Mark Mobius, founder of Mobius Capital Partners and former chairperson of Templeton Emerging Markets Group, is widely credited with having established emerging markets as an asset class.
Mobius had virtual “fire-side chat” with CFA board member Delphine Govender at the recent CFA Investment Conference.
Here is a run-down of some of Mobius’s views on current issues facing investors:
On investing in China
There are three things to remember about China:
- China has a communist leadership, but it’s a market economy. The Chinese government want to be bigger and better than the US, and they know the US has become what it is by being a market economy.
- China is not turning away foreign investors. They want more foreign investors. But they also want investors to adhere to the communist idea of a level playing field – ensuring that China provides all its people with a certain standard of living.
- What’s happening now in China is similar to what happened in the US, where large monopolies took over the economy, and the US passed anti-monopoly laws. China’s leadership doesn’t want big groups such as Google, Alibaba and Tencent taking over the economy, because this will disadvantage medium and small players. The government’s interventions have given the medium and small players a better chance. We are focusing on these players, not only in China but globally.
China represents about 30% of the emerging markets index, so when China goes down, investors can make the mistake of thinking that all emerging markets are declining. Emerging markets comprise a number of different countries, with different dynamics. It’s okay to index your portfolio, but you need to be an active investor: look at individual countries and, importantly, individual companies.
Large companies will continue to have their place in investment portfolios – for one, institutional investors need these large-cap players. Alibaba, etc will continue to innovate; they will attempt to abide by the Chinese government’s regulations.
Outside of the big names, Mobius Capital is focusing on:
- Health care. China’s healthcare system needs to improve to meet the needs of its large – and increasingly ageing – population.
- The focus of the portfolio has been higher education. The government’s clamp-down on cram school companies will see money move from cram schools to higher education. This is an example of how the government’s crackdown in one area benefits another.
On what is shaping his approach to investing
People often ask whether we are value investors or growth investors. You can’t separate value and growth. A company can’t be good value if it’s not growing.
Low interest rates have made traditional measures of value (for example, P/E ratio) somewhat meaningless. We focus on whether a company can maintain its ability to make money. That means looking at return on capital, return on equity, earnings growth and, most importantly, debt. We have to be very cautious about debt now, because, assuming interest rates rise, companies with heavy leverage will be in trouble.
Our biggest shift is that we are placing greater emphasis on the people behind a company. More and more, we are looking at the quality of the management, the ethics of the management, and their views about the culture of their company. We look at ESG plus C (internal cultural factors).
On inflation
CPI or something similar is a very flawed measure of inflation, because the basket of goods and services changes over time. Comparing the basket of 1950 with today’s is comparing apples with oranges.
What’s important is the increase in the money supply. Inflation is the devaluation of the currency.
History teaches that no currency holds its value, which is why I advise people to have some gold in their portfolio.
In the US, money supply is up 30%, so inflation should be 30%, not 5%. The countervailing force is technology, which is making goods and services cheaper by the day.
The only way to protect yourself against the devaluation of money is to invest in companies that can adjust their prices so that they increase faster than the printing of money.
On investing in companies with debt
We only invest where the debt-equity ratio is less than 50. Most of our investments have a ratio of less than 10, and many only have cash.
Debt is a measure of company profitability. If a company has a high return on capital, there is no reason to have debt.
Companies with debt can make money, but we don’t want to take that risk, and we don’t need to, when there are many companies growing rapidly without debt.
On coal and ESG
Most of the electricity generated in India and China depends on coal-fired plants. Either we eliminate all coal-fired plants, which is unrealistic, or we improve CO2 capture, which it has been proved scientifically to be feasible.
We need to be realistic, particularly when it comes to emerging-market countries. South Africa, for example, needs cheap power and has lots of coal. It’s unfair to tell South Africa that you can’t have any more coal-fired plants.
The wrong approach is to tell a company to shut down a plant because it is polluting. The right way is to work with a company and find ways to make it less polluting while becoming more profitable. Many of the environmental measures that have been introduced made companies more profitable, because they reduce energy consumption, for example.
On whether institutional investors should hold cryptocurrencies
There are two ways of looking at this. If I had to appear before my board of directors and explain why I’ve lost money on crypto, I would have to say: I’ve never met Satoshi Nakamoto (who invented Bitcoin), I don’t understand blockchain, and I don’t know why the prices went down.
I could tell my board that there’s a craze out there, that the prices are likely to go up, so let’s speculate. But let’s call it what it is: speculating, or gambling, but not investing.
The other side of this issue is: why do I need this speculation, when there are wonderful companies to invest in? Why do I need Bitcoin?
It’s shocking that people regard this as an investment, but I understand why they do it: very low or negative interest rates.
On having the right mindset as an investor
History shows that bull markets last longer than bear markets. Don’t be disappointed when a bear market occurs; instead, be willing to buy more at the beginning of that market, because the bull market will start in one or two years.
The most important thing in investing is to have an optimistic mindset. This doesn’t mean being a Pollyanna and saying everything is nice and rosy; it means thinking that the forward movement of the market will benefit you in the long term. The corollary is that you must resist the temptation to sell a company you believe in (it has good management and good long-term prospects). Just hold it; don’t buy and sell.
