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Emerging Markets Guru Mark Mobius - Finding Needles in an Emerging Markets Haystack
Posted by: CanadianValue (IP Logged)
Date: December 5, 2012 05:09PM

Mark Mobius writes this month about how he goes about trying to find bargains in emerging markets:

When you consider the sheer magnitude of investable equities to choose from in the world’s emerging markets, you realize that finding one that looks attractive enough to warrant investing your faith and assets in is as formidable a task as finding a needle in a haystack. Fortunately, researching investment opportunities is a lot more interesting than digging for needles in haystacks. I’m a firm believer in the value of first-hand experience, which is why I spend some 250+ days a year circling the globe to uncover companies that meet our quality criteria. Furthermore, I am always looking to buy shares at what are deemed to be a reasonable price. But I do have lots of help in this daunting endeavor—a team of 53 Templeton Emerging Markets investment professionals spread across 18 offices around the world, giving us a strong on-the-ground presence in the emerging markets.

When we first invested in emerging markets in 1987, there were only a handful of places we could invest in, and a limited number of companies. Today, 25 years later, we can invest in more than 60 countries in the emerging markets universe and have tens of thousands of companies to consider. So, where and how do we decide to invest?

It Begins with Research

No matter where we are looking to invest, the first step is research—and we do a lot of it. We have to confirm foreign exchange is available and look for a good global custodian.

Our research starts with a bottom-up approach, analyzing each individual stock. Who owns and controls the company, how does it operate and in what markets? The balance sheets have to be audited. We like to see statements going back five years so we can analyze them and make our projections five years out in time. Here are a few factors we consider when analyzing accounts:

  • Trends in profit margins.
  • Ratio analyses, such as price-earnings ratios, dividend yields, and debt-to-equity.
  • In companies involved in manufacturing and sales, we monitor inventory, accounts receivable and order backlog trends. These can be strong indicators of potential problems, and we find they tend to be more closely aligned with potential stock returns than reported earnings.[/list]We visit as many of the companies we invest in as we can. We try to get to know not only the management, but also the employees. We do a lot of factory visits too, so we can see things going on outside the boardrooms and gain a better understanding of the production processes. I also like to talk to people living and working in a country to get a sense of their lives and their views of the economy. Often, local people can offer you insights about a company—or a country—that you won’t find in a glossy brochure.

    Continue reading.

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