Blog

According to Sir Karl Popper, the central question in democracy is not “who should rule?”, but “how can we organize political institutions to ensure that bad, or incompetent rulers can be prevented from doing too much damage?”This distinction between the position of the ruler and the system of ruling, or “governance”, is as important for investors as it is for democracies. In both cases, the system of governance offers some protection to constituents that their interests will not be compromised by dishonest, incompetent, or self-serving leaders.Agency costs – the costs of hiring others to run your business – can cover a multitude of sins. This ranges from incompetence, negligence, recklessness, conflicts of interests, a lack of transparency, to unfair and unequal treatment of shareholders, insufficient separation of the powers of the executive committee and the board and insufficiently diverse boards.The pervasiveness of the misuse and abuse of power in business in both developed as well as emerging markets is exemplified by scandals such as Enron, Parmalat, Elf, Madoff, Volkswagen and Kobe Steel in the former and Petrobras, Asia Pulp and Paper, Polly Peck in the latter.At Mobius Capital Partners, we believe that strong governance is key when it comes to managing risk. Good governance standards could have prevented many if not all of those scandals mentioned. Without robust governance, and the good management that it fosters, environmentally and socially responsible policies are unlikely to be adopted and implemented.By “good” governance, we mean a particular set of corporate principles which we regard as universal in that they are logical and are common sense. Good corporate governance touches all interested parties: shareholders, staff, customers and the society as a whole. For shareholders in particular it is:

1. Fair, in that all shareholders are treated equally

2. Open, in that all relevant information is disclosed to all shareholders at the same time

3. Aligned, in that the interests of the company’s management are the same as those of shareholders

4. Rules based.

Increasingly the need for emerging market companies and countries to attract investment is putting them under pressure to respect good governance principles. If they do not, they’ll be denied access to the mobile pool of global capital.While passive investors have surrendered their power to influence poor corporate governance active investors can have a major impact on a company. They gather knowledge, work with management on reform, and help to ensure compliance with appropriate standards.As active investors, we see Governance as the primus inter pares (first among equals) in the world of Environmental Social and Governance factors. Active investors, however small must exert their power, as owners, basing their activity on the rules and regulations governing corporate behavior.There are some recurring themes in our efforts to bring about governance reform. We see the composition of boards as important evidence of the seriousness with which companies take their responsibilities to minority shareholders. Such factors as dividend policies, reporting transparency, executive remuneration linked to performance are some of the variables of fundamental interest.There are many examples that demonstrate the value of shareholder engagement and advocacy at a time when the general trend is towards passive investment. Actively engaging with companies on governance issues should benefit the company and its employees as much as it will benefit the investors.

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.