

During the three or four days a month he spends in his New York headquarters, he does his best to not actually be there, coming in late, staying away from the holiday party and ignoring his constantly ringing office phone.

Such eccentricities are tolerated when a fund represents close to 20 percent of a mutual fund company’s assets. Superior stock picking also helps.

“I am so proud of him — to have that kind of performance with a fund of that size is just spectacular,” says Rajeev Bhaman, a top portfolio manager at Oppenheimer who originally hired Mr. Leverenz and has served as his mentor.

Given his punishing travel and work regimen — he is on the road six months out of the year — and the challenge of repeating success with such an ungainly sum of money, it would be easy to question whether Mr. Leverenz has the necessary energy and drive to continue.

But Mr. Leverenz scoffs at the notion of moving on.

He mentions the $1 million-plus of his own money invested in his fund; the annual trips he takes to China with his children, all of whom are fluent in Mandarin; and the writers and artists that he finds and cultivates along the way.

“Everything is in equilibrium,” he said. “I can never exit this.”

This entry was posted on Saturday, June 14th, 2014 at 6:00 am and is filed under Turkey.  You can follow any responses to this entry through the RSS 2.0 feed.  Both comments and pings are currently closed. 

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Wildcats & Black Sheep is a personal interest blog dedicated to the identification and evaluation of maverick investment opportunities arising in frontier - and, what some may consider to be, “rogue” or “black sheep” - markets around the world.

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