Looking For Value In Unconventional Places

Courtesy of Emerging Frontiers, a look at an international value investor focused on emerging markets:

Chris Mayer is an international value investor with decades of experience under his belt as a corporate banker. Seeking riches among the ruins, Chris has traveled the world in search of value, often in under-appreciated sectors.

Below is an excerpt from a conversation we had with Chris regarding his investment philosophy and which industries are peaking his interest today. Enjoy!

Emerging Frontiers: Chris, you have been investing outside of the US for many years, while most American’s wouldn’t consider going beyond the major American and maybe Canadian exchanges. What draws you to investing abroad?

Chris: The short answer would be that an investor today can’t really ignore the emerging markets. Even if you invest only on American and Canadian exchanges, there are pretty good odds that your investment plays into emerging markets somehow.

I wrote a book about this last year, called World Right Side Up. The main thesis is that if you look back over the long arc of history, the dominance of “the West” is a relatively recent development. I think the world we’re heading toward is one of more balance. For example, in the 1950s, the US alone made up something like half of the world’s manufacturing output and the West made up 90% of it. That’s a time long since gone and probably never to return.

Now, we’re living in a world where economic output from the developed countries is about roughly equal to the developing countries. And the latter, I think, will soon make up more than half the pie, if they don’t already.

The point of all this is that if you ignore these markets, you’re ignoring a big chunk of the world. It’s like eating from only part of the menu and ignoring the other part. There are good opportunities in that other part, too, so why not broaden the range of options before you? That’s the way I look at it. Sometimes you can find some really good stuff just because no one’s paying attention. In the US, you are competing against many bright people in what is mostly a transparent market. In emerging markets, not so much.

Besides that, I have to say, investing in emerging markets is a lot fun. You learn about the world and other cultures. You come to appreciate this big old globe of ours in ways you might not have if you just stock to your home country.

Emerging Frontiers: Certainly. The perspectives you reach from traveling to countries different than your own often results in great learning experiences. You have visited about 30 countries – and several multiple times – while writing your market letter Capital & Crisis. Which countries have you found most enticing from an investment perspective?

Chris: My knee-jerk answer today is Mongolia. The upside there is just ridiculously high. Mongolia could be one of the wealthiest countries in the world on a per capita basis in a decade. It has such a small population and such a small asset base, but the natural resource wealth is gigantic. You have an $8 billion economy or so with tens of billions of dollars of mining projects on tap. All that money funneling through such a small market is going to do crazy things to asset prices. It’s as simple as that.

Of course, the Mongolian government could screw it all up. And so far, they seem to be doing just that as they blunder through investment rules and mining negotiations and their currency tanks. But it is the most enticing still, just because of the sheer potential of the place.

Mostly, though, I tend not to think of emerging markets in this way. I don’t think about it as a top-down exercise where I sit here and say, “What market do I like best?” I think more in terms of the bottom-up. I want to know about specific companies and specific opportunities and then have a nice macro overlay. For me, it’s about being in the right vehicle as much as being in the right place. I’m an old-fashioned value investor. I don’t like to over pay. I want a margin of safety. So, I’ll go anywhere I can find value.

Emerging Frontiers: So it’s safe to say you don’t focus on just one sector; you go where there is value. So what industries are you eyeing as potential investments right now?

Chris: I like agricultural themes, including water – that latter is not just about agriculture, but farmers are often the biggest users of water in a country. The reason is that the demand picture seems like such a sure thing.

There is a lot of guesswork about how many cell phones or sneakers certain emerging markets will consume. But there is less doubt about food consumption or water use, which reliably tracks population growth and industrialization. And we know statistically that as countries get wealthier, they eat a more complex diet, more meat and processed food. This has exponential effects on the demand for basic grains.

I’m less interested in the commodity side of it – such as the fertilizer stocks. I prefer to invest in the processors and handlers. With these, you’re more dependent on volume. Plus, they own physical assets that are easier to value in terms of replacement cost.

And it so happens you can buy a few of these pretty cheap today. Noble Group is one I wrote about recently. The stock is as cheap as its been since 2008 on an earnings and asset basis. It trades for about book value, yet competitors like Wilmar and Olam trade for 30%+ over book. Historically, Noble trades for 1.6 times book.

Noble has stumbled recently and had one of the worst quarters they’ve had since 2008. But, the long-term track record of this business is phenomenal. They’ve compounded book value per share at a 20% clip since going public in 1997. That’s really a great record and today you can buy it for book.

Emerging Frontiers: Sharing an interest in the secular uptrend in the agricultural sector, how are you positioning yourself in the space?

Chris: We have a position in Alliance Grain Traders. It trades on the TSX under the ticker AGT. Alliance processes pulses. Pulses include crops such as lentils, chickpeas and beans. Processing means washing, sorting, splitting, polishing and bagging. Basically, Alliance takes the product from the farm and when they are done with it, it is ready for us in your kitchen.

Pulses have a lot going for them. They are nutrient rich and they require less water to grow. Food companies are starting to use pulses more. They mix it with regular flour to improve the nutrient density of their products, for example. Abroad, demand for pulses is rising, especially in North Africa, the Middle East and India, where they are consumed heavily. And even in China, where Alliance has a facility opening up later this year.

So, the macro is pretty good. The micro is good too. Alliance pays a nice dividend yield of nearly 5%, trades for a modest premium over book value and has put up two sizzling quarters in a row. I think it’s a solid long-term play on inevitable food trends.

I’ve visited the company’s plants in Saskatchewan and in Turkey. About 30% of the company’s assets are in Turkey, enviably located near a major port. I’ve gotten to know management pretty well. I think they are trustworthy and they own a bunch of stock, so their incentives are aligned with ours as shareholders. So, that’s one I like.

Emerging Frontiers: Willing to invest in less than popular markets, for that’s where outsized returns can be had, you have previously spoken about the African Opportunity Fund, listed on the AIM. What attracts you to the fund? Is it the ease in which it allows you to gain exposure to multiple African frontier markets?

Chris: A few things: I like the track record. Since 2008, a 20% annualized return. I like the managers; Francis Daniels and Robert Knapp are experienced investors in Africa and their own money makes up 25% of the fund. I like the process they use; they are old-fashioned Graham-and-Dodd investors, applying those timeless principles to African markets.

And I like the value you can get in Africa. The top ten names in the portfolio have an average price-earnings ratio of about seven times, pay nearly 6% and enjoy a return on equity of 21%. It’s a strong package and the best way I know of to invest in the emerging markets of Africa.

I met Francis Daniels in Johannesburg about two years ago. We’ve kept up a correspondence ever since and I usually meet him in New York at least once a year. I think he’s a thoughtful money manager and risk averse. So, I’m very comfortable with putting money here.

Emerging Frontiers: It is amazing the evolution African countries are undergoing. And unlike many believe the story is rooted in commodities, there is a powerful consumer class on the continent.

Having been a professional investor for nearly 20 years, how do you define risk? What is your investment strategy?

Chris: Risk, to me, is a word that needs an adjective. There is interest rate risk. There is commodity-pricing risk. There is market risk. There are all kinds of risks. The big goal is to limit the risk of losing money, of experiencing a permanent capital impairment. That, above all things, is what I want to avoid.

As far as my investment philosophy goes, I have an acronym I use that sums up things nicely: CODE. “C” is for cheap, as indicated by replacement cost or private market value. O is for owner-operator, I want to invest with people who have skin in the game. D is for disclosures. I prefer to invest in transparent businesses. And E is for excellent financial condition, which is self-explanatory. I must have all elements or I’m not interested.

Beyond these things, I like to think long-term and aim to hold my investments for a period of years. I’m not a trader and I have no interest in trades.

Emerging Frontiers: As Emerging Markets have taken a beating over the last quarter, do you see a light at the end of the tunnel? Are valuations beginning to peak your interest again?

Chris: Yes, valuations are interesting again. The problem is the US market. The Fed has to taper at some point, which ought to force interest rates up. If that happens, then emerging markets are going to suffer more pain, in my view. So, in some respects, I think emerging markets are vulnerable, as a generalization, and can certainly get cheaper.

Having said that, there are always pockets that will outperform. And getting the timing right on these big picture market turns is about impossible. So, I focus on the long-term trends. I focus on getting in the right vehicle at the right price, and letting it play out.

Emerging Frontiers: Chris, thank you for sharing your thoughts.

Chris: Sure, my pleasure and thanks for having me.

This entry was posted on Thursday, October 10th, 2013 at 5:39 am and is filed under Uncategorized.  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.

Focusing primarily on The New Seven Sisters - the largely state owned petroleum companies from the emerging world that have become key players in the oil & gas industry as identified by Carola Hoyos, Chief Energy Correspondent for The Financial Times - but spanning other nascent opportunities around the globe that may hold potential in the years ahead, Wildcats & Black Sheep is a place for the adventurous to contemplate & evaluate the emerging markets of tomorrow.