Investing in emerging markets – governance and strategy
This week we bring you part two of our ‘investing in emerging markets’ video series featuring June Lui from Polen Capital, our investment partner in global equities. June is a Portfolio Manager and Analyst in Polen Capital’s Emerging Markets Growth team and has two decades of experience in Asian markets.
In this episode, June outlines Polen Capital’s investing approach to emerging markets. She explains that the team focusses on high-quality businesses that have competitive advantages, strong cash flow, disciplined capital management, and trustworthy leadership.
In this conversation we touched on governance, which remains a critical issue within emerging markets. June explained that Polen is focussed on investing in companies that have strong governance frameworks in place, to protect minority shareholders.
Watch the full video to learn how Polen navigates risks and uncovers opportunities in the evolving emerging market landscape.
Transcript:
Roger: Hi. I’m Roger Montgomery, and welcome to this second part in our ‘investing in emerging markets’ video series with June Lui, who’s joining us from our partner, Polen Capital, in Hong Kong. June, you can be a bit more expansive in your answers this time. We’ve got a little bit of time. Explain to us your approach and Poland’s approach to investing in emerging markets.
June: We are a bottom-up investor. We spend most of our time in analysing the fundamentals of companies. We like high quality companies which have competitive and sustainable business models. Ones that have a “big moat” built around their business. We like companies that have a very strong cash generation capabilities that compound for their shareholders. Also, [companies] with strong capital discipline in maintaining a healthy balance sheet. And we also put a lot of emphasis on management – their capability, track record and trustworthiness. We would like to partner with management that really understand the business and have good capital discipline in leading the business.
Roger: So, shareholder friendly in terms of their capital approach?
June: Yes.
Roger: So, tell me something. In emerging markets, there are those who are concerned about governance. Can you talk a little bit about how you deal with that at Polen and in your stock selection process?
June: This is indeed an issue we have to be really mindful of. There are many companies in the emerging market space where they have poor governance. For example, we see state owned companies and their governance problems, but also privately-owned companies, where the key founders (or the key owners) don’t respect the minority shareholders’ rights (in sharing the fair share of the success of the company). So, we have to be really careful in that we have a strong governance framework to protect the interests of minority shareholders.
Roger: So, I wasn’t aware, June, that you can distinguish between companies that might have a state ownership (or a significant state ownership), and therefore more questions around governance and those that don’t. Is that easy to distinguish between?
June: Yes. Indeed.
Roger: Oh, good.
June: Yeah. The first thing we look at is who are the owners, that we have to entrust the company or the capital with. So, the ownership is the first thing we look at.
Roger: So, disclosure is not a problem for these businesses?
June: Yeah, no problem at all.
Roger: That’s terrific. And then perhaps, a question without notice. In in China in particular, what are some of the sectors, where you find a disproportionately large number of those companies?
June: So, in the sector where the state-owned companies dominate the market, like the banking system, they are mostly doing the national service to provide buffer for the economic environment – rather than growing the capital for shareholders. But, in other sectors like the construction (the oil majors) – there is a lot of say in companies from these sectors.
Roger: And again, another question without notice, tell me what are some of the growth rates of the ideal businesses that you found? What can investors expect if they’re investing in a portfolio that you’re managing?
June: So, in emerging markets, particular China, we are still seeing a lot of growth potential even though the overall macro environment is slowing. There are companies who are able to capture the future growth, the transformational growth. So, we believe that 15 – 20 per cent growth would be something that we expect from the companies that we own.
Roger: That’s amazing. June, you’ve been very generous with your time. Thanks again for joining us.
June: Thank you.
Roger: And thank you. We’ll see you for part three.
Roger Montgomery is the Founder and Chairman of Montgomery Investment Management. Roger has over three decades of experience in funds management and related activities, including equities analysis, equity and derivatives strategy, trading and stockbroking. Prior to establishing Montgomery, Roger held positions at Ord Minnett Jardine Fleming, BT (Australia) Limited and Merrill Lynch.
He is also author of best-selling investment guide-book for the stock market, Value.able – how to value the best stocks and buy them for less than they are worth.
Roger appears regularly on television and radio, and in the press, including ABC radio and TV, The Australian and Ausbiz. View upcoming media appearances.
This post was contributed by a representative of Montgomery Investment Management Pty Limited (AFSL No. 354564). The principal purpose of this post is to provide factual information and not provide financial product advice. Additionally, the information provided is not intended to provide any recommendation or opinion about any financial product. Any commentary and statements of opinion however may contain general advice only that is prepared without taking into account your personal objectives, financial circumstances or needs. Because of this, before acting on any of the information provided, you should always consider its appropriateness in light of your personal objectives, financial circumstances and needs and should consider seeking independent advice from a financial advisor if necessary before making any decisions. This post specifically excludes personal advice.
