Odd Lots - Two Investors Did A Tour Of The Globe To Find The Best Place To Put Their Money

Episode Date: June 8, 2020

As many active fund managers have discovered in recent years, it’s extremely hard to find a sustainable edge in investing. But for people who put in hard work to discover opportunities off the beaten track, it may still be possible to find undiscovered value. On this episode, we speak with Burton Flynn and Ivan Nechunaev of Terra Nova Capital Advisors about their highly unusual approach to doing research. The two of them, along with their families, traveled the globe, spending a month at a time in different countries to find places to put their money. They explained to us why this approach was important, what they learned, which countries excite them the most, and how these markets are dealing with the COVID crisis. See omnystudio.com/listener for privacy information.

The news doesn't stop on the weekends. Context changes constantly. And now Bloomberg is the place to stay on top of it all. Hi, I'm David Gurra. Join us every Saturday and Sunday for the new Bloomberg this weekend. I'm Christina Rafini. We'll bring you the latest headlines, in-depth analysis, and big interviews. All the stories that hit home on your days off.

And I'm Lisa Mateo. Watch and listen to Bloomberg this weekend for thoughtful, enlightening conversations about business, lifestyle, people, and culture. On Saturday mornings, we put the past week's events into context, examining what happened in the markets and the world. That on Sundays we speak with journalists, columnists, and key political figures to prepare you for the week ahead. Join us as soon as you wake up and bring us with you wherever your weekend plans take you. Watch us on Bloomberg Television.

Listen on Bloomberg Radio, stream the show live on the Bloomberg business app, or listen to the podcast. That's Bloomberg this weekend. Saturdays and Sundays starting at 7 a.m. Eastern. Make us part of your weekend routine on Bloomberg Television, and wherever you get your podcasts. And welcome to another episode of the Odd Thoughts podcast. I'm Tracy Allaway.

And I'm Joe Wisenthal. Joe, do you remember a few months ago, wow, it seems like ages ago, actually, but back in January, we spoke to an investor in Iranian markets. Yes. And I was thinking actually we should invite that guy back. Because when we talked in January, you know, we talked about Iran. and what investing in that market was like. But that was, of course, obviously before it got hit with COVID,

which it was one of the countries that really got hit hard very quickly after China. So I'm glad you mentioned that because that's a reminder to us to have him back and see how things are going there. We should definitely do a follow-up. But one of the sort of themes that came out of that episode, I guess, was the idea that you can find yield and you can find returns if you're, willing to put in work that basically no one else is willing to do. So if you're willing to go to Iran all the time and sort of deal with all the sanctions issues and things like that and really get

to know that particular market, well, maybe you can find some decent investment opportunities. Right. I think that's a really important point. And I like the way you put it in terms of like putting in the work because you're not going to find much sort of like yield or obvious alpha If you're just sort of like looking through a screen of liquid tickers traded on a U.S. Exchange, or at least it's going to be very hard to find an edge. But what made that episode striking was just the sheer amount of legwork required to even invest in Iranian companies as a foreign investor and setting up the brokerage relationships and getting money in and out of the country. And if you can find a way to do that and you can make that smooth.

operate that, then there are opportunities, but that's a lot harder than what most people are willing to do. Right. Most people will just put their money in SPX and think that will suffice. But clearly, again, if you're trying to generate alpha, a lot of people do look to emerging markets. They look to frontier markets because those are considered sort of lesser known than the rest of the world. And that, per the Iran example, is really where due diligence comes in. And this has been a theme in emerging markets for a long time, but we've had people, you know, who go to those markets and try to become experts in them and really get to know what's going on in those particular countries. And I'm happy to say that while we aren't talking to the Iranian investor today, we are talking to two investors who have basically made traveling to various emerging markets. their raison d'etra for almost the past year.

They've gone to, I think it's something like 10 countries and lived probably a month in each one, all in the name of getting that edge, doing the due diligence and getting to know the market better. I'm looking forward to it. I love this topic. I love the idea of putting in the legwork, actually getting to know countries, now just sort of looking at screens and looking at PE ratios and saying, oh, they're going to mean revert or, you know, actually putting in the work. And I'm looking, I think this is a great topic. And especially now, like, in the middle of this crisis that we're still in, I feel like there is going to be a real,

I don't want to say, I don't know, maybe bifurcation isn't the word, but there are some companies that will thrive and figure out ways, some companies that won't, and different countries are going to come back in different ways, eventually. And it's going to be rewards for the investors that actually figure out sort of what works and what recover is faster and what can thrive in the sort of post-COVID order, whatever that may be. Yeah, I think that's absolutely right. And the other thing that's sort of at play at the moment is just how countries are dealing with coronavirus. And I do think it's very difficult to get a sense of how different places are grappling with it without actually being on the. the ground and seeing everything that's happening. So this is going to be an interesting episode.

We're going to talk EM. We're going to talk coronavirus. Without further ado, let's bring on our guests. We have Burton Flynn and Ivan Netsuneioub. Burton is managing partner at Terra Nova Capital, which advises the EFley Emerging Frontier Fund, and Ivan is a senior investment professional for the same fund at Terra Nova. So thank you both for coming on today. Thanks for having us. Yeah, thanks for having us. So I guess just to begin, where did this idea actually come from? Traveling around emerging markets, I think when you originally set out, you wanted to go to 12 countries over the course of 12 months.

Why do that? Yeah, you know, we've been traveling as part of our investment strategy for over five years. and, you know, we've spent about a week a month, usually visiting about two countries. And, you know, I think that's already more than most managers typically do. We go out and we meet management and we get a lot of value out of those meetings. I had a friend who was kind of perpetually traveling for five or six years. And I was always interested in, you know, doing something. like that, but applying it to kind of our business model. And so this is something that's been in

the works for years. Finally, we kind of made the plans and we set out to not just visit, but live in 12 emerging markets for one month each with our families, moving our families, you know, one month at a time and, you know, really immersing ourselves. So what a, what country did you go to on this tour and what does immersing yourselves actually mean? Because a month, you know, it's obviously a little longer than sort of a tourist trip. It's longer than a typical vacation, but still not, you know, necessarily long enough to really sort of know a place and know what dated life is like. But what is, how do you learn about a country in a month? Yeah, absolutely. Well, we started out with the Philippines. From there, we went to Malaysia and then Indonesia.

then we were in Bangladesh and Pakistan. From there, we went to Thailand and then Vietnam and Saudi Arabia, South Africa, and Turkey. And we had planned to go on to Egypt and Argentina, Chile, and Mexico. And that's actually more than 12. We started out with the idea of 12. We got really excited and added a few more countries before, before the United States. things kind of came to a screeching halt with, with coronavirus. But the idea was, you know, that we wanted to really get to know these smaller emerging markets. I mean, there's a lot of

experts out there that know China and that know India, but we really wanted to get to know these smaller markets. Just on that point, can you maybe walk us through a little bit of the investment strategy of the fund that you manage? Like, what exactly is it that you're investing in and what are you looking for when you go to these countries? Yeah, absolutely. So our strategy is a value, a value strategy. So we are value investors. We are going on location and trying to find companies that aren't just cheap, but that are growing and, you know, that are high quality companies. And so, you know, it sounds like we're trying to get the best of, you know, all worlds. Most people are either value investors, growth investor, quality

investors, but we're really looking for a combination of all three. So if you look at our, you know, portfolio statistics and you compare it to, you know, to the index, for example, you know, our PE ratio is, is less than half that of the index. And while our, you know, the average growth of the portfolio is quite quite a bit higher. And the return on equity is double. The net debt to EBITDA is a fourth. So, you know, it almost seems like too good to be true. I mean, you've got something that's cheaper, that's growing faster, that's more high quality.

But that's what we're going for. And it's not easy. And so that's why we spend so much time on the road looking for these companies. And it's not easy to put together a portfolio like this. But we've managed to find somewhere in the range of 30 companies that we're really excited about. Talk about that, the easiness. Because Tracy and I alluded to that in the introduction when we talked about the guy who invested in Iran. It's work.

And it's not easy. And it's not looking at a screen. And it's not looking for some sort of PE ratio. historical norm, mean reversion or some other quantitative strategy, it actually seems difficult to find opportunities in a way that it's a lot harder than just looking at a list. Talk about like, obviously there's the travel part and going to a country, but then like just sort of the grinding it out and figuring out which companies are traded and which companies have the characteristics that you like for your portfolio.

So what is that process like? So basically, this kind of project of 12 markets in 12 months, it's not only meeting the companies that already look attractive on paper fundamentally, which we could probably find just off the computer screen. So we actually try to meet every company that's willing to meet with us. Part of this is research if there is any signal whether the company is willing to meet or not. But also it really helps us build the knowledge and expertise in this markets. And so the more companies you meet, the more CEOs you meet.

I think you also learn the psychologists of people and the managers. Because I think at this point, it already kind of came to this stage that when we walk into the meeting, sometimes it's enough to talk to the CEO for two, three minutes to realize whether they're just trying to promote their business or they're being authentic. in the responses to our questions. So this implies that we meet a lot of companies. So, for example, I think it's somewhere between 40 companies, the minimum we met in the country, to 90 companies, the maximum we met.

And I think we were going to meet over 100 companies in a month in Turkey, but obviously COVID kind of disturbed our plans. And after we meet the company, obviously, before that, we already have the research done. our team does the research, we have the qualitative, quantitative data about the company, then we have the data from the meeting itself. Then a big component of the process is also ESJ questionnaire that we ask the companies to complete. And when we have all of this data, all of this information, we then make investment decisions

and as an investment committee. Of course, some of the companies we meet probably would never qualify as investors, but at the same time for research purposes, this is an invaluable. experience. I think Derton can kind of explain a bit more about the research itself. Absolutely. So, and it's not just, it's not just meeting companies that we are setting out to do. So, so basically in addition to these kind of 42, you know, 100 company meetings that we've done each month, we've also set out to meet with some of the best macro experts in the country. And that starts with the finance minister and the central bank governor.

And, you know, and then the president of the stock exchange, the commissioner of the local SEC, you know, the financial regulator. And then many more in South Africa, for example, we also met with the commissioner of their black economic empowerment initiative. And, you know, we also attempt to meet with the minister of climate change or of environment in each country as well, which we met in Pakistan, for example. So we set out to meet kind of these important macro players and, you know, government officials. We also meet the U.S. ambassador and, you know, the Finnish ambassador in each country that we're able to. But then in addition to that, you know, we also try to triangulate what we're learning in those meetings as well as in the, you know, company meetings with other kind of business leaders. And the best way we found to do this is, you know, is to reach out to alumni from, the business school that we went to. So Ivan and I both attended the Wharton Business School.

And so we've reached out to, you know, to many of the Wharton alumni in each of these countries, you know, starting with the Philippines, which was interesting because there's quite a broad base of Wharton alumni there. So we had lunch every single day with a different Wharton alum in the Philippines. But this has given us a great opportunity to, you know, to basically meet more people in a different setting, you know, people that are more comfortable talking to us and, and, you know, talk about like what we're seeing in these company meetings and in these macro meetings and and get a better idea of, you know, of what, of what the real situation is. Just on this note, how do you actually go about arranging these meetings?

I think Joe and I as journalists probably have an interest in anything you can teach us about access. But what's it like to actually approach, for instance, the central bank governor and get a meeting with them? Like, how does that work? Well, the typical way that fund managers, you know, get meetings with companies or with, you know, macro players like the central bank governor is through the broker. And, you know, in the past, we've, we've had, we've had an okay experience working with our brokers. But actually in our, in our second and third countries that we were in, we kind of had a bad, bad experience with our brokers. In the second country, we were in, our broker quit

the first week we were there and kind of send us an email on, you know, on our fourth day there and just said, hey, today's my last day, by the way. And then our, you know, in the third country, in Indonesia, you know, the broker just didn't respond to emails. And so we just started actually reaching out ourselves to companies, just off their investor relations website or, you know, off the central bank governor website. And we were really surprised, actually. So the brokers, you know, their big value proposition is that you can't get

these meetings yourself. You know, you just can't do it yourself. You have to have the local networks and everything. So we started emailing these companies, you know, in the first country, we did it. We sent a couple of, you know, I think we sent one follow-up. And the more we did this, the more experience we got. We actually hired an administrative assistant to help us. And, you know, the last country we were in, for example, I think we sent 15 follow-up emails. So it was literally every single day, we would send another, you know, another follow-up. And you'd be surprised, actually, how many companies, well, there's not that many, but you'd be surprised that, you know, there are companies that on the 14th email,

you know, reply and say, oh, I'm sorry, I missed your first 13, you know, emails. So it's really been an effort of reaching out cold, of course, explaining who we are, kind of working it that way, of course, then we, you know, if we can't get a hold of companies that we really want to get a hold of or, you know, government leaders, we might try other sources. We might ask, you know, the broker still. And we'll also go through the Wharton Network and we'll go through kind of, you know, any, any channel that we can. So, for example, in Saudi Arabia, you know, we were able to, actually, we write about this in our, you know, trip report that we have published on our website.

But we asked our broker to help us get a meeting, you know, with kind of the central bank governor, with the finance minister, with the stock exchange president. And they said, you know, it's just really too hard. And in Saudi, those people never, you know, never meet with investors. You know, it's not even worth trying, really. And so we, you know, we got on LinkedIn and we found somebody who was an advisor to the CEO of the stock exchange and reached out to him. And through him, we were able to get a meeting with, you know, with, with, with the president of the stock exchange.

And actually, in the meeting with the president of the stock exchange, we mentioned that we were, you know, trying to get a meeting with the SEC, you know, commissioner and the central bank governor. He said, oh, no problem. And he pulled out his phone and, you know, WhatsApp, you know, the commissioner and the governor. And I said, oh, I've got a meeting arranged, arranged for you guys. So, you know, no problem. So it's really, you know, it's really just kind of being scrappy and, you know, and, and, and, you know, reaching out to to everybody we want to meet and, you know, explaining, explaining who we are. So, Burton, you mentioned your blog just then, and I was sort of flipping through it earlier. And one of the meetings you describe was with, I think it was Donald Trump Jr., which is kind of unusual for,

someone to go to Indonesia and then end up meeting someone like that. How did that come about and how did the meeting actually go? Yeah, I still wonder how that really all happened because basically, you know, we went to Indonesia and I think maybe 10 days after we arrived, you know, we're sitting across the table at a small group dinner with Donald Trump Jr. and some others from the Trump, you know, Trump organization, and then a company that we, you know, that we were investigating as well as a potential investment. So basically, you know, we showed up the, the CEO of this company there that's a media company that also has real estate holdings, accepted our meeting request. We went and met with him and had dinner afterwards, a very prominent individual in Indonesia.

who's a billionaire and very well known. We were sitting at dinner with him and he was kind of dropping names of people that he knows. But in the classiest way you can imagine. So basically, he would mention having a vacation house where his neighbor is Justin Beaver or hanging out with Donald Trump or something. And then he would grab his phone

and, you know, to show us the pictures. But instead of going to his photos app, like most of us would do, he went to Google and typed in his name and the person's name and showed us the pictures with him. So he mentioned, you know, at this dinner, and this was Friday night after our meeting, he mentioned to us that a couple of days later, Donald Trump Jr. was flying in for a pre-launch event for their, their properties that they that they're selling together with the Trump organization and that they're also, you know, going to Bali to tour a project that they're working on together. He said, oh, you know, if you guys would like to come to this pre-launch event, you know, you're welcome to come. And actually, you know, if you'd like to, if you'd like to come to Bali and, you know, spend four days hanging out with Donald Trump Jr., please come. And the purpose for us was really a chance

to one, observe the CEO, this chairman, owner of a company that we were really interested in. And two, also tour the assets that the company owned. And so then we were, you know, we were sitting at a small group dinner. We were invited to four, you know, four dinners with Donald Trump Jr. and I sort of got more and more comfortable in each meeting. And by the third dinner, I kind of made some jokes. And I ended up getting uninvited to the fourth dinner. You can get the news whenever you want it with Bloomberg News Now.

I'm Amy Morris. And I'm Karen Moscow here to tell you about our new on-demand news report delivered right to your podcast feed. Bloomberg News Now is a short five-minute. audio report on the day's top stories. Episodes are published throughout the day with the latest information and data to keep you informed. Yes, there are other products like this from a variety of news organizations, but they usually rerun their radio newscasts throughout the day. That's not what we do. We create customized episodes that can only be heard on Bloomberg News Now. And we don't wait an hour to publish breaking news. When news breaks, we'll have an episode up in your podcast feed within minutes.

So you're always getting the latest stories and developments. Get the reporting and the context from Bloomberg's 3,000 journalists and analysts. We're all over the world. Listen to the latest from Bloomberg News Now on Apple, Spotify, or anywhere you listen. So let's talk about some of the countries and places. We can get to the sort of current crisis and how COVID is affecting your view of the world and various emerging markets or frontier markets. But pre-crisis, as you traveled the world, where were some of the places that particularly

stood out to you in terms of places where there are a lot of companies doing interesting things that people didn't appreciate at compelling valuation? Yeah, I mean, I guess there are countries that stood out for good or for bad reasons. I think in terms of valuations, I think we had a very interesting month in Pakistan, because when we came to Pakistan, the country was basically coming of a very, I think, pronounced currency crash, I think about over 30 percent. And there was economic crisis in the country. And we kind of captured the very bottom of it.

And so many companies, especially the good companies with good corporate governance, with good cash flows, they were trading at like four or five times PE, which, if you compare it to some other countries like Thailand, where we went to after Pakistan, you would actually, you never find a company that trades even at like 10 times be in Thailand. So in Pakistan, evaluations were very, very cheap, but we found some companies that were very good quality with growing earnings and with good prospects. I mean, from the bad countries, I mean, not bad countries, but countries with, let's say, unfortunate macro situations.

So unfortunately, South Africa comes to mind as number one country that is really, really challenged from macro perspective. So it still is considered an emerging market, but it's the only emerging market in the world that failed to grow its GDP per capita over the past 10 years. So we witnessed many kind of issues stemming from inefficient political system and just basically failed institutions all over the place. Unfortunately for the people of the country, but there is a lot of corruption, there is no credible opposition. There is basically they have the decades of institutionalized racism and unemployment rate is at 30 percent and about 60 percent for

young people. So we really felt that the country has so many challenges. And actually we were there right before the Moody's, Moody's downgraded their credit rating. And since since then the currency collapsed another 15, 20%, before even coronavirus. And this is kind of the interesting part of investing in the emerging markets. We have really countries in different stages of their politics, economics, for example, of South Africa, Pakistan, and they mentioned. You also have Vietnam with a very, very strong command communist regime, which actually makes economic wonders like at this point of the country's development.

also have Bangladesh, which was growing like 7,8% GDP per year. And this diversity is very, very interesting. I mean, Malaysia probably stands out. And I think Burton will give you some good reasons for why. You know, people look at our portfolio. And today we have about 30% of our portfolio invested in Malaysia. And they often, you know, one of the first questions they often ask us is why do you guys love Malaysia so much? But can I, before you go on, I just want to interrupt you, I used to live in Malaysia and I love it, so I'm really excited about hearing. Well, so people ask us, why do you love Malaysia so much? And our answer is we don't.

We hate Malaysia. Oh, that's the exact opposite. Oh, that's so good. Sorry. So, you know, we're really passionate about emerging markets. We love emerging markets. I've spent my entire career in emerging markets. And, you know, emerging markets are exciting. There's always something, you know, something happening. You know, there's some kind of air strikes or, you know, currency devaluations, hyperinflation.

There's always something interesting happening in emerging markets. But not Malaysia. You know, Malaysia is boring. It just, it grows at 5% a year and maintains 3% unemployment. You know, it keeps inflation around 2% a year. And, you know, it just never has these really riveting, exciting stories. So, you know, it's it's the most boring of all the emerging markets. So, you know, my point is we're not macro investors.

So we're not, you know, we're not, we're not to. trying to pick countries and say, okay, we really love Malaysia. Let's invest 30% in Malaysia. It just happens to be the case that we have found several really, really interesting, exciting companies in Malaysia that we are, you know, that we're really confident, will grow their earnings and that are trading at very reasonable, cheap valuations. And, you know, that's the reason that we have 30% invested in Malaysia. You know, I said, KL is an amazing city.

I'm June Grosso, inviting you to join me for the Bloomberg Law podcast. Every weekday, we help you make sense of the legal stories that shape the nation and the world. Listen for complete analysis of the biggest court cases, the latest actions from Congress and regulators, and the legal moves driving the markets. From corporate law to constitutional law and from state courts to the Supreme Court. At Bloomberg Law, we go beyond the day. headlines. We speak with top attorneys, judges, scholars, and policy experts to break down what the rulings really mean. We do this every weekday, then bring you the best conversations in our

daily podcast. Search for Bloomberg Law on YouTube, Apple, Spotify, or anywhere else you listen. On the East Coast, listen as you start your day. And on the West Coast, catch up in the evening. That's the Bloomberg Law podcast with me, June Grosso. wherever you get your podcast. Something I'm curious about is, you know, you talk about all the great companies you find in Malaysia. And I think when I often think about frontier markets investing, I think about these or emerging markets, whatever you want to call them.

You know, not many listed companies. Exchange is dominated by some privatized banks or commodity or utility or telecom companies maybe. but what are the types of companies sort of industry specific that you find exciting? Like are there interesting tech companies on these markets? Like what are the sectors within these, say, Malaysia or any others, that you tend to see interesting opportunities? Yeah, absolutely. You know, often we find some very interesting industrial companies that, you know, are kind of boring and overlooked. Ivan can share with you a couple of examples, but I'll share with you, you know, one example that we actually found in Malaysia that's currently our highest weight in the portfolio.

And this is a tech company, but tech hardware company. So they produce testing equipment for 3D sensors. So the kinds of sensors that you find on your iPhone, for example, They test, you know, they test the equipment that, you know, does facial recognition. They test the AirPods, you know, for Apple. Apple is one of their biggest clients. They test the equipment that goes on to, you know, onto autonomous cars and electric vehicles. And this company, this company, what's really interesting about it,

Okay, so it's been growing at over 50% a year, both top line and bottom line, for five years now. It's a company that is high quality in a lot of respects. And one that we actually owned several years back when the PE was 10 times or even less. And we did quite well on it before, but we ended up selling it because the valuation got into the 20s and 30s. But when we went and revisited this company, we actually learned that they had since restructured their listing. And they now have essentially a dual listing, one on Malaysia and one on the Hong Kong Stock Exchange. And what was really interesting is that the listing on the Hong Kong Stock Exchange was trading for less than half the valuation of the listing on the Malaysia Stock Exchange. So, you know, we get really excited not only about the fundamentals and the prospects, the growth prospects of this company, but also, you know, this sort of arbitrage opportunity where, you know, we could own this company that was growing at, you know, over 50% a year for a multiple of 10 times or less. And so we, I'm immediately after that meeting, I think within within a couple of days, you know, put in our order.

and made that company the, you know, the largest weight in our portfolio. And it's actually paid off. So, so since we started this trip back in June until the coronavirus crisis hit, you know, our performance for that, I think, seven or eight month period was 10%. And just to give you a reference, the closest index to, you know, to our strategy, which, by the way, were very different from what the index looks like, but the closest index was up 4%. And of that 10% return, about 4% came from this one company.

And so it's been a huge win for our fund. So just going back to the Malaysia example, and I'm just going to pile in on Joe here a little bit. And you mentioned that that market tends to be quite bored. but we have had one exciting thing that happened, and that was the one MDB scandal. And this is sort of a repetitive theme in emerging markets. We often have scandals. We often have corporate governance issues.

How do you get comfortable with that risk as emerging market investors? Is there something specific that you look out for when trying to judge a company? Yeah, a company or a country? I mean, the example you share. Yeah. Either, I guess. So in terms of getting comfortable with the country, you know, using your example of kind of the one MDB scandal, we used to do absolutely nothing on the macro front. So, you know, we were true bottom up investors that were just looking for amazing companies to add to the portfolio.

And, you know, for the first four or five years, that worked really well. And in 2018, we had a fairly high weight in Turkey and in Pakistan. And that year, Turkey's lira, the Turkish lira fell within a 12-month period, fell by 50%. And the, you know, the rupee fell by 30% in a 12-month or maybe an 18-month period. And as a result, we actually ended up massively underperforming. So up to that point for the first three or four years, we actually, our performance was in the top one percentile of, you know, of all of our peers. That year, had it not been for Turkey and Pakistan, we would have actually maintained that stellar performance. But as a result, we ended up massively underperforming.

And so, you know, what we ended up doing was doing a lot of research on macro events. I'm actually currently listening to the audiobook of Ray Dalio's principles. And he does a lot of these case studies, these macro case studies. And that's essentially what we did is we started digging into all of the currency crises that have happened in emerging markets. By the way, do you guys have any idea how many times a currency in emerging markets has devalued by 50% in a 12-month period? let's say in the last 30 years. Hmm. No, but I'd like, what's the idea?

So it's only happened 12 times in the last 30 years. And four of those 12 times was related to the Asian financial crisis. So if you take away those four related Asian financial crisis, there's only been eight times that a currency has devalued by 50% or more. And four of those eight were Turkey. and two of those eight were Argentina. So there are some repeat offenders in terms of emerging market currency devaluations. And so we did these big case studies.

And we also built a kind of macro risk quantitative model. And as a result, we have now overlaid this macro risk model to get comfortable with, you know, with countries on both quantitative basis, looking at their current. account, looking at their fiscal deficit and their debt, and also on a qualitative basis, you know, looking for the events that have been associated with currency crisis in the past. That's on the country level. On the company level, you know, we obviously go on the ground and do our diligence on the companies, you know, that we're interested in. But we also, spend a lot of time, as I mentioned, kind of, you know, meeting with those outside of the company,

you know, really trying to meet with locals who are, you know, alums from our business school or, you know, competitors, ideally suppliers, people that are familiar with the company, because we want to make sure, you know, that the people that we're talking to are reliable. And, you know, if we get conflicting accounts or we get questions, reports of the integrity of the managers, we won't invest. And so just to give you one example, actually, which was also Malaysia, there was a company we were really excited about and would have ended up investing in. We got some conflicting accounts about the integrity of the managers, and we decided not

to invest in that company. Now, unfortunately, for us, it would have been one of the best performers. It turns out, you know, it turns out that what the, you know, what the CEO is, you know, that we met with was telling us was in fact true. And it would have been this amazing investment. But at the end of the day, that's what we need to do to make sure that we are, you know, that we're protecting our investors. So talk to us now. Let's talk about the sort of current situation a little bit more because obviously, you know, it's kind of a cliche, but the current crisis, in a sense, has changed everything.

We don't know how much will permanently be changed, but presumably a lot. And there are also just questions about who will even make it from a sort of company standpoint to the post-crisis era, given the collapse in cash flows, et cetera. So talk to us, and Ivan, maybe you can come in here about how you're monitoring who's making things work or who's getting by or who's thriving in this current moment. Yeah, absolutely. So I think in our review, actually, we see some. great opportunities to buy good businesses at attractive valuations. I mean, some of the purchases could probably be 100% related to taking advantage of the current environment.

So, for example, I mean, speaking of Malaysia, but we bought a rubber glove manufacturer in Malaysia to protect against this COVID-related market collapse. And so we bought it about two, two and a half months ago. and since then it already went up 150% because the demand for rubber gloves has skyrocketed. But also, because we spent so much time on the ground, we try to select the very best company

we can get for the valuation for the strategy prospects and demand and everything. So in Malaysia, there are four very large glove manufacturers. So the one we bought went up, as I said, about 150% since we bought it, but the other three went up probably between 35 and 75%. So, you know, it takes some time on the ground to really understand which companies are undervalued.

So in this case, we had the right call. Of course, we recently did a survey of all the companies we met over the last 10 months, so 632 companies. We asked each one of them 13 questions about the impact of coronavirus on their operations. and I think over 90% of them said that the impact is negative. So, of course, in this environment, it's not so easy to, you know, select only the winning companies. But what we can do if you think long term, obviously there are some like this rubber glove company, but at the same time we can position our portfolio very well for the long term.

For example, businesses that were hit the most because of the panic sell-off, but that have great management teams, great cash flows, and the customers will return quickly. So we believe those companies are positioned very well to keep performing. I mean, some of those could be some of the largest and most stable banks in, let's say, each of the emerging markets. Some of those could even be retailers when people start, and I think more grocery retailers than some other type of retailers.

But, you know, I think, think everyone is hit about the same all around the globe, but you always have these pockets of opportunity. For example, in Pakistan, we had this company which makes hydrogen peroxide. So, I mean, of course, it's basically luck, but during these tough times, they started producing the disinfectants because they used hydrogen peroxide for food industry, but now they started producing it as a disinfectant. So their shares also went up about 60%. So, you know, sometimes it's skill, but sometimes, I mean, you're also good lucky. Tracy, remind me to tell you after the podcast about the time I was in a nightclub in KL, by the way, listening to a palm oil CEO telling

me about why the world will forever need palm oil and why it's one of the greatest businesses in the world, but that's for another time. I was a bit worried when Ivan was talking about, you know, like disinfectant and you immediately segue to remind me to tell you about the time I was in a club in KL. Oh, okay. I will definitely ask. Well, okay, so clearly COVID has had an impact on businesses and is definitely going to continue to do so.

It's also had an impact on the market itself. I'm just curious, but in terms of investment appetite for emerging market assets at the moment, what are you seeing? Like how bad is it and how difficult is it to convince people to invest in EM at the moment? Yeah. Well, we don't spend a lot of our time marketing our fund. So we spend 100% of our time on the investment side. What I can tell you is I've been really surprised by the limited amount of redemptions from our fund.

Typically during, you know, during drawdowns like this, you'll get a lot of, you know, investors heading for the doors. We've only had one investor really redeem their investment. Aside from that, the flows have been very stable. And so I think, you know, part of that is that we, when we do meet with clients, we try to make sure that they understand, you know, what our strategy is. and the, you know, the volatility that's, you know, that's related to it. But I think part of it might be, yeah, I mean, it's, you know, emerging markets are scary right now, but it's hard to say what's scarier. I mean, there's also very, very high, you know, inflated valuations in developed markets.

So, you know, it's, it's, it's, maybe it's difficult to know where, you know, where to optimally put, you know, put, put, put, put, put, put, put, put money. emerging markets relative to, you know, to develop markets have definitely been out of favor for the last decade. In some sense, are an interesting place to be. Obviously, you know, central banks have much more limited ability to manage the crisis. And that's, you know, that's something that we're looking at. And so we've spent a lot of time analyzing, you know, as part of our macro risk management, you know, commitment. analyzing where each of these countries are at and reducing or eliminating our weight in countries that we see having excessive risk

and related to coronavirus crisis. Do either of you have, or do both of you, have a favorite moment from your recent trip? I realize it was cut short, but I'm sure you have a lot of memories, a lot of interesting takeaways and lessons. What's one thing that sort of stood out for both of you? Yeah, sure. I'll let Ivan think about that for a second. I'm going to go back to the situation that I had shared with you earlier about sitting across the table from Donald Trump Jr.

Yeah, and you know, we already mentioned access we can get simply by sending emails to companies and to stakeholders in its markets. And I think maybe half of the companies they never met foreign investors before. And here we come, we send them an email. of course they're happy to meet, which kind of means the brokers don't always hold the keys. So, for example, I think for me it was when we spend a month in Bangladesh, basically I just send a simple email to the Nobel Prize winner, Muhammad Yunus, Dr. Yunus. And I said, you know, our fund has a very kind of pronounced ESG focus, but we always want to learn more about ESG, how can we create impact through our investments. and we would really appreciate meeting you.

And he himself, he responded and he said, look, I'm in Bangladesh right now, so we can meet next week. And it's been a great half an hour one-on-one meeting just kind of talking about his involvement in the UN Sustainable Development Initiative and just kind of really getting this experience and wisdom from the Nobel Prize winner, how we could also try to be more sustainable investors. So these kinds of meetings on the ground really are worth a lot for us. All right.

Well, thank you to you both for walking us through your experiences. And of course, it's a shame that your trip got cut off early due to the coronavirus crisis. But hopefully you get to go out again at some point. And you can tell us what you've learned on that trip as well. So Burton Flynn and Ivan Natchanea, thank you so much for being on all thoughts. That was great. Thank you. Great.

Yeah, thanks to love. So, Joe, I was going to say something, summing up that conversation, but I think I'm just going to go right to your KL, your Kuala Lumpur Club experience with a palm oil CEO. Yeah, I think he was definitely an executive, and it was like this, like thumping nightclub. It was like really loud. Like, you know, like you try to have conversations in a club,

and it never works. But this guy was like really trying to give me this detail. like sort of like technical argument about why palm oil is this great business in the middle of a club. And he like talked about all the uses for palm oil like women's lipstick and how there's no substitute for it. And then he also said, and I thought this was really interesting, which is that you can't really automate palm oil production because of the way the, because of the way they're on trees. And so it's not like, say like potatoes or wheat where you could just just like have someone out there with like a machine and get a big field.

You really need to have people in, in the jungles or in the plantations picking the stuff. And so he was talking about how much of an advantage that was for Malaysia and labor costs were essential. So you couldn't do it in a high labor cost country, et cetera. So I don't really know where I'm going with it. If I were doing a tour, that would have been my highlight. I like how this is just like this episode has morphed into share your sort of random emerging market experiences. What's yours, Tracy?

What's your favorite random emerging market experience? I got a lot, Joe. You have to have one. Well, okay. One time I was in Pakistan with my mother's then-boyfriend who owns a very large company. We were going up through the mountains in Pakistan. We'd just gone to dinner somewhere. And then we were coming back down.

And suddenly he stops the car and he starts to panic. and my mom and I are going, oh my gosh, what's happening? What's the problem here? And her boyfriend gets on the phone, calls his personal assistant and starts talking to him in Urdu. And he finally, like, hangs up the phone and he comes back to the car and we go, what's the problem? And he says, I just reach down for my gun underneath my car seat and it's not there. So basically, he's really unusual in the. that he's a rich CEO who drives himself. And that's pretty unusual in Pakistan. And he thought,

because his gun was suddenly missing, that someone had basically set him up to get robbed or kidnapped or worse. It turns out that his driver or the guy that cleans the car just forgot to put the gun under his chair. But that kind of gives you a snapshot of what it's like to live in Pakistan and do business, right? This is the kind of stuff. need. No more of this like, oh, the Fed is going to lose some policy and that'll weaken the dollar and that'll cause inflows into countries with high real GDP, blah, blah. It's like, this is the kind of stuff that really matters for investors. Yeah. Well, the CEOs have to carry a gun. The late competitive labor cost advantage of picking palm oil in Malaysia. This is where we need to go.

This is what we need to be talking about. You know what? We need to do like a call-in show where everyone just shares their sort of like emerging market business investment experiences. I'm down. Let's do that. Okay, but on a serious note, I really enjoyed that conversation. I think it gets back to what we were discussing in the intro, which is that if you are investing in these types of markets, you really have to do the legwork. And that should mean really going to these places and experiencing both the country and the business that you're investing in. Yeah, it's also interesting to think about like the sort of even in the midst of, even in the midst of this crisis, the sort of competitive advantage of having gotten to know a new market.

So it's like, okay, suddenly this virus breaks out, oh, there's a well-run Malaysian rubber glove company that could stand to benefit. Like how many people would know that? Yeah, absolutely. That that company even exists. But so, yeah, but very good, very interesting. And of course, it'll be interesting too. And it always comes up with EM things or frontiers. the degree to which the macro overwhelms the micro. So obviously even good companies are going to have a hard time in an extreme, severe, negative macro scenarios, but it'll be interesting to see sort of which wins out

and whether there are companies that really sustainably thrive even during what is expected to be an extremely, just sort of difficult time for the foreseeable future on a macro front. Yeah, the other thing I was thinking is that Burton and Ivan and sound like they would be good financial journalists, you know, sending, like, 14 emails to, yeah, sending 14 emails to try to get one meeting and just sort of like wearing down the CEO of a company in order to get that interview. Yeah, that sounds very journalistic. Yeah, very much so. And I would listen to a podcast of theirs, too. They should do one for each country they go to.

Yeah, that'd be interesting. Okay, well, now that we've created a competing podcast to All Thoughts, Let's wrap it up. So this has been another episode of the All Thoughts podcast. I'm Tracy Allaway. You can follow me on Twitter at Tracy Allaway. And you should also follow our Bloomberg colleague Felipe Pacheco. He actually wrote a really good article about what Ivan and Burton have been doing and their travels in various emerging markets. You can follow Felipe on Twitter at Felipe F-I-L-I-P-E-P-E-P-H-E-C-O.

And I'm Joe Wisenthal. You can follow me on Twitter at the stalwart. Follow our producer on Twitter, Laura Carlson, Laura M. Carlson. Follow the Bloomberg head of podcast, Francesca Levy, at Francesca Today. And check out all of our podcasts at Bloomberg under the handle at podcasts. Thanks for listening. focus on just one story. But right now, you probably need more.

On Up First from NPR, we bring you three of the world's top headlines every day in under 15 minutes. Because no one's story can capture all that's happening in this big, crazy world of ours on any given morning. Listen now to the Up First podcast from NPR.