Animal Spirits Podcast - Talk Your Book: Emerging Market Fundamentals

Starting point is 00:00:00 Today's Animal Spirits Talk Your Book is brought to you by Schaefer Cullen Capital Management. Go to cullenfunds.com to learn more about their emerging markets, high dividend fund. That's cullenfunds.com. Welcome to Animal Spirits, a show about markets, life, and investing. Join Michael Batnik and Ben Carlson as they talk about what they're reading, writing, and watching. All opinions expressed by Michael and Ben are solely their own opinion and do not reflect the opinion of Riddholz wealth management. This podcast is for informational purposes only and should not be relied upon for any investment decisions. Clients of Ridholt's wealth management may maintain positions in the securities discussed in this podcast.

Starting point is 00:00:42 Welcome to Animal Spurts with Michael and Ben. On today's show, we are covering emerging markets. A lot of people are looking at like investing now and they're saying, I can't invest now with the market at all time highs. And I guess I want to say a lot of people, who's the source? You know the meme? I made it up. Me. Many people are, you're right.

Starting point is 00:01:05 Many people are saying this. The stock market is overvalued and where am I supposed to put my money. Yeah, yeah. Well, there are other areas of the world that have not had nearly the same success over the last five of ten years as the mega cap stocks in the S&P 500. Emerging markets is certainly near the top of the list. So we've been talking about emerging markets being relatively cheap for a while. and they always kind of traded a discount to the U.S.,

Starting point is 00:01:29 but they've just sucked wind in terms of performance for well over a decade now. And I think I've come around to the idea. We've been talking about, like, what's the catalyst for this, right? What would cause foreign stocks for emerging market stock performance? I think it's just the dollar, which we get into this. Like, I think if the dollar were weak for a prolonged period of time, you would see emerging market stocks do really well.

Starting point is 00:01:48 Is that fair? Well, have you seen the deficit? It's common. That's true. If you're an anti-deficit, government spending, government debt, kind of thing. Emerging markets are, that's where you put your money, right? What of gold in emerging markets are the big one for the next decade? That would throw people for a loop. That was the lost decade of the first decade of the century. So, but anyway, we got

Starting point is 00:02:09 into a lot of really good stuff on India and China and the opportunity set in emerging markets and the crazy high dividend yields that you can get there, too, which are way higher than United States. So we talked to Raoul Sharma, who is a portfolio manager. And he's been doing this apparently for about as long as anyone in emerging markets. He's been doing it for over 20 years. really, really sharp guy. So we learned a lot from him. Yeah, this was a good one. Excellent conversation. Here is our talk with Raul. We're joined today by Rahul Sharma. Rahul is a portfolio manager and an executive director at Schaefer, Collin Capital Management. Welcome to the show. Thanks for having me, Michael.

Starting point is 00:02:46 All right. Today we're going to be talking about emerging market equities. And maybe let's start here. So from the perspective of a U.S.-based investor, uh, thanks have not been great over the last decade. Emergent market stocks have done 3.6% a year. That's a 43% total return versus the S&P 500, which has obviously crushed it, doing 13% a year for a total return of 235%. The reasons for how we got to where we are now are very well documented, the tech trade, like we get it.

Starting point is 00:03:18 If you had to put your crystal ball on, that doesn't make sense. If you had a crystal ball, what would you guess would be, the reason why emerging markets could outperform U.S. stocks over the next decade? Well, I think, you know, emerging markets are so diverse. So there have been several emerging markets that have been doing very, very well. But everyone is just so focused on China and China has such a large weight in the emerging market index. And China has been really underperforming. And that more than anything has caused the emerging markets to underperform. But if you look at other markets like, say, Mexico or India or Indonesia or Taiwan, those markets have actually done very, very well.

Starting point is 00:04:00 And in some cases, they've actually outperform the S&P 500. And a lot of the same drivers that have driving the U.S. market, namely tech, you know, there's a lot of that at emerging markets in places like Taiwan and South Korea. You can get very good exposure to things like AI and semiconductors and that sort of thing that are also doing very, very well. Well, you know, one of the other problems has probably been the dollar. I mean, typically there's a very strong correlation for when the dollar weakens. That's usually a very good thing for emerging market stocks. And seeing that the dollar is outperformed for the last decade or so, we definitely think we're getting into a period where you might start to see kind of a reversal of that trend.

Starting point is 00:04:38 And I would expect that to be a big catalyst for, you know, all emerging markets. In the meantime, I expect those certain emerging markets to continue to do very well. And, you know, you got to watch China. You never know if China is going to improve, you know, it's a very sizable economy. They're pretty much the biggest consumer of, you know, most products globally. So, you know, while we're quite underway China, I wouldn't say that China is, say, uninvestable. I was going to ask you actually about the currency side of things here. Maybe you could explain for the audience just why it matters when the dollar is strong that emerging market stocks tend to do poorly.

Starting point is 00:05:11 Well, a lot of the, some of certain emerging market countries and companies might have a lot of U.S. dollar denominated debt. So, you know, as the dollar strengthens, that debt gets more expensive, the interest expense, you know, starts to rise. So that's, you know, a big reason for it, I would say, you know, and usually when the dollar is strengthening, you're generally talking about kind of a risk, or oftentimes you're talking about a risk off environment, which is usually not a good thing for emerging market stocks as well. So with China as such a large percentage of just passive indices these days, there's a lot of, well, first of all, there's a lot of money coming out of China, right? Foreign investment is just going the wrong direction. But when I see calls for EMX China or China is uninvestable and their stock market already in a 70 plus percent drawdown, I don't know, I tend to think that like, it's not to say

Starting point is 00:06:08 that things have to get a lot better, but what if they're not catastrophic? What if they're just really bad? Like that in and of itself could potentially spark a nice rally. What I guess what I'm saying is, maybe this is wishful thinking, is not all,

Starting point is 00:06:22 is anybody pessimistic? I'm sorry, optimistic on China. Like isn't all of the bad news baked into the pie already or a lot of it? I think sentiment is pretty terrible on China. And I mean,

Starting point is 00:06:32 I've been doing this for almost 25 years and I've never seen it as bad as it is in terms of either the sentiment or the overall economic activity. But I do think it's kind of bottomed out, and I think it's just going to generally improve. And then there's areas of the Chinese economy that are doing a lot better than other areas. So if you look at things like, say, travel and tourism, that's an area that's doing quite well. I mean, domestic travel is well beyond pre-COVID levels, and now outbound travel is really, really picking up.

Starting point is 00:07:00 So we own a few kind of travel and tourism-related stocks that are doing pretty well. you know there's also been this you know general dot change in in the way people think about travel a lot of younger people you know are really more after experience rather than materialistic things so that's helping travel a lot and then also having these kind of hybrid work environments now makes it a lot easier to maybe get a three-day weekend or a four-day weekend in another place and you know you could still maybe work a day and so so that's one example there's other areas where the Chinese certain Chinese companies are just extremely dominant I would say electric vehicles would be one example of that.

Starting point is 00:07:36 If you look at companies like D-YD, they're now selling more electric vehicles than even Tesla and their cars are quite quite competitive. If you look at battery technology, if you look at companies like CATL, they are by far the leaders in battery technology way, way ahead of everyone else and really dominant in that area

Starting point is 00:07:56 where they have something like 40% global market share and like I said, that big lead. So those, to the extent we have exposure to China, Those are kind of the areas that we like to be involved in. But I still think there's better ideas outside of China. Because again, just like you said, there's money coming out of China. Either people aren't investing in emerging markets or they're reinvesting from China into other emerging markets. So markets like India, Mexico, Indonesia, and other markets are seeing very, very strong fund flows.

Starting point is 00:08:23 And if it was just that, I'd say that's a problem. But it's also coinciding with a lot of huge long-term opportunities, things like nearshoring and reshoring, where people are trying to relocate their supply chains to places like Mexico or India, first because of the problems that supply chains had during COVID, but now because of the geopolitical tensions between China and the U.S. We have AI. Everyone's talking about AI. So there's a lot of stocks in Taiwan and, like I mentioned, South Korea,

Starting point is 00:08:48 that are really benefiting from that. Climate change is another big thing. You know, I mentioned the EVs, you know, finding the companies that are, you know, providing the products and solutions to address climate change concerns. And so those same markets where the fundamental, loads are going into are also benefiting from these trends and that's creating excellent opportunities in those markets. So Michael mentioned the fact that the pessimistic side of things for EM is pretty

Starting point is 00:09:11 well documented. It's funny because it was the opposite heading into the 2010s where everyone said, well, the only place you can find growth is in emerging markets and they have billions of consumers, so that's the place that you want to be. And it turned up to be the opposite. And I think one of the things a lot of U.S.-based investors have figured out is that, well, you don't get to hold a lot of your returns from the corporations in some of those countries. So how do you, how do you ensure that you actually do get those returns? And it's not something that is that is the government regulation is taking away and making sure that they're not getting those same returns from their, from their companies. Yeah, I mean, we're just really focused on kind of, we're really kind of simple stories

Starting point is 00:09:49 that are, you know, we're very, very focused on earnings growth. So, you know, even though we're value investors, you know, we're very focused on the earnings growth. We tend to be quite thematic in nature. I mentioned some of those themes that we're exposed to, whether it be something like AI or we have a lot of exposure to this and your shoring, reshoring. And also to the consumer, like you mentioned, that still is a very good long-term story, particularly in Asia. And so if you just focus on companies that are kind of selling into those areas, you can get very good growth. And we also pay a lot of attention to things like corporate governance. That's much more of a problem in emerging markets. So it's just a lot more kind of value traps potentially in emerging markets.

Starting point is 00:10:26 And so you need a lot of tools to be able to avoid those. And we're quite experienced and quite focused on doing that. Are there certain countries that you avoid altogether? How do you think about that side of things? Well, these days, obviously, Russia, we can't invest in there. We typically, we do a lot of country research. So that's one of the things when we first started these strategies really back, or really started investing in EM really back in 2001.

Starting point is 00:10:49 We noticed it was a little bit different than what we were doing in the U.S. And usually it was because of country factors. And if you look at empirical research, you'll see that country selection matters just a lot more when you invest in emerging markets. So we had to kind of come up with a framework to analyze countries. And we started publishing a country report that we do every year where we basically rank and assess countries on a broad array of metrics. We go beyond the stocks. You know, we're looking at bond markets. We're looking at economic statistics.

Starting point is 00:11:18 We look at a lot of, you know, kind of surveys on the ease of doing business. We look at their past experience in certain crises. and doing all this helps us identify the strengths of certain countries. And that helps us identify maybe certain types of companies within countries because we always love to leverage the strength of a country through a company. But then it also points out some of the vulnerabilities that countries have. And probably the biggest problem, this gets back to that dollar issue we were talking about, is when an emerging market country has a weak external position.

Starting point is 00:11:50 When they have a lot of debt, when they don't have a lot of reserves, when they have twin deficits, that tends to lead to big currency. depreciations, which then could lead to kind of blowups in certain emerging markets. So we tend to be a lot more selective or really not even invest in those sorts of countries. The good news is that they're not a big part of EM. They're just so much smaller countries like say a Turkey or Argentina that don't have large weights. But that's one of the tools we use to kind of avoid those pitfalls.

Starting point is 00:12:20 And sometimes you also get very, very good opportunities. Greece was a very good example of a country that you really wanted to avoid. after it had a huge crisis many years ago. But when you looked kind of five or ten years later, all of a sudden, the things had really turned around a lot, the government really changed. It went to a more business-friendly government. They put in a lot of sound economic development policies. They refinanced their debt at low rates, and they benefited from a lot of the kind

Starting point is 00:12:47 of changes that have happened during COVID and because of the wars, too. And so all of a sudden, Greece went from being a pretty weak market to one of the best performing markets in the world. And, you know, that's a market that we're actually overweight. Greece was up 43% last year. I would have not had guessed that. Yeah. It's still cheap. If you look at the valuation, it's still, you know, one standard deviation below its long-term average on either a P-E basis or a price-to-book basis. So we still like that market a lot. You said you're a value investor and you mentioned that Greece is still attractively priced. How do these companies or countries get re-rated? Does there need to be a catalyst or can it

Starting point is 00:13:18 generally just be, I don't know, value finds a way? I think it's both. I think certain companies, companies within a country that might not be performing well will still perform well because they have very good company factors and they're kind of firing on all cylinders. So there's examples of Chinese companies that are doing quite well over the last couple years even though that market hasn't. And then you get these huge re-ratings of a country like we mentioned, Greece, are probably the best example of a re-rating would be India over the last 10 years. And usually it's when governments change and like I said, you get a combination of a less corrupt

Starting point is 00:13:49 government that's more business friendly that puts in sound economic. development policies and then in a country that just has a lot of potential. So if you look at India with, you know, 1.5 billion people yet for capital income, it's still only 2,000, you know, U.S. dollars. There's just huge opportunities for group. You know, there's a lot of management talent in India. There's just a labor advantage with 450 million young people that often speak English. So, you know, that allows a country to kind of start firing on all cylinders and that could create great long-term opportunities. And that's basically what's happening in India and to a lesser extent, Greece.

Starting point is 00:14:22 And there's other markets, too, like Mexico, like Indonesia, like Vietnam, that I think you could say a similar thing. India is one of the hottest markets right now. I'm curious, what are the leading companies, maybe not companies specifically, but what are some of the sectors that are driving those returns higher? Yeah, the whole market has been doing well. You know, certainly, you know, the big conglomerates, which are probably the companies, people know best, the Adonis and reliance industries of the world, they've been, you know,

Starting point is 00:14:47 performing reasonably well. But it's actually been the SOEs more recently and some of the kind of smid caps have been doing well. And by SOEs, I mean state-owned enterprises because usually we don't like state-owned enterprises in the emerging markets. That's usually where you do see a lot of governance problems and you see a lot of value traps in markets like China or Russia. And that's usually because these companies are not really acting in the interests of shareholders, but rather they're acting in the interest of the state. And that becomes a problem. But when you get a really technically sound government that is making just frankly brilliant economic development, plans, you know, really over the last decade, all of a sudden those SOEs become a big beneficiary

Starting point is 00:15:23 about it. And they're often the means to which these, you know, development plans are kind of implemented. And so you've seen a lot of the utility stocks do really well in India. That's an area that we own because that was still an area where you could find cheap stocks to pay dividends. They're doing well because, you know, India's growing. And so there's a lot of demand for electricity, but probably even more so, they all have some exposure to renewables. And if India has one problem, well, one of the problems India has is pollution, certainly. They're making a huge push into renewables, and there's just a ton of money coming into the sector. And so a lot of these utilities have really benefited from that.

Starting point is 00:15:58 So that's an area where we've really been able to do well in our fund and still more or less like the exposures. Some of the banks, I mean, anytime you have an economy doing well, like whether be Indonesia or Mexico or India and you're seeing strong macro trends, banks tend to do well. So that's another area where we've had some exposure that's also done very well in India. How do you think about some sort of valuation discounted there? Because a lot of people have been saying for years that the U.S. deserves to have a valuation premium to the rest of the world. And then places like some emerging markets and maybe even Europe actually deserve to have a discounted valuation multiple. How do you think about that when building a framework for thinking about what the right valuations should be? Yeah, I mean, I think that's true.

Starting point is 00:16:37 I think it's hard to argue that the U.S. shouldn't have a premium. I mean, there's just things about the U.S., the ease of doing business, the rule of law, the dominance of the technology companies that, that probably weren't that premium. But the question is how much of a premium? So if you look at valuations now emerging market stocks, if you look at the MSCIEM index, it's trading about 12 and a half times earnings versus the S&P 500 trading at 21.5 times earnings. So EM is, you know, over 40% cheaper on a P basis and it has double the dividend yield just on an index level. And then, you know, value managers like ourselves are even cheaper than the EM index. So to me, that's way too much, you know, that maybe you should get, you know, on average, a 10 or 15%

Starting point is 00:17:17 discount, but I don't think it should be that much. And so that allows it for the opportunity for a re-rating. And then within certain markets, you probably shouldn't have much of a discount at all. Like India probably does deserve to trade at a similar multiple as the U.S. because, like I said, that things are going just so well in that economy. And then you have other markets like Mexico and Greece, which are also doing very, very well, but they're still really quite cheap when you really look at them. So there's a lot of opportunities there, too. And it's just not on a P-based, it's even probably more dramatic on a price-to-book basis. So that's how we think about it, you know, how much should the discount be both, you know, kind of overall and then

Starting point is 00:17:55 on a company-specific basis as well. How important are demographic trends in your process? They're important. You know, we definitely like favorable demographics. That's another thing we live about like places like India or even, you know, that's one of the advantages that Mexico has always had. And it's a reason why people are outsourcing so often to Mexico because they have a pretty good skilled labor force. You know, it's definitely a problem for places like China in terms of a shrinking kind of labor pool and also in places like Eastern Europe where you have quite an older kind of demographics. We also think about it just in terms of, you know, opportunities.

Starting point is 00:18:30 I mean, things like kind of like health care, kind of interesting when you see demographic trends, you know, because unfortunately as you get older, you do them to use more, you know, kind of health care services. And then we mentioned like the consumer in emerging markets. places like India, that that's, you know, something we want to be exposed to, or, you know, you look at how changes in behaviors among certain demographic groups, like we were mentioning travel and tourism, that also can create opportunities. So it's definitely something we look into and we do think it's important. Your strategy is called the high, the emerging market's high

Starting point is 00:19:00 dividend strategy, which is kind of funny because in the U.S., it seems like most investors have kind of just let go the dividend thing from the overall market perspective. The NASDAQ 100, I don't know, it's a 1% dividend. S&P is probably what, 1.7%. percent or something, 1.6%. So what are the differences there in terms of the kind of dividend yields you can find in companies in the emerging markets? Yeah, I mean, you wouldn't believe. And that's, I always say that emerging market dividend paying stocks are the best kept secret for income seeking investors. We do have a bit of flexibility with the mandate, too. The mandate is that 90% of the companies will have a dividend yield

Starting point is 00:19:34 at 2% or more at cost when we invest in them. But the other 10% might have lower yields. And there might be other things we like about them, like just their peer evaluations or or whatever it might be. But like I said, there's such a diverse, you know, set of companies. Like, who would have ever thought that the biggest driver of our relative performance last year would have been AI? I mean, no one would have thought a value dividend manager would be able to get that exposure. But, you know, you can just load up by companies that are, you know,

Starting point is 00:19:58 basically supplying the Magnificent 7 that pay dividends and that are cheap, like I said, in places like, you know, Taiwan. So it's quite a diverse opportunity set. And I think it's just almost kind of more important in emerging markets. it gets to that governance factor that usually companies that pay dividends do have better corporate governance and corporate governance is so important in emerging markets. So it's kind of a good way to start, you know, to kind of get to where you want to be in terms of getting into higher quality companies, you know, NEM. And I think that's more important in emerging markets than, say,

Starting point is 00:20:30 in the U.S. So that's kind of have the dividend opportunities look outside. You know, we're usually, our dividend is usually about 60 to 100 percent higher than the index. So we're currently over a 5% dividend yield. Wow. Yeah, so there's a lot of opportunities out there. I'm curious how you think about portfolio construction. Do you view it through the lens of, okay, these are like our sector constraints or we're bullish on this country.

Starting point is 00:20:54 We want to be underway that country. How does a portfolio management process work? Yeah, I mean, we are officially benchmark agnostic, but, you know, we do have certain concentration limits on position size, country size, and exposure to any industry. But, you know, that doesn't mean that we can't, you know, you know, you have big conviction in certain markets and have huge overweight. So, you know, we've been 10 times the index in places like Greece, four times it, in places like Mexico. So obviously those are markets that we like. But we're really looking at. We're very rarely are we

Starting point is 00:21:26 saying, all right, we want to get overweight this market. It's more of a bottoms up process. We're looking for companies, you know, in markets and then, you know, maybe we can get to an overweighted position if we like the companies enough. But like I said, there's oftentimes, there's There's kind of a, you know, that works out pretty well because a lot of the things that make you like the country are the things that the company is kind of capitalizing on. And so it leads to kind of good, you know, kind of growth opportunities. So that's how we think about, you know, portfolio construction. We also like price momentum a lot, believe it or not, as a value investor.

Starting point is 00:21:58 So a lot of times you'll see the bigger positions in our, in our portfolio. They've become that way because they are benefiting from positive price momentum trends. And, you know, we love to let our winners run. You know, we do not just keep doubling down on our losers. as long as the thesis is intact and if stock has positive price momentum and the valuations are reasonable, we're going to keep holding on to it. So you use momentum as more of a way to like entry and exit signals? Yeah.

Starting point is 00:22:22 What we do is when we're doing fundamental research on companies, we have bull bear-based case scenarios for each company we invest in where we kind of stress certain macro factors and obviously company factors to come up with a bull price target and then also a bare kind of worst-case scenario price target. And we like to compare the one to two to the one to the other to develop kind of a risk-reward ratio, the bull to the bear. And when we're getting kind of like two times the upside compared to the downside in the bear scenario, we tend to get more excited. And that's another thing that helps us develop more conviction in some names versus others. How big is your universe

Starting point is 00:22:52 when you're picking stocks? How big is the opportunity set emerging markets? And then how much do you winnow it down to the number of holdings you have? Yeah. I mean, it's a huge opportunity set. But like, you know, I'm going to say there's something like 20,000 EM stocks, but then a lot of them are not very liquid or very, very small. So we do have, we do like investing in smitcap. but we have a limit of about 15% of the portfolio that will invest in submit caps because we want to have proper liquidity. But we do like to leverage that. So when you start taking out the kind of minimum liquidity requirements in market caps, you're probably looking at about, you know, 4,000 stocks that you can invest in. And then we're doing the screens on those stocks, looking for low PE, above average dividend yield and dividend in earnings growth.

Starting point is 00:23:32 So these days, that's getting to us down to about 800 or so stocks that meet those screening parameters. it's a universe we know very well because I believe I've been doing this in this space longer than anyone globally. I'm going back to like 2001. So if you give our team the universe, we feel like we know it better than anyone. And so that's clearly an advantage. And not only that, you know, there's only about, you know, maybe say 40 or 50 stocks that when we look at the screen that we might not be familiar with that we'd have to do the research on. So it's quite an efficient process. And, you know, we very skilled analysts and we have a lot of research resources to do that. You know, I'd say out of the 850 stocks that meet the screening parameters, we're

Starting point is 00:24:06 then looking just at the stocks. It's kind of like classic stock picking with certain biases to some of the things that we've been talking about. Exposures to growth thematics, good corporate governance, you know, stable macro environments. I'd say we get about 80 to 90 stocks that kind of make it out of that stage. And then we construct a portfolio owning the 50 to 60 best ones. And we're also monitoring those other ones. Those stops kind of make up our prospect list. And those might be the kind of companies we invest into the future. So you guys have been doing this for a while. The inception of the strategy goes back to 2006.

Starting point is 00:24:40 At the end of 2023, there was $995 million in the strategy. There's different chassis for investing in this. There's a separate account. You have mutual funds. Who is your customer base? We primarily sell to the big advisory firms. So, you know, kind of the big sixth, the Morgan Stanley's, UBSs, you know, Jake and and Mriggins are all, you know, big clients for us.

Starting point is 00:25:01 And we do have direct relationships too. But I would say, you know, and we do have institutional businesses too, or institutional relationships. We also have offshore businesses. We have just about over a billion in assets in offshore funds. So, you know, that's our primary client base. And so we're often selling through financial advisors who sell them to their clients. And oftentimes our products have gone through the due diligence of these firms. And sometimes we're often recommended as well. You said you've been doing this for over two decades. How did you get involved in this space in the first place? Yeah, it was kind of interesting. I started at Schaefer call. And I started my

Starting point is 00:25:34 career actually in education. I thought I wanted to be a teacher and I used to be a wrestling, and so I wanted to be a wrestling coach and do all these kinds of things. And a lot of my friends were doing quite well on Wall Street told me that, look, you should really be looking at this, you'd be good at this. And so I kind of switched over and I got an opportunity at Schaefer column in 2000. And back then, we didn't have any non-U.S. strategies. We just had, you know, we were doing our high-diven strategy in the U.S. We had a value strategy, but nothing outside of the U.S. So based on client interest, you know, we had a client who asked us if we take kind of more of a global approach, start doing more international investing.

Starting point is 00:26:08 And Jim Cullen at that time, I was fortunate enough to sit in his office for about 40 years. So I really got, and that was at a very interesting time when value, of course, it's out of favor, right? This was back in 2000 when the tech bubble was blown up back then. So it was kind of a very interesting time to enter the business. And we decided to take on the client's mandate of a global high-dividend strategy. That's the first strategy that I started managing in 2001. We all saw that the emerging markets were kind of one of the more interesting parts of that universe. But then first in 2004, we launched a international high-dibend strategy,

Starting point is 00:26:39 which is more of a developed market dividend strategy, which I, by the way, also managed. And then after that in 2005, we launched the emerging market strategy, first and the secondly managed account. And then later in 2012, we launched our U.S. mutual fund. And then a few years later, our offshore fund. So that's kind of how I got my start. Basically, what we were trying to do is we were trying to get the same kind of profile we're getting in the U.S., but outside of the U.S. And by that, I mean, we wanted to have a lower volatility strategy that outperform the market over the long term and generated a nice income stream that had good growth potential. And so it was just a matter of trying to replicate that.

Starting point is 00:27:15 And like I said, there were definitely a few curb bolts that I had to get up to speed with, mainly due to the country factors. But, you know, over time, I think we've developed a pretty good process to, you know, kind of handle those challenges. I'm curious to hear your take on if it's easier. Obviously, it's nothing's easy. If it's less difficult to generate alpha in emerging market stocks, obviously companies here like the big ones Apple have so much coverage. There's very little edge there. Do you think that the amount of analyst coverage and just general knowledge of these companies, does that actually matter? Are there greater inefficiencies when there's less people looking at these companies? Yeah, I think it's definitely fair to say that for me, it's easier to generate alpha in emerging markets from the U.S. for the reasons you said that, yeah, they're just so, the U.S. stocks are just so well followed. There are just a wide variety of inefficiencies in emerging markets. There's those country factors that you have to really be aware of. So at the same time, it's still true that your average manager has underperformed the index, you know, over the last, say, 15 years. So it's not that, you know, the majority of managers are generating alpha, but a greater percentage of, I think are doing it. And the other interesting thing is, I just think that, you know, in a world where people are so interested in kind of passive and ETFs and that sort of thing, that in emerging markets, I think, you know, really mutual funds make a lot of sense.

Starting point is 00:28:34 And I think active management makes a lot of sense. There's just a lot of things that we can do, that passive strategies cannot do. I mean, I think it's very, very hard to analyze things like dividend yield and dividend growth consistently if you're trying to do that passively. You know, when the Russian and the Ukraine war broke out a few years ago, we were able to completely de-risk our exposure and get basically out of Russia completely, whereas passive approaches, you know, we're stuck with those positions that, you know, generated big losses for them. So there are definitely advantages to being active. And I think that is one of the

Starting point is 00:29:03 reasons why you can generate alpha probably a bit easier than compared to the S&P 500 or in the U.S. You mentioned the mutual fund. Is there a particular reason why you've stuck with this structure? Obviously, the exchange traded fund chassis has gotten very popular over the years. What are some of the differences? Like, why haven't you released that? I think what we really haven't had to. I mean, you know, we're getting decent demand. We're also, you know, not, I mean, obviously we want to grow and do well, but it's not like my goal is just to manage, you know, $10 billion or something like that. It's, you know, we want to manage the money well. That's the biggest goal. We have had, we do have a separately managed account product, too. The big difference is, is that, you know,

Starting point is 00:29:43 you can't get the same access in a lot of the separately managed accounts as you can in a mutual fund where I can get into places like India or into China or even into frontier markets like Vietnam or Bangladesh if you really wanted to. So that's the big advantage of a mutual fund. You know, we've been asked a lot to run a EMSMA as like an ADR-only strategy, but we've always said no to that just because we don't think it's really a viable product. So we probably would be managing a lot more if we had said yes to that. But again, we think it would ruin the integrity of the product.

Starting point is 00:30:13 Getting back to one of Michael's first questions about there being the need for a catalyst, Is low valuation alone a catalyst for emerging markets? You think there has to be something like, is it going to have to be the fact that U.S. stocks are too expensive and the dollar falls or whatever? Like, what would it take for emerging markets to take off from here? Yeah, do we need like an agreement between like China and the U.S.? Like with that, do we need that or can these stocks rally absent? Can there be a turnaround absent that?

Starting point is 00:30:40 You know, that would definitely help. Make no mistake about it. I mean, when you look at China, you know, if China traded it, you know, 12 to 14 times earnings five to 10 years ago, they just. shouldn't be trading at that level anymore because there should be a geopolitical discount in the stocks owning to the tensions and the fact that they're out there saying that they're going to invade Taiwan, which, you know, that makes me start thinking that they're a bit like Russian stocks. And I frankly think that if they did invade Taiwan, a lot of the sanctions and things

Starting point is 00:31:03 that happened to Russian stocks would probably happen to Chinese stocks, which would then make them uninvestable. So it would help a ton if, if China would say, hey, we're not going to invade Taiwan or if B, they put more stimulus into their economy so things could start improving. But you don't need that. Like I said, there's too many other opportunities that are making a lot of money and generating, you know, very big returns in those other markets. And so people are just too focused on China and too worried. And so, you know, yeah, would it help if the dollar started weakening? Definitely.

Starting point is 00:31:33 I mean, if you look at the past, I think in the last 10 periods when the dollar went down by 10%, emerging markets were up on average 45%. And the hit rate was 9 out of 10 times. So, you know, that's kind of the mother of, yeah, the mother-of-all catalysts. But you don't need that. You could just have, you know, company-specific catalysts, country-specific catalysts. You have these, I said, these huge trends. Like, you know, I think we're kind of like living in an interesting world where, you know, we have a lot of problems like high rates, inflation.

Starting point is 00:32:02 We have these terrible wars that are going on. But when you look at some of these long-term growth trends, like near-shoring, reshoring, like AI, like addressing climate change. And unfortunately, these wars, too, which create a lot of demand for, industrial products, obviously defense munitions and other things. That's a lot of demand. And that's why I think, you know, we haven't really seen kind of a recession yet and why earnings growth has been very good. And a lot of these emerging market companies are exposed to those, you know, excellent, you know, kind of thematic growth catalyst. And those countries, too, are used to experiencing high inflation and high rates, right? They are. That's been the other, you know, big

Starting point is 00:32:38 difference is that unlike in most emerging markets, rates never went down to zero like they did in develop markets, all right? So they're not going to have to deal with, you know, that refinancing risk that is kind of looming. That's like kind of the elephant in the room. If you ask me, if you look at, you know, develop markets either in the U.S. or in Europe, that it's true that companies and corporations have done a very good, and individuals have done a very good job at refinancing their risk or refining their, refinancing their debt and locking in, you know, their debt at low rates. but at some point they're going to have to refinance that. And when that goes up at a much higher interest expense, that's going to be a problem

Starting point is 00:33:17 for a lot of companies. And in emerging markets, you have much less of that as a problem because rates never really went down that low. So there's several emerging markets where rates are actually lower than pre-pandemic levels. And like I said, they've done a lot better. Inflation did not have nearly the negative impact that it had in the past in emerging markets, both because I think, A, they're so experienced either on a company level or country level in dealing with inflation. And then there are other things that happen. Like, for example,

Starting point is 00:33:46 in Asia, a lot of Asian countries kept buying Russian oil. So all of a sudden, energy prices going through the roof didn't have that negative impact that it typically has. So from that perspective, I think emerging markets, most emerging markets, certainly not all of them, most emerging markets are in a much better relative position compared to develop markets with regards to both inflation and refinancing risks. All right. Well, last question for me. You mentioned that they're in a much better position. But if you look at their economic footprint of EM countries versus the rest of the world, they are way underrepresented in the stock market in terms of they account for a lot of the GDP,

Starting point is 00:34:22 the population, the growth, and yet they're whatever, 11% of the global stock market or something like that. What do you think, again, I'm asking you to like predict the future, which is not fair, but how does that, how does their stock market weighting grow relative to the rest of the world? Yeah, I mean, that's definitely a great long-term opportunity that if you look at, for example, like market capitalization is about 20% of the global market cap, but GDP is, you know, over 40%. And probably even more importantly, their contribution to global earnings is probably close to about 40%. So that is a disconnect that we think over time that you'll definitely see convergence. And one of the things that should happen is that stock prices should go up. But there are certain markets where if you look at market cap to GDP, which is something we do look at, that it's already quite advanced, like a place like Taiwan, I want to say, has the largest market cap to GDP of any country in the world, even though it's an emerging market. So it's not just an opportunity necessarily for all emerging markets. And I guess that's the big point of what I'm trying to tell everyone is that you can't

Starting point is 00:35:23 just call them emerging markets, right? They're all different. You want to look at each market. There's different opportunities, different risks, different valuations. And so you really kind of have to think of them, you know, one by one in getting together your, you know, collective EM exporter. Where do we send people to learn more about your strategies? Well, certainly, our marketing team, our website has a lot of information. You know, we love talking to clients and educating them about our strategies. We have a big marketing team that knows the product very well. So, you know, just inquiring with our firm is a great way to start.

Starting point is 00:35:54 All right. Rahul, thank you very much for your time today. We appreciate it. Yeah, thank you guys so much. By now. Okay, thanks again to our old member Schaefer, Colin Capital Management. That's ColinFunds.com. To learn more, send us an email, anal spirits, at a compound news.com.

Starting point is 00:36:08 Thank you.

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Animal Spirits Podcast - Talk Your Book: Emerging Market Fundamentals

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