Okay, okay – so emerging markets have begun what so far is shaping up as another disastrous year. What are you going to do?
Sell – and lock in the lowest prices in six years? Sit tight and wait for the next hammer blow from U.S. interest rate hikes or more evidence of China’s slowdown?
You could simply throw your arms in the air and say – well, at least my money is doing some good for the developing world.
But is it?
The biggest recipients of emerging-market investment are places that fall woefully short on transparency and corporate governance standards, with external funding to some countries as likely to spur corruption, pollution and division as aid development.
A new breed of money manager is out to challenge this – marrying altruism with equity investing, as one company has sought to encapsulate.
Alquity invests as any other emerging-market fund manager, trying to make the best of a bad market by buying unloved companies in the hope the rest of the world will some day catch on and realize their true value. Except it’s a bit more picky. Take South Korea, for example.
“It’s somewhere that we find very difficult to invest, which is actually quite surprising,” Eve Black, Alquity’s marketing manager, tells the Emerging Opportunities show on Share Radio.
It’s surprising because South Korea is the biggest component of that bible for developing-nation fund managers – the MSCI Emerging Markets Index. Used by investors the world over to guide allocations, it apportions the biggest chunk to South Korea after China, at almost 16%.
“It is somewhere that you’d expect to have good governance and transparency but it is in fact the opposite,” says Black.
The largest listed stock after the Korean colossus, Samsung, is Hyundai.
“They produce good cars and they are very well known,” says Black. “But they have absolutely no interest in minority shareholders.”
If this too sounds shocking, consider recent evidence. The family-run conglomerate and two affiliates bid three times the appraised price for a property in Seoul’s Gangnam district to house a company HQ – offering an eye-watering $10 billion. The decision sent shares plunging – and prompted remedial steps to win back investors last year by setting up a “transparency management committee” with four outside directors to defend minority rights.
But it’s not just the biggest components of the indexes – like South Korea and Hyundai – that irk Alquity. It’s the indexes themselves.
“They’re historically backward looking,” complains Suresh Mistry, Alquity’s sales director.
In Latin America, for example, almost half of MSCI’s index comprises stocks in Brazil – rocked for the past year by successive corporate corruption scandals that threaten to bring down the president.
“We already know the challenges that Brazil faces and will face for some time to come,” says Mistry. “Not following a benchmark enables us to focus on picking stocks that deliver returns, and avoid those that are just in there because of their size.”
While Alquity does invest in Brazil – particularly the exporters benefiting from a weaker exchange rate – it’s more interested in improvements to infrastructure lifting the economy of Peru, and the political transformation in Argentina, where a favourite holding is Pampa Energia, the largest electricity company.
“One of the brightest spots at the moment is in Argentina,” says Eve. “It’s coming to the end of a disastrously toxic period for the country, but this is just one of the positive steps in a country that is facing many challenges.”
Rather than democratic South Korea, Alquity finds more to buy in Communist Vietnam. It makes up 15% of Alquity’s Asia fund and 20% of its Future World fund.
“There are good stocks to be had there, with the right level of transparency,” says Eve. “Hardly anybody has any meaningful exposure to it.”
But there’s yet another difference that sets Alquity apart from the big money managers. Along with stocks, it buys chickens – lots of them.
Working with an organization in India, it supports some of the poorest families by providing small-scale farming kits. The knowledge and equipment guarantees an income from selling eggs to support the home and sustain further business ventures.
Alquity allocates up to a quarter of its revenue to social projects like this in the countries where it invests. The point, insists Suresh, is not purely altruistic.
“If we can increase somebody’s income from $2 a day to $10 a day, what are the first things they buy?” he says. “A mobile phone. That’s a great stock to own. We’re actually providing the future consumers for the companies we’re investing in.”