New York University



To Be an Analyst/Portfolio Manager

What it Takes

1. Solid knowledge of finance, economics and history

— MBA, accounting, spread sheets

— Perspective

— Forecasts are rarely linear

2. Independent thinking/open mind/common sense

— Ability to “step back"

— Skepticism

— "See through" current events

— The "screen" is only a rear-view mirror

3. Honesty

— Perfect recall of successes, amnesia for failures is very human

— You learn only from your own (painful) mistakes

— Keep track - fess up!

4. Humility

— You will get it wrong - again and again

— Experience helps but is no guarantee

— Markets quickly punish cockiness

— Interviewing skills

— Listen rather than impress

5. Stamina

— Food, let tag, long hours

— Footnotes

6. Languages and junior year abroad

— Spanish, Chinese, French, Russian

— Excel

The EMM Experience

• Our performance

• Our style

• Our core beliefs

• Our model

• Our stock picking

• Our portfolio

The EMM Experience

• Founded in 1987

o Pioneer in emerging markets asset class

o Exclusively focused on emerging markets equities

• Over US$ 3 billion assets under management

• Institutional client base

• Independent

o But backing from major European banks

o Affiliated with "global" firm

• Largely owned by those who set up and are now working in firm

Our Investment Process Is

• Active in its country and stock picks

• Driven by fundamental analysis

• Value oriented

• Highly disciplined

• Based on quantitative country allocation model

• Top-down in country allocation

• Bottom-up in stock selection

• Broadly diversified in its "bets"

• Highly conscious of risk controls

Our Ten "Core" Beliefs

1. A quantitative approach disciplines the investor

--to avoid the excesses of market psychology

2. Markets and stocks revolve around their fundamental (fair) value

--over longer periods of time

3. Value is not always the same as "cheap"

--view in the context of growth, asset backing, quality and liquidity

4. Market sentiment and broker opinions are poor forecasters

5. In a volatile asset class, the focus should be on the longer term

-- "panic" reactions to recent events often subtract value

Our Ten "Core" Beliefs

6. "Models" are essential to investment discipline

--but are poor at capturing politics and structural policy changes

7. Market inefficiencies found in unknown markets and smaller stocks present opportunities as well as risks

8. Stock prices (still) tend to move more with local markets than global industries

9. Competitiveness is essential for sustainable success in an increasingly open world

10. Macro-economic imbalances sooner or later "trip up" ostensibly successful economies

[pic]

[pic]

[pic]

What Do We Look For in

Choosing Portfolio Companies?

• Cheap

• Promising Growth or turning around

• Smart (management, strategy, niche)

• Solid

• Competitive

Picking stocks

(100-200 out of 1 1200-109000)

• Valuation in the context of growth, quality and liquidity

• Quantitative forecasts reflect historical financial data on sales

• Growth, prices, margins, and financial ratios

• “Soft” factors include management, competitiveness, industry cycles, macro-economic outlook, pricing power, transparency and respect for minority shareholders.

Ratios

• A single ratio can never summarize a detailed judgment but a combination of quantitative indicators may be used to screen stocks for investment

• Price/cash earnings and price/net asset value viewed within the context of a growth trend are useful for valuation comparisons

• Sustainable earnings growth may be estimated on the basis of market dominance position, cost advantage, technological edge, and cyclical outlook

• Margins, ROE, net debt/equity, and interest coverage are good indicators of quality

• Average daily trading volume and rankings with the MSCI Free global/country universes may serve as proxies for liquidity

To Remember

The best investment opportunities in emerging markets may be found in a cool-headed analysis of stocks which

• have left investors shell-shocked

• are beneficiaries of public policy changes

• enjoy cyclical uptrends

• benefit from shifts in consumption patterns

• excel in technological innovations

• are prized for cost-efficient outsourcing

and, in general

• will be able to sustain above average growth

Companies are Analyzed in Several Steps

• A standard list of key financial data for a "new idea" are analyzed and included in our company data base

• If a stock idea meets broad investment parameters, the analyst summarizes his/her investment opinion in a brief company report

A Company Report

• Standard financial data

• Background information on the company

• Our investment thesis

• Details on the earnings outlook

• An evaluation of competitive strengths and weaknesses

• Other "soft" factors

• A price range at which the stock should be bought and sold

• A price chart

Company Financial Data Base

• EMM has its own, proprietary data base on over 800 companies

• Detailed income statement, balance sheet and cash flow information for recent years and earnings estimates for the next few years

• Highly individualized earnings models prepared by the analysts are integrated with our overall data information system which contains extensive standardized data, ratios and growth estimates

• Information from various data banks and estimates from various brokers can also be integrated instantaneously with our own information and used for updates, market consensus estimates and earnings revision trends

[pic]

[pic]

Portfolio Construction

• Our portfolio managers guide company/industry research and are responsible for constructing the ultimate stock portfolios in each country and industry

• The objective of this process is to create a portfolio which will outperform the benchmark and stay within the risk parameters specified by a client

• Both absolute risk (standard deviation) and relative risk (beta and tracking error vs. benchmark) are monitored

Portfolio Construction

• Valuation, quality, liquidity, and contribution to portfolio risk as well as neutral weights of country and industry benchmarks are major considerations in constructing a portfolio

• Companies are over/underweighted relative to benchmark weights depending on comparative valuation and liquidity

• A very attractive small capitalization stock may be significantly overweighted despite poor liquidity as long as the less liquid stocks in the overall portfolio stay within certain limits

• An unattractive company with a large weighting may be excluded as long as the overall tracking error of the portfolio is within certain limits

• Companies of lower quality or liquidity are not excluded but must meet a higher valuation hurdle.

Portfolio Construction

Portfolios are continuously monitored. When a stock price reaches the "sell" point, it is either sold or the buy-hold-sell range is changed to take account of new factors unknown at the time of the earlier analysis.

[pic]

[pic]

The Outlook

• What’s new in emerging markets

• What will drive future earnings

• Lessons learned

• Unanswered questions going forward

What's New in Emerging Markets

• News is disseminated electronically on a global basis and investors react virtually instantaneously

• Several hundred of the major emerging markets stocks are followed closely by broker analysts although quality and timeliness of research remain very uneven

• Many companies have web sites and may be approached for questions through e-mail

• Lack of transparency is more widely recognized by company managements as detrimental to stock prices

• Most of the higher quality research is now available electronically

[pic]

Macro-Lessons Learned on Investing in Emerging Markets

1. Growth, earnings and market success do not (necessarily) coincide

Lessons: - watch interest rates and changes in growth

- long-term investors must get inflection points right

2. Don't expect markets to be rational

Lessons: - markets are efficient in theory only -- useless as a guide to investing -- they always overshoot on the upside and downside more than expected

- instant analysis and push button execution are a curse but also a reality

3. Easy to get caught when investors and bankers panic

√ Mexico and Asia worse than expected

Lessons: - watch macro-imbalances

- watch short-term corporate debt and over-leverage

- watch rapid loan growth

- denial/anger/adjustment cycle applies to investors

4. It takes time to transform Communism into market economies

√ Early enthusiasm for China and Russia was misplaced

Lessons: - corporate earnings are as important as macro-story

- transformation = prime-time for rip-offs

5. Illiquid stocks are not immune to market drops

Lessons: - limit even attractively valued illiquid stocks to less than 20% of portfolio

- unload small caps when they achieve "star" status

6. Emerging markets are strongly affected by the "new economy"

√ Mobile, outsourcing, concentration, price transparency

Lessons Learned on Picking Stocks in Emerging Markets

1. "Cheap" stocks often hide poor corporate governance

√ Risk premiums sometimes well deserved

Lessons: - forget about low-quality banks

- shareholder culture emerges slowly, after crises and under pressure

- "quality" is a "soft" factor -but often makes the difference

2. Global brandnames challenge local "blue chips" as markets open up

Lessons: - dominant local market share erodes quickly and margins disappear be skeptical of - wholesalers, small banks, sloppy conglomerates

3. The competitive response has become (and will become) increasingly important

√ Globalization and the Internet are reaching "dusty corners" and create opportunities

for those who adopt and innovate quickly

4. Successful emerging market companies have often been hi-tech rather than low-labor cost

√ Electronics, software and mobile telecom have been the best long-term performers

Lessons: - brokers rarely spot long-term winners

- outsourcing trend rather than local growth has been key

5. Approaching a new inflection point - dare to be boring

√ Internet mania is over

√ "New economy" benefits will become visible after costs

................
................

In order to avoid copyright disputes, this page is only a partial summary.

Google Online Preview   Download