Capitalist Exploits | 24 January 2013
Investing in
frontier markets is a challenge due to lack of liquidity and significant set-up
times. One way to circumvent these problems is to Invest in other people's
expertise through a managed fund.
We work hard to associate
ourselves with smart individuals where we can reciprocate value. This not only
gives us opportunities to put capital to work, but provides us the ability to
grow a powerful network filled with influential people.
One such person I have become
friendly with is Thomas Hugger, COO & CFO of Leopard Capital, a frontier
markets private equity fund we have discussed previously in these pages.
Thomas has had a global career,
spending 27 years in private banking, where he specialized in managing
portfolios of listed and unlisted equity investments. Further, he is a CFIA.
His most recent venture is the formation of the Leopard Asia Frontier Fund
(LAFF), a liquid investment vehicle focusing on Asia’s frontier markets.
I recently caught up with Thomas in Phnom Penh where we had a discussion about his fund, as well as some opportunities he sees right now in the countries LAFF is active in. Enjoy!
I recently caught up with Thomas in Phnom Penh where we had a discussion about his fund, as well as some opportunities he sees right now in the countries LAFF is active in. Enjoy!
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Scott: Thomas, you started the Leopard
Asia Frontier Fund, under the umbrella of Leopard Capital last year, at the end
of March. Why did you decide to start this fund? What opportunities captivated
you? And, how's the performance been thus far?
Thomas: We have been marketing our PE funds since 2007 and have met with
more than 1,000 potential investors over the last 5 years. Many of them told us
that they liked the growth story of Asian frontier markets, but would prefer to
invest in a more liquid product. That was one of the main reasons for launching
the Leopard Asia Frontier Fund.
We strongly believe in the growth
potential of all of the countries we invest in because they have young and
growing populations, and rapidly-expanding GDPs – resulting in higher GDP per
capita and disposable income for these countries in the future.
The performance of the MSCI
Frontier Market Asia Index has lagged the performance of developed countries
which is a kind of conundrum. However, this provides investors in 2013 an even
better opportunity since they can invest in Asian frontier markets at a lower
P/E ratio compared to developed markets, despite considerable current and
future economic growth.
We believe that it is just a
matter of time until investors rediscover emerging and frontier markets and
allocate more capital to them.
Scott: Your mandate is fairly broad, allowing you to invest in any Asian
frontier market, from Mongolia to Laos, Bangladesh and even Iraq. Of course
that doesn't mean that you are finding value in all those places. What does
your current asset allocation look like?
Thomas: There is definitely a lot of
value to be found in Asian frontier markets. Currently, the countries with the
largest allocations are Vietnam (19.5%) and Sri Lanka (16.8%). In both
countries, I have found stocks which are trading at unbelievably low
valuations.
I was able to invest in breweries
in Vietnam which are trading at P/E multiples between 4 to 6x, and at or below
book value. At the same time, Heineken is prepared to pay 36x P/E and 10.5
times book value for Singapore-based Asia Pacific Breweries (APB) in order to get
a bigger foothold in ASEAN countries. Another example is a leading car
distributor in Sri Lanka, in which I was able to invest at below 2x P/E and
below book value.
Laos makes up 10% of LAFF and
even though its exchange only has two listed stocks, they are both still
trading at attractive valuations despite the recent price rally. I have also
invested in five stocks with significant exposure to Myanmar (Burma). Four of
these five stocks are not trading at attractive historical valuations, but due
to the opening of Myanmar to foreign investors, these companies are very
attractive in our view.
Scott: What sectors, in general, do you
tend to lean toward when making investments in frontier markets?
Thomas: We especially like consumer and consumer-related
stocks due to the underlying GDP growth and the emerging middle class – these
factors will contribute to an increase in consumer spending. It is simply a
repeat of growth stories we have seen in Thailand, China, and India. We also
like stocks focusing on infrastructure, banks, and financial services.
Additionally, each country in LAFF’s universe has its own unique key sector,
such as tourism in Sri Lanka and Cambodia.
Scott: We beat the drum of “boots on the
ground” here at Capitalist Exploits constantly. You can't really understand a
place without spending time with local business owners, entrepreneurs and even
the political decision makers.
I can say that I've never seen a
passport like Douglas Clayton’s. You guys log a LOT of kilometers every year.
Can you give us an idea what your due diligence process consists of once you
touch down in a place?
Thomas: It's a short answer, really...we
try to meet as many people as possible from many different sectors and business
communities in order to understand the country’s opportunities and challenges.
Scott: With such a diverse number of
frontier markets in Asia and places like Pakistan performing well, while
Bangladesh and Vietnam have done the opposite, which country are you most
excited about at present?
Thomas: I am very excited about the
immense opportunities Myanmar presents. We at Leopard Capital believe the
opening of the country will be a game changer not only for Myanmar but also for
the whole Mekong region (Cambodia, Laos, Thailand and Vietnam) and also for
Bangladesh.
I currently also like Vietnam
because of the extremely low valuation of mid and small cap stocks there, and
the fact that almost all foreign investors would prefer to stay away from the
country because they lost so much there in 2008.
Scott: Leopard having operations in
Cambodia I want to direct this question to Indo-China. The capital markets of
Laos and Cambodia are very young with a combined total of three listings. From
your experience, how will these exchanges evolve? Do you see institutional
funds and liquidity flowing into these exchanges in the near future? What's
your 5 year prognostication?
Thomas: One of the most important next
steps in both countries is the arrival of custodian banks in order to provide
their services to institutional foreign investors. I believe that there are
attractive IPO candidates in Laos and Cambodia which will provide good
opportunities for both local and foreign investors.
I would love to see Naga Corp.,
which is currently listed in Hong Kong, have a dual listing in Cambodia. I
expect that there will be two to three IPO’s in 2013 in both Cambodia and Laos
and that there will be about 20 companies listed in five years in both markets.
Scott: You mention Vietnam, a country
that has been battered by both stubborn inflation and a property bubble. It's a
fascinating country with fabulous resources, including its young, hard-working
and literate population. Do you see any catalysts on the horizon that could
signal a floor in the market? When should we look to jump back into this
market?
Thomas: I like Vietnam exactly for the
reasons I stated earlier and for what you said. I think it is a classical case
of “contrarian investing”: invest in a market when nobody likes it. I think we hit
this point in the second half of last year with the problems surrounding Sacom
Bank and the arrest of the CEO of Asia Commercial Bank.
There are still problems with the
property market and the bad loans within the Vietnamese banking system, but
this provides a great opportunity for long term investors to pick up mis-priced
stocks, especially within the consumer, utilities, and agriculture sectors.
Scott: How about Laos. Many peg it to be
one of the fastest-growing economies in the region..?
Thomas: Laos should benefit from more
trade and investment activity within the Mekong region, and also with China.
The country has a very young population (average age is 19). Laos is
particularly interesting for power production and agricultural investment.
However, it is still a communist country and may move a bit slower than its
neighbors.
Scott: Investing in so many markets
means you likely see a number of compelling opportunities. Can you give our
readers one or two?
Thomas: Consumer, consumer! We like the
consumer sector due to these countries’ young populations and high GDP growth.
Scott: Frontier markets tend to
under-perform when the overall global economic environment suffers, as it did
in 2008. Even in 2012, frontier markets as an asset class did not perform well.
Do you see this changing in 2013, or are we destined for another year of the
same? And, is it possible that some areas will outperform regardless?
Thomas: I see
2012 as a year of transition for frontier markets. Frontier markets are
particularly driven by capital flows from foreign investors. In 2012,
international investors bought stocks in the US and Europe, since it seems that
America’s economy and property market have both found a bottom and the European
currency crisis has been resolved for the moment.
In 2012, investors overlooked
emerging and frontier markets and I believe that 2013 will be much better.
Scott: Chris and Mark keep hammering the
point of seeking out and working with competent exceptional management, finding
it more important than most other factors when evaluating an investment. This
seems even more important when working in Frontier Markets, can you provide us
with some insight into your own philosophy in this respect?
Thomas: I fully agree with them that it
is important that the management is outstanding, trustworthy, and most
importantly, creating value for the shareholder. I have seen instances where
the management’s interests were not aligned with that of the shareholders,
especially from companies in state-directed economies.
Scott: Thomas, thank you for taking the
time to share your thoughts. Any final gems you can share with readers who are
just getting their feet wet, so to speak, in frontier markets.
Thomas: I believe that investors in
frontier markets should invest in an “actively” managed fund and not in a
passive investment like an ETF. The reason is that if something goes wrong in
frontier markets, it can have severe consequences (i.e. Vietnam in 2008 which
lost 66% in local currency). At Leopard Capital for example we try to detect
these events early and make exits in our fund at the appropriate time in order
to preserve the investor’s capital.
Scott: Thanks again Thomas... I'm
looking forward to spending more time with you here in Phnom Penh, and hopefully
seeing you at our Meet Up in April.
Thomas: Thanks Scott.
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Thomas hit on some key points to
investing in frontier markets, namely:
- Taking an active role, or investing in an actively managed vehicle
- Invest only in strong and trustworthy management
- Be a contrarian; invest in a market when nobody likes it!
- Invest where valuations don't reflect the growth
For those of you who are
interested in learning more about the Leopard Asia Frontier’s Fund you can visit
Leopard's website. For a personal
introduction to Thomas, just drop us a note.
If
you want to experience SE Asia for yourself then you need to come to our
Cambodia: Boots on the Ground Meet Up, April 24-26 in Phnom Penh. Our keynote speaker, Dr. Marc Faber
will take us through why he loves SE Asia and how to invest.
We'll also hear from local fund operators, including Leopard. You'll get a
personal tour of the Cambodian Stock Exchange, and hear from prominent local
businessmen, attorneys and real estate developers.
- Scott
“East Asia has prospered since the end of the Vietnam War, and
Northeast Asia has prospered since the end of the Korean War in a way that
seems unimaginable when you think of the history of the first half of the
century.” - William Kirby
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