Ignore Wall Street Is Skagen’s Advice With Emerging Markets Bet

January 12, 2014 Leave a comment

Ignore Wall Street Is Skagen’s Advice With Emerging Markets Bet

Skagen AS, a Norway-based investor that has outperformed funds run by Goldman (GERIX) Sachs Group Inc. and JPMorgan Chase & Co. (JPM) over the past decade, is telling clients to ignore Wall Street’s biggest banks and buy emerging markets.Kristoffer Stensrud, the founder of Stavanger-based Skagen who manages the 50 billion-krone ($8 billion) Kon-Tiki A emerging market fund, says a series of elections in the Middle East, Asia and Africa may provide a boost to markets in those regions as lawmakers turn to policies that underpin stability.

“There’s an election cycle starting this January in Egypt, India, Indonesia, Thailand and South Africa,” Stensrud said in an interview in Stavanger, on Norway’s southwest coast. “South Africa is interesting because of the social unrest over the past year. They may be more committed to statutory reforms and we might see a change of policy or a change in government.”

Kon-Tiki A (STKONTI) has returned an annualized 15 percent over the past 10 years, the fifth best performance among 1,116 funds tracked by Bloomberg. It returned 5.5 percent over the past 12 months, measured in dollars, compared with a 6.7 percent loss for the benchmark MSCI Emerging Markets index, according to Skagen. Its biggest holdings are Hyundai Motor Co. (005380) and Samsung Electronics (005930) Co. Ltd.

Some of Wall Street’s biggest banks, including Goldman, say that emerging market losses triggered last year by the U.S. Federal Reserve’s signals it might scale back stimulus will probably continue into this year.

Goldman’s Advice

Goldman last month told investors to cut allocations in developing nations by a third predicting a “significant underperformance” for stocks, bonds and currencies over the next 10 years. Goldman advised clients to lower their allocation to 6 percent from 9 percent, citing a lack of economic reforms to improve growth.

Developing economies still have a lot of potential to offer above-average returns as consumers there continue to invest in a higher standard of living, according to Stensrud.

“Cars in emerging markets are very interesting because penetration is low, demand is very high and affordability is rising sharply,” he said. “This gives these companies fantastic possibilities of growth.”

Kon-Tiki’s portfolio has 17.14 percent of its investments allocated to auto manufacturing in emerging-markets. These include Great Wall Motor Co. (2333) Ltd., a Chinese car manufacturer, and Mahindra & Mahindra Ltd. (MM), a maker of utility vehicles in India.

Next Toyota

“Hyundai has clearly set their goal to be the world’s next Toyota, master of the universe, best manufacturing, highest quality, best design and affordability, highest level of productivity,” Stensrud said. “I think they will succeed.”

Emerging economies have benefited from a boom in credit and commodities over the past 15 years, a trend that some say may now have peaked. Morgan Stanley labeled Brazil, India, Indonesia, South Africa and Turkey as the “fragile five” in August because of their reliance on foreign capital.

Stensrud sees emerging economies breaking away from dependency on these cycles as they rely more on service based industries.

“Looking at traditional emerging markets you could be tempted to think that they used to be commodities driven, that they used to be cyclical, but their service sector is growing very fast,” he said. “You could say South Africa is a mining country, but if you look at South Africa’s stock exchange, it’s basically a services index. The service sector is growing fast in all emerging economies.”

Stensrud said they’re also pursuing investments in South Africa and in Chinese Internet companies.

“Two years ahead, we think we are in a huge paradigm shift globally to what you might call a non-material economy,” he said. That means “less and less goods and energy produce services, so we are looking a good deal into global e-commerce.”

To contact the reporter on this story: Ilana Friedman-Schroit in Oslo at ifriedmansch@bloomberg.net

Filed under Macro Trends

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Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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