Blog

If you stopped someone in the street and asked “What does it mean to be a shareholder” what do you think they would say? Would their response change if you asked: “What does it mean to be a shareowner”? Do many people differentiate between the two?To my mind, there has always been a fundamental difference. They sound similar but in reality are like night and day. A shareowner invests in a company and acts as a co-owner. A shareholder passively holds the asset without getting involved. Being an active owner of a company requires you to effectively engage with management and stakeholders on a range of strategic issues. It can add significant value to a business if you can provide assistance in addressing risks, reducing inefficiencies and improving operational and ESG (environmental, social and governance) standards. In many circumstances, this type of engagement and support can eventually lead to a higher valuation of the business. A recent study shows that companies implementing changes to environmental, social or governance standards following engagement from investors, generated more than 7% of excess returns after 18 months.When I started my career as an emerging and frontier markets investor in the late 90s (at that time frontier markets did not even exist as an asset class) it was much more difficult and even uncommon to behave as a real shareowner. Exercising voting rights was perceived as the highest possible level of corporate engagement. Attempting to partner with portfolio companies on strategic business issues was simply not done. For many investors, meeting with a listed company was seen as an exception rather than a rule.Thankfully today the situation looks different. Institutional investors exercise their rights in most (if not all) of their portfolio companies. As a result, parties with controlling stakes are increasingly aware that all meaningful decisions (taken at or outside of a shareholder meeting) will be scrutinized, assessed and voted on by minority shareholders. This has changed the dynamic between majority/minority investors and has led to a significant improvement in corporate governance standards. This can only be a positive development for all investors, but particularly shareowners.Unfortunately, some investors have not capitalised on the opportunity to have more involvement and as a result, continue to keep companies at arm’s length. It is common practice for many investors to vote blindly in accordance with recommendations from a small group of influential proxy advisors. Therefore, the votes of a significant proportion of investors are decided by the views of a few analysts. This can be ineffective as specialists often apply the same principles across all markets without factoring in local market standard practices, regulations, differing level of capital market development and local cultures. One size does not fit all. In other instances, institutional investors are engaged but still allow the proxy to exercise their votes i.e. in their absence delegate their voting power to a representative. While this form of shareholding is often easy, as it saves time and money, it also significantly reduces the pressure and scrutiny on executives and boards during meetings. There is no better way to mark yourself out as a true shareowner than to take up your right to look executives straight in the eye and ask them the difficult questions.Opportunity for constructive engagement in EM and FM

Mark Mobius: Please tell me about your career to date.Usman Ali: It’s been fun. After graduating from university, rather than following my peers into investment banking, accounting or management consultancy, I wanted to focus on something that tied together my studies, interests, and personal philosophy: ESG investing.I joined Royal London Asset Management’s (RLAM) sustainable investment team and have been focused on the space ever since. I moved from RLAM to New York’s Caravel Management (now Greentech Capital Advisors), where I built a sustainable investment framework for one of the world’s first ESG integrated emerging and frontier market equity funds. Most recently, I’ve acted as a consultant for firms looking to expand their ESG capabilities, including a single-family office in London, East Capital in Stockholm, and Degroof Petercam Asset Management in Brussels.It’s been incredibly valuable to sit on both sides of the table: as a client at a sophisticated family office, and on the direct equity investing side itself. Above all, I’ve loved witnessing the seismic shift within the industry as investors start to take ESG seriously and understand its material impact on valuations. Clients, funds, governments, countries, and individuals are all increasingly interested in ESG, and it’s been great to work alongside them to be a part of that change.Mark Mobius: What attracted you to Mobius Capital Partners?Usman Ali: There are a lot of reasons! Firstly, I am a strong believer in independent partnerships. As a small, highly entrepreneurial firm, our ownership structure frees us from institutional bureaucracy. We can focus solely on investment performance. Furthermore, the reputation of the founding partners is unrivalled within emerging and frontier markets investing. It is an enormous privilege to work alongside and learn from such a seasoned team, who bring with them decades of field experience.However, what makes Mobius Capital Partners truly unique is the hands-on approach, rigorous due diligence and engagement processes, evidenced in our highly concentrated portfolio. In addition to us partnering with companies, there is a tremendous opportunity to engage with regulators and capital markets authorities to improve ESG standards in emerging and frontier markets, contributing to a real and lasting difference.I’m very excited about our boots-on-the-ground approach and meeting companies throughout the world!Mark Mobius: What is your interest in emerging and frontier markets?Usman Ali: The scope for development in emerging markets presents an unprecedented opportunity for ‘leapfrogging’ developed markets. The lack of legacy infrastructure and sunk costs, combined with a wealth of technological innovation and labour, allows entire industries to not just catch up but improve on how we have done things in developed markets. Whether that’s in the context of tangible development (high-speed internet, public transport) or intangibles (corporate culture, governance, etc.), it’s such an exciting time to be investing in emerging and frontier markets. I also find that EM investing is always much more closely tied to macroeconomic and political affairs, which really broadens the scope and keeps things fresh and interesting.I’m particularly looking forward to heading back to my family roots and generating investment ideas in Pakistan. I’ve been following the country’s development very closely, including its upgrade from a frontier market to an emerging market, and so it’ll be really fulfilling to be able to play a part in the country’s continuing development.Mark Mobius: Where do you see the greatest opportunities when engaging with emerging and frontier market companies on ESG issues? Usman Ali: Where do I start? There are so many opportunities for emerging and frontier market companies to flourish by tackling everything from governance standards to social sustainability. Improving capital allocation, aligning incentives of management and shareholders, or adjusting board composition – these are just a few examples of areas where many companies fall short of the standards expected in developed markets.On the social side, there is a real opportunity to improve the quality of supply chains and products themselves. It is important companies are on the right side of forward-thinking regulation. Above all, however, disclosure is what needs to improve the most – transparency is critical!Mark Mobius: What are your thoughts on the new government in Pakistan?Usman Ali: I think the local population, as well as Pakistanis living abroad, are excited to see Imran Khan, a childhood hero for many, take up the highest office. However, the immediate challenges require speedy solutions. Negotiating with the IMF will be key. For many years, companies in Pakistan have been able to thrive without the support of the government. With the right policies, this could be a game changer. With a forward PE of 8x and earnings growth of 16%, Pakistan’s equity market continues to be very attractive. Mark Mobius: In another life, what would be your dream job? Usman Ali: The diplomatic service. I suppose there are many similarities to what we are doing. The core tenet of our active ownership approach is commercial diplomacy. It’s tremendously rewarding to develop awareness and sensitivity to different cultures, learn how to persuade key stakeholders, partner with a range of companies, and to have the opportunity to gain real international experience. Otherwise… maybe a food critic – I’m a fan of Giles Coren!

Day 1

I was recently invited to speak at a conference in Istanbul and my visit came at a rather opportune time, with the result of the Turkish election imminent. The key talking point was whether or not a runoff election would be necessary if the leading candidate and incumbent Erdogan did not achieve over 50% of the vote (he received 52% and a runoff was not required).Whenever I am on the ground to observe elections, rather than analysing the result I prefer to focus on the actual mood in the country. On landing at Istanbul airport my initial takeaway was the large crowds. This was the second time in a month that I had been to this airport and on both occasions it was notable that there were not enough bridges to connect all the arriving flights to the terminal building. Once I eventually got to immigration there were long queues. Clearly a significant number of the local population are keen to travel.My second takeaway was that Istanbul needs a new airport! However luckily one is due to open later this year to mark 95th anniversary of the Turkish Republic. Istanbul’s new airport is expected to handle 200 million passengers a year in addition to air cargo.

In the last 15 years trade between African nations and Turkey has increased over 600%.

Turkish Airlines has been expanding rapidly in recent years with routes travelling to all parts of the world. In addition to over 40 destinations within Turkey it now has scheduled services to 302 destinations in Europe, Asia, Africa, and the Americas. This makes it the world’s largest carrier by number of destinations. The airline has also started to fly new routes, particularly as Turkey turns to Africa for business. In the last 15 years trade between African nations and Turkey has increased over 600%.I should declare that I have previously been an investor in Turkish Airlines. I recall recommending that the business consider hiring more independent directors on its board. The President at that time was quite amenable when we mentioned it to him. However, since the airline was controlled by the Ministry of Transport, he suggested that we fly to Ankara and ask the minister directly. While in some instances government involvement can act as a roadblock, we were surprised by the minister’s response “instead of hiring one independent director, why not two?”This reflects an increasing trend in emerging and frontier markets as large corporations become willing to engage with investors to improve their corporate governance.

Day 2

The conference I spoke at was sponsored by Sabancı University and focused on global investment. Once again, I was surprised by the tremendous interest and large numbers of attendees. The sessions were packed full of businessmen and woman, with the organisers turning people away! One of the most interesting sessions was a panel by blockchain experts. The moderator asked the audience if they were investing in cyber currencies and I was interested to see hands shoot up from about 20% of those present.

Day 3

Over the weekend I took a boat tour on the Bosporus to look at the historic homes that hug the shoreline. It is one of the most busy and crowded waterways in the world. In 2017 the narrow channel accommodated over 53,000 ships. By comparison the Suez and Panama Canals each year accommodate 31,000 combined.The Turkish government has now announced a plan to build a new canal, which would bypass the Bosporus and provide a safer and faster route. This would reduce the congestion and risk of accidents. The new canal will be 45 kilometers in length and the land alongside will be used for building upscale apartments and commercial properties. It will also be linked to the new airport.Commentators might say these are trying times for the Turkish economy. The lira is tumbling against the dollar and inflation at 15% is a 14-year high. However, on my recent travels I saw little sign of a recession. Istanbul was bustling with both tourists and locals. The government is planning some major infrastructure projects such as the canal, the airport and the construction of homes. If anything I expect this to further accelerate economic activity and feel Turkey is a market to watch in the coming years.

Last week I blogged about my fascinating trip to Istanbul during the Turkish Presidential election.The people of Malaysia also recently went to the polls and produced an electoral earthquake. For the first time since the country won its independence from Britain in 1957, the ruling coalition Barisan Nasional (BN) was defeated.At the age of 92, Tun Dr. Mahathir Mohamad returned to office as head of a new party and as the world oldest Prime Minister (he had previously served from 1981 to 2003). Following his swearing in, Mahathir called for an inquiry into the massive trillion dollar corruption scandal which engulfed the previous government and led to the arrest of former Prime Minister Najib Razak on corruption charges.After returning from Istanbul, I decided to get an insight into the local mood by visiting the city of Malacca about 90 miles south east of Malaysia’s capital Kuala Lumpur.Normally when I travel to Malaysia from Singapore I would either drive to Johor or fly to Kuala Lumpur. This time I decided to take the bus to Malacca which I was told would take about three hours. It actually turned out to be much longer due to the heavy traffic and immigration procedures on both sides of the border.I found my visit to Malacca revealing, in light of the tremendous changes compared to my first trip to the city 30 years ago. At that time you could not even call it a city. Rather it was a small, sleepy town that seemed untouched by the wider world. Although the old town is still in existence and as quaint as ever, there has been an incredible expansion of the city limits as a result of land reclamation. There have even been a number of high-rises sprouting up. This pattern is similar to what I have witnessed in other Asian cities. There is a growing trend for the construction of mixed-use developments with apartment buildings, hotels, and shopping centres in one big complex. I stayed at the Doubletree Hilton, which was part of such a complex built on reclaimed land overlooking the Straits of Malacca. It is a beautiful hotel and I was surprised to find that the room rate was only the equivalent of US$90 including breakfast.Talking to people about the election I sensed some concerns around vote-rigging by the powerful ruling coalition. As a result many citizens kept an eye on the polling stations and used Facebook and Twitter to inform others of any possible tampering. Whenever news spread about potential wrong doing, crowds of people gathered around the polling stations to ensure no corruption was taking place. In some cases, the crowd stopped policemen from bringing in boxes of false ballots. Malacca’s district had been supportive of the opposition for quite some time so it was not surprising that the ruling party was defeated here.Besides being tempted by the very low prices in Malacca’s shops, which were half the price of Singapore, I decided to visit some of the tourist attractions. First I took a river cruise on the Malacca River through the old town. The city government has beautifully restored the river, which was once heavily polluted. They have lined the banks with walkways, elaborately decorated bridges and painted murals on the walls of houses. Close to my disembarking point lay the Malacca Maritime Museum, a full-size reproduction of the Portuguese ship Flor de la Mar (Flower of the Sea), which under the leadership of Afonso de Albuquerque supported the conquest of Malacca by the Portuguese in 1511.At the time of the Portuguese conquest, Malacca was a very rich city due to the spice trade traversing the straits between the Malaysian Peninsula and Indonesia. It was thus a key centre for commerce between Malay, Gujarati, Chinese, Japanese, Javanese, Bengali, Persian, Arabic traders. To this day the city maintains influences from those different cultures. Malacca was ruled by a Malay Sultanate until 1511 when the Portuguese took control, followed by the Dutch in 1753, and the British in 1824. In 1942 it came under Japanese occupation. Finally it became part of the independent Federation of Malaya in 1948. As a result of its history, the city centre was listed as a UNESCO World Heritage Site in 2008.Walking around the town I came across a major property developer’s exhibition. The Singaporean firm had been heavily investing in apartments, hotels and shopping centres in Malacca. They have built apartments designed to cater to medical tourists. The accommodation had been dubbed “a holistic haven that fuses physical, mental and spiritual elements”. Traveling around the city I had noticed a high number of hospitals and learned that medical tourism is an important industry. Apparently a large number of Indonesian people from Sumatra come to Malacca for treatment. The latest count indicated that over a half million tourists came to the city for medical purposes.I also noticed a brochure advertising the number of residential buildings that are specifically designed to cater for the 152% growth in Airbnb guests since 2016 and the expected surge of 28 million tourists in 2018. Another project was selling 1,350 square feet luxury apartments for M$1,809,000 or about USD$452,250.After a long bus journey back to Singapore, I dreamed of the proposed high speed rail that would connect Singapore and Malaysia. This would allow passengers to travel to Malacca in an hour and then up to Kuala Lumpur and Penang (another interesting and beautiful spot). The proposed 350km (220 mile) line would have an operating speed of 320 km/h (200 mph). This high speed train was announced in 2013 by the now ousted Malaysian Prime Minister Najib Razak together with Singapore’s prime minister, Lee Hsien Loong. Completion was scheduled for 2020.The new Prime Minister, Mahathir Mohamad, first threatened to scrap the project but later said that it would only be postponed due to the high cost. Japanese, South Korean, Chinese and French firms have expressed interest in participating in the project. It is important to note that the excellent but now crowded four lane North-South Highway from Johor to Kuala Lumpur was built at the time when Mahatier was previously Prime Minister of Malaysia. It now extends 772 km (480 mi) from the southern tip of Malaysia to the Thai border in the north. The project was launched in 1991 and completed in 1994 becoming the main backbone route for Peninsular Malaysia.During my bus trip to Malacca I noticed that the highway was busy with cars racing down the expressway in almost a continuous line. At the immigration and customs points on both sides of the strait separating Malaysia and Singapore, the cars and buses were lined up bumper to bumper. Clearly there is a demand for more and more transport infrastructure not only in Malaysia but throughout Southeast Asia.

In recent years the importance of non-financial indicators in the corporate valuation process has become undeniable.Investors are becoming increasingly aware of the link between financial returns and environmental, social and governance factors (known as “ESG”). Disclosures linked to issues such as resource scarcity, labour rights and minority investor safeguards are being heralded as key metrics to evaluate performance.Failures at Petrobras in Brazil, Satyam in India, scandals in China and South-East Asia, but also Volkswagen in Germany, have drawn attention to the significance of this data as a proxy for risk management and ethical standards. On a more macro scale, the wider implications of climate change have become undeniable when assessing an asset’s long-term sustainability. Given global agriculture consumes 70% of the world’s fresh water and generates 20% of greenhouse gas emission, investors must evaluate whether existing resource-intensive business models are at risk from regulation or disruption.ESG and related strategies are well understood in developed markets (over 95% of sustainability-oriented investments are focused on the US or Europe). This is facilitated by the availability and transparency of data. However emerging and frontier markets continue to lag. Investors are still regularly confronted with challenging conditions exacerbated by ESG shortcomings; particularly in corporate governance. These issues cause disengagement among the investor base, which leads to a lack of pressure on management. Many investment strategies that attempt to apply an ESG approach rely on passive screening techniques that only engage with corporates that are already compliant; therefore, upside is limited. Large asset management firms often appear to use ESG as a marketing tool.According to a recent report published by Transparency International, when analysing 100 emerging markets multinationals for anti-corruption disclosure, 75% scored below 5 out 10[i]. The average score was a lowly 3.4. Frustratingly, many of the companies that had been surveyed four years earlier had barely improved their standards when re-reviewed.We launched Mobius Capital Partners to tackle this predicament by challenging the status quo through a new type of investment in emerging and frontier markets. Our goal is to reach beyond simple exclusion screens and adopt an active approach that is governance orientated. We want to be a catalyst for corporate improvement. This can be best achieved through collaboration and partnership with portfolio companies. We believe that it will have a substantial impact on non-financial indicators while also boosting companies’ operational performance over the long term. Shareholders can and must facilitate the development of an ESG pathway with companies.According to a recently published study by HSBC, since 2008, companies with improving ESG practices outperformed those who lagged behind by over 25%. This is supported by research (Dimson, Karakas and Li, Aug 2015) that found working with companies on ESG issues can have positive financial benefits. Academics noted that following successful engagement on environmental and social themes, operational performance improved by 7.1%[ii]. This increased by as much as 8.6% when the focus was concentrated solely on corporate governance. Overall the firm’s financial performance improved, it attracted a wider investor base and had lower stock volatility.Our investment strategy is founded on the principal that a deep understanding of ESG factors is one of the best ways to identify, understand and manage investment risks. We understand that improving a company’s corporate governance is central to long-term commercial success, which in turn leads to sustainable investment returns. Through our funds we aim to leverage decades of experience in emerging and frontier markets to generate sustainable returns by actively partnering with companies to improve corporate governance and enhance broader ESG standards.[i] Source: Transparency International, Transparency in Corporate Reporting: Assessing Emerging Markets Multinational (2016)[ii] Cumulative abnormal return- (Dimson, Karakas and Li, Aug 2015)

Investors are always concerned about risk particularly in times of market uncertainty or volatility. The “Value at Risk” (VaR) calculations that banks and other institutions developed in order to determine how much could be lost in the bank’s trading positions on any given day is based on historical volatility of markets. However, once financial crises hit it becomes evident that losses can be much greater than the what the models predicted.Although the theory of a bell-shaped curve distribution sounds good, the reality is that markets often do not obey those theories. Investors can be lulled into feeling secure when markets are moving up steadily and volatility is decreasing. At such times it is tempting to pile more money into the markets, thus causing them to continuously climb and exhibit low volatility. However once the trend is broken and a “black swan” event takes place volatility can skyrocket as the market gyrates up and down violently.A brief history of risk reductionDerivatives are not a new phenomenon. In fact they have been around since the beginning of trading, originally created to reduce uncertainty or risk. When a buyer of, say, grapes agreed to buy from a farmer in the future when that farmer had his harvest a derivative was created.A buyer wanted to fix the price he would pay for a certain product at a future date so he could adequately plan, while the seller also wanted to fix the price so he could expect a given income in the future. But as the market grew, gaming entered the picture so investors not necessarily interested in the actual transaction wanted to bet instead on the outcome of certain transactions.The growth in derivatives popularity and complexity has been dramatic. Securities that derive their value from something else amount to over $500 trillion according to the Bank for International Settlements.As the creativity of gamers and investors know no bounds, there are now any number of derivatives covering a wide range of operations and not necessarily products.There even exists an index on volatility itself and a number of derivatives opportunities around it. The Chicago Board Options Exchange’s VIX index measures the expected volatility of the US stock market over the next 30 days as indicated by option prices. The theory is with the index you are measuring the level of investor anxiety since the theories of the “Efficient Market” define risk as volatility.Measuring riskHarry Markowitz, who developed so-called “modern portfolio theory”, published an article in 1952 that argued investment returns should be judged against the amount of risk taken. Of course the concept of risk was too vague and difficult to measure so he used volatility, or variance, as a proxy for risk. So if one particular stock or index was more volatile than others, investors should expect better returns in order to justify the increased “risk”. He won the Nobel Prize in 1994 for his theories.Following on this, William Sharpe, another Nobel prize-winning economist and a disciple of Markowitz, developed the Sharpe Ratio. This ratio compares the returns of the fund manager to the volatility of his performance subtracting the returns of a risk-free asset such as cash.Risk enduranceThe application of these theories has not resulted in a magic formula for consistent, excellent returns for investors but at least they give us some theoretical measures we can use in the never-ending battle for investment survival.

I was recently asked a series of questions on Brazil. Here are the questions and my answers:Q1. What’s your current perspective on Brazil? A: My view on Brazil might best be described as “concerned”. This is because the current desire for complete reform of the government could slow as a result of the continued popularity of Lula and his supporters. This could lead to a slackening of the reform movement or even its complete demise.Q2. One year ago, you mentioned structural reforms were still expected to be implemented in Brazil. Recent public opinion polls show that most centrist, reformist candidates are having trouble gaining traction. How do you see the political risk in Brazil? Has the risk of turning away from the path of structural reforms increased? A: Yes this is a real problem and heightens the political risk. The “lavo jato” scandal was a watershed moment and ushered in a tremendous shift in public consciousness, with calls for a change in how the country is governed. However now a weakened reformist candidate points to problems going forward.Q3. Regarding the stock market, do you think Brazilian shares are trading at attractive levels, compared to other emerging market peers? What are your favourite sectors/stocks at this moment? A: Brazilian shares generally are not trading at bargain levels but there are some well managed firms that look attractive. Our favourites are companies with good corporate governance who have resisted the temptation to engage in corrupt practices and respect shareholder rights. In regards to industry sectors, consumer products and distribution groups are the most attractive to us. However, there are also some manufacturing firms who have a strong international positions and are able to earn substantial foreign exchange, which also makes them of interest.Q4. The Brazilian Real recently weakened to close to 4.00 per dollar and economic activity data points to a weaker-than-expected recovery. Do you think these two factors may reinforce the downside risks to company earnings? A: Actually the weak Real could be a blessing in disguise since export oriented firms will do much better in overseas markets. Generally the weak currency, if combined with continued increases in productivity, could make the market more attractive.Q5. What strategy should Brazil’s central bank look to adopt in the current market conditions? A: The central bank in Brazil should focus on working towards a liquid foreign exchange market so that the currency can find its market level. It should not try to control the exchange rate since such expenditures are a waste of precious foreign exchange and stimulate further exits. The Brazilian central bank should do all it can to persuade the government to streamline investment procedures, which will encourage both domestic and foreign investment.

Investing in emerging and frontier markets allows me to travel around the world and experience a wide range of cultures and traditions. However, across all seven continents some things remain a constant, and one of these is a love of football.With a global audience of over 1 billion, it often seems the whole planet is glued to the World Cup. It brings together communities, villages and countries. This is particularly true in Africa. Once again, the countries representing the vast continent have played well and been unlucky not to advance further in the competition. While an African nation will not triumph on the 15 July, in a series of blogs over the coming weeks, I would like to shed some light on a more significant achievement. An economic victory.I will start by focusing on Senegal, given one of my personal highlights of the group stages was Senegal’s 2-0 win against Poland, evoking memories of their result against France in 2002.Historically, in both football and economic terms, things in Senegal have not always been easy. The country ranks number nine in the world for illiteracy, with 58% of the Senegalese population not being able to read, while 46.7% live in poverty. Both issues are largely linked to Senegal’s agriculture focused workforce, which is heavily affected by extreme weather conditions like droughts.However recently Senegal has certainly made people take note – and not only by scoring goals. In 2017 the country was able to grow by 7.2% – which is more than China or India. Since their victory against France 16 years ago, Senegal has had the second highest GDP growth among all Africa’s 2018 World Cup entrants. This should be taken in context however, as the country’s GDP was $16.5bn in 2017, which is only slightly above the cost of hosting the World Cup in Russia ($14.2bn). Senegal’s currency is also performing well, with an average inflation of just 1.5% per year since 2002, making it one of the most stable in Africa.While Senegal does have some challenges, there also is much promise. After winning independence from France in 1960, the country has only had 4 presidents, but notably every transition has been peaceful. It is frequently seen as one of the most politically and economically stable countries in the region. This solid political foundation and recent economic growth provides the perfect conditions for Senegal to develop into a prosperous nation. The future looks bright both on and off the pitch.