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Jonas Daly:
Hello, and welcome to our podcast today. My name's Jonas Daly. I head up the distribution team at Bennelong Funds Management. Today, I'm joined by one of our newest investment boutique partners, Skerryvore Asset Management, who is a specialist in emerging markets. Today, I'm joined by Ian Tabberer, who's one of the co-founders and portfolio manager at Skerryvore, who's based in Edinburgh, Scotland. Ian, welcome to Melbourne.
Ian Tabberer:
Thanks very much for having me.
Jonas Daly:
Excellent. Now Ian, ultramarathons is a bit of your thing. Tell me a bit more about that.
Ian Tabberer:
I run ultramarathons slowly, very slowly, in fact. I'm in fact more of a run walker than a runner.
Jonas Daly:
You’re better than me, so I'd be lucky to get halfway at best.
Ian Tabberer:
I had the real privilege to run the Marathon des Sables about three, four months ago. So, seven days in the desert. The best thing is actually, it was seven days without being on a mobile phone. How I managed not to read Twitter and have the shakes – that was probably the hardest thing rather than the five marathons or whatever. But no, it was great.
Jonas Daly:
Unbelievable. In the desert. So, that's even more challenging obviously, with food and keeping hydrated. So I mean, tell me, what was your secret to kind of keeping yourself motivated?
Ian Tabberer:
I think the thought of just completing it. You're in the most wonderful part of the world. You're with, sort of, seven or eight people who've got a similar challenge to you, and just the thought of crossing the finish line, seven days, a real sense of achievement, and it was wonderful – it was a real, real privilege to be able to do something like that.
Jonas Daly:
Absolutely. That would've been very taxing on the body, and what a great effort. Many aches and pains, I'm sure. Now just changing speed a little bit, you also like to focus on books and reading, and you refer to a lot of books. What are you currently reading?
Ian Tabberer:
I've just read, and it was the benefit of the long flight here, was I've just finished Anna Karenina by Tolstoy. So, my daughter thinks I have quite weird reading habits. And I'm just about to start, which is probably slightly more work-related, in a way; there's a great book called Wild Swans that I'm going to reread. It's a really good, interesting story of three women, a family of three women who, through three generations, lived in China in the 20th century. The book was actually banned when it was authored in 1990, but it's a really good, it gives lots of insight of actually how people have to sort of live and accommodate the Chinese political system that's changed over time. So, I think it's, with everything what's going on at the moment, I thought, I decided to reread that.
Jonas Daly:
Okay, interesting. Very good. And we'll touch on a little bit on China a little bit later on, on the podcast. But, well, your background in emerging markets and investing, so can you tell me a little bit more about that?
Ian Tabberer:
Yeah. Well, I sort of had a strange route. I've been an investor for about 20 years. I've had a strange route sort of in a way. I started off leaving school and joined the Royal Navy, and was a submariner for 10 years, so sort of an interesting background. And then bizarrely enough, it was actually reading Karl Marx at university, so it got me into finance and capitalism, and I was very lucky enough to get a job as a fund manager in Edinburgh. And I was initially a US and global portfolio manager, and then I was really lucky; Glen asked me to join his team, sort of 2015, at Janus Henderson. And from then on in, I've had the real ... oh, it's just been really exciting to be an emerging markets investor, so a fascinating and interesting sort of investment landscape.
Jonas Daly:
Fantastic. And you mentioned you're up in Edinburgh, so can you tell me a little bit more about the team at Skerryvore?
Ian Tabberer:
Yeah. We're very lucky, we've had eight founding partners and we've been able to grow. There's also three employees now, so that we're a team of eleven. We're led by Glen Finegan, who's the sort of the lead investor, and importantly, he's the co-founding partner on the management committee with Karen Lumsden. Karen's effectively does all the focusing on the non-related, non-finance related, non-investment related parts of the business, and without her we really wouldn't have been able to build the business that we've managed to achieve over the last few years. So, she's done a great job, and also allowed Glen and the investment team, the rest of us, to really focus on producing returns for clients. So, portfolios are doing now what we would hope them to do. So, we've got a really strong team. We've worked together through various ups and downs.
Jonas Daly:
Fantastic. I mean, team is everything, especially on the investment side, so that's really interesting. We did have Glen, obviously, down here in Australia more recently as well. So, just as far as emerging markets go, look, Skerryvore is definitely a specialist in here and has a long-term track record in this space. So I mean, BRICS is an acronym that a lot of people know about and was pretty popular at one stage, but should we be a little bit worried about BRICS and emerging markets?
Ian Tabberer:
I don't think you should be worried about emerging markets, but I do think the BRICS sort of abbreviation isn't really going to work or be relevant for the next 10 or 15 years. The BRICS phrase was, I think it was a Goldman Sachs economist that came up with it, and it was a great sort of acronym and really sort of served the time. It was from about 2003 to about 2012. But what we think now as we look forward over the next 10, 15 years is actually, that the rates of growth will be more varied. Effectively, previously, it was a sort of rising tide, floated all boats, but actually, now the economies in all the different countries in emerging markets have actually different growth rates and there's different growth opportunities. So, it's probably going to be more selective in terms of the opportunity set.
Jonas Daly:
Absolutely. And obviously, some geopolitical tensions there, to mention a few. Is there any concerns there; any call-outs, obviously, that you're concerned about?
Ian Tabberer:
No. This might sound a bit trite, in a way, but we've always thought that investing in emerging markets is always going to be volatile, and actually, the strategy is designed to protect capital and then to take advantage of any volatility. The issue with emerging markets is they're immature. You've got immature political, financial, judicial and regulatory systems. So, in one way you have great growth, but then you have immaturity, and so that's why we always focus on finding aligned business owners who have created resilient businesses and can effectively live through these geopolitical challenges. Effectively, the ... it's quite interesting, but emerging markets always seem to be on the front page of The Economist every two or three weeks. I mean, it's just part of investing in the opportunity set that we have. But there's some great businesses who have been able to grow through all these challenging times.
Jonas Daly:
And we've seen some developed markets on the front page more recently as well. So, can you comment on those?
Ian Tabberer:
I’ve just come back from a meeting from a client today, and we talked about the United Kingdom becoming a submerging market rather than an emerging market.
Jonas Daly:
Prime minister once every month, I think.
Ian Tabberer:
Yeah, exactly. We're not doing ourselves very proud at the moment.
Jonas Daly:
And as far as kind of, just on that side of things, in particular, China, obviously, it's something that you have, I suppose, shied away from as an investment house, but not completely avoiding China altogether. Just a few comments on there, like how you approach in China, because obviously, you don't also want to miss out on any upside there, and any growth in that country as well.
Ian Tabberer:
Yeah. What we do is we approach China in the same way that we approach all countries. Effectively, what we're trying to do is find aligned owners of businesses, and we're also trying to avoid state-owned enterprises; businesses who effectively, who are creating cash flows but whose cash flows are effectively going to be diverted to support the needs of the state rather than meet the needs of you, as minority shareholders. And that could be the likes of Petrobras, which is a bit like the Ministry of Energy in Brazil, or China Construction Bank, which is almost a bit like the Ministry of Finance in China. So, it's not necessarily that we've specifically decided to avoid China, it's just that within China, there are large parts of the market opportunity that are state-owned enterprises, or effectively have businesses that are significantly aligned to the state. And for that we’d include the likes of Alibaba, Baidu, Tencent, who effectively have very politically sensitive business models.
They've actually been great cash generators. Unfortunately, that cash doesn't come back to you as an investor. The Chinese government fined Alibaba about $15 billion last year, so the cash loads were going back to the state rather than coming to you. So, our opportunity set is probably slightly different to most emerging market investors, but we still think we can find amazing businesses there that have good long-term opportunities but are significantly far away from the government for us to be able to protect our clients' capital.
Jonas Daly:
That makes sense. And any examples you can talk about?
Ian Tabberer:
Yeah, there's a couple. So, one of the most obvious of business, it's called China Resources Beer. It's a joint venture with ... Heineken has a significant stake in the business, and it's a beneficiary of the premiumisation of the beer market. It's not as though more people are going to go out and start drinking beer, but what actually happens is that the price of Heineken is four, five, six times more expensive than the price of the local beer. Actually, Snow Beer is the most popular beer drunk in the world. I might upset some beer drinkers here. But I actually upset clients on Monday when I gave this analogy, who happened to be of sort of Danish origin. But effectively, what I said was that beer is quite a commodity product. It's effectually water, yeast and hops. So really, what beer companies are really doing, are moving large amounts of liquid around the world, and it's really the branding that's key. So, with Heineken charging higher prices than the local beer, there's a real opportunity for strong earnings growth in this business, as people prefer more sort of high quality products.
So, I think China Resources Beer is a really good example of a business in China that has a long-term growth runway. And in a way, it's unlikely that the Chinese administration are really going to be that upset by the quality of the pint that you're drinking.
Jonas Daly:
So, you talk about China and obviously, there is a low allocation to China. And I know that you are index unaware in your approach to allocate into emerging markets, so you aren't forced down, to have certain weights in certain countries; but having a low weight to China, what other countries do you have larger weights to?
Ian Tabberer:
Yeah, we have a significant amount of capital, or clients' capital, invested in India at the moment. And we took advantage of the selloff in March 2020, during the COVID selloff, to buy some names that we've been looking at for quite a long time, but who had stock prices that were a bit above what we wanted to buy. And so, we took advantage of that. So, there's businesses like Colgate, India. Penetration of toothpaste in India is very, very low. It has a great long-term growth opportunity, a sort of a developed market owner of the sort of aligned owner in the business, so that's a really great business. And also, there's a fantastic Indian bank called Kotak Bank led by Mr Kotak, who founded the business in the sort of late '80s. He's been able to grow its book value by about 20%, if not more, per annum, over a number of decades. Personally, I think he's a bit like the Warren Buffett of Indian financials. He's a great countercyclical allocator of capital.
So we were able, and so was he, able to take advantage. Before the COVID selloff, the Indian market was actually having a property development crash, too much money had been lent to people at the wrong time, and the tide was coming out. And we were able to take advantage of that, 'cause the Kotak share price had come back. But also importantly, Mr Kotak was able to start lending money at really good rates. So, it's been a good investment for us and just shows you the kind of opportunity you can find at the right price.
Jonas Daly:
Fantastic. And you mentioned Colgate, and you also mentioned Heineken, which is another favourite beer of mine, but they're developed brands. And I think Heineken, obviously, it's listed on the developed exchange. So, can you just comment a little bit more on investing into some of those kind of more well-known brands, and also accessing emerging markets from developed market exchanges?
Ian Tabberer:
Yeah, sure. I'll start on the brands front first. Fundamentally, we believe that emerging markets are essentially inflationary by nature. The currency is likely to depreciate. And it's interesting that with developed market investors talking a lot about inflation, that's just been the environment that we've been investing in, and the strategy has been able to navigate for all of Glen's track record, in effect. And the reason why we like branded businesses is because they have great pricing power. The pricing power allows them to effectively take their price of the goods up greater or as much as the cost of the inflation of the underlying commodities that's forcing them. So, we've seen really good results from Coca-Cola Hellenic, Colgate India, that have been able to take up pricing, because consumers are ... there's strong demand for these products, and they're able to take it and they've got really strong competitive positions.
So, for the likes of Colgate India, it has around about, and I might be wrong here, but around about 50% of the market share, so it can really take price. It's got a very, very strong competitive position. So, consumer-branded businesses, and also retailers. We own a number of retailers in the portfolio. We own Raia Drogasil, the Brazilian drugstore operator, that has world-class leading returns, and it's again, able to pass on the increasing price inflation. But also, these businesses have a natural tailwind; as economic growth, consumers have a bit more money in their pockets, they can effectively start to afford buying better quality pharmaceutical goods and a number of health products that helps grow the business.
Jonas Daly:
And just moving into developed market exchanges, the world is becoming a smaller place and obviously, a lot of emerging markets companies are listing themselves on developed market exchanges, whether it be in New York or whether it be in Hong Kong. Just wanted to get a few comments around that.
Ian Tabberer:
Sure. We've always had this view that you can have a global approach to investing global emerging markets. And where a stock is listed isn't really, in effect, indicative of its growth opportunity. We insist that any business that is listed on a developed market has more than 50% of its assets, profits, or revenues in emerging markets, so it kind of meets the criteria of being an emerging markets company. But it's been a great source of opportunity for us. So, there's the likes of Unilever, Heineken, Coca-Cola Hellenic; they're all listed in developed markets that give you that emerging markets exposure.
Jonas Daly:
And I suppose, then you get the oversight by that developed exchange as well, in regards to the compliance and rules around company rules and listing and exchanges, and that's obviously a big positive as well.
Ian Tabberer:
It is, yeah. It's probably a risk aware, a way of accessing the emerging markets opportunity.
Jonas Daly:
Yep, great. Investment philosophy. I mean, you touched on a lot of it, so I think anyone listening can get a good feel of that, but how would you define your investment philosophy at Skerryvore?
Ian Tabberer:
I would actually use the analogy of the Skerryvore name. The Skerryvore name might sound a bit strange and weird, but it's actually Scotland's tallest lighthouse, based on the west coast of Scotland, just off the coast of Tiree. And what do lighthouses do? They effectively, they sit on rocks or difficult places, and they protect mariners and move them to places of safety by shining a light to where they need to avoid or where they need to go. That effectively sums up our investment philosophy. We're trying to help our clients access what is actually quite an attractive long-term investment opportunity in emerging markets, but in effect keep them off the rocks. As you see, we can see with the Russian invasion of Ukraine, events going on in China, various corruption, political scandals in Brazil that we've seen through the time; there's a number of rocks, and the strategy has a history of avoiding those rocks and helping clients access the opportunity without sort of significantly hurt themselves in the downside. So, allows them to therefore generate long-term absolute returns.
Jonas Daly:
Did that name come from you with your naval background?
Ian Tabberer:
No, it was Glen. Glen's quite a keen sailor.
Jonas Daly:
He does love his sailing.
Ian Tabberer:
He does. We have our meeting rooms in Edinburgh are all actually named after parts of the Shipping Forecast. So yeah. I must admit, I might have been involved in that one.
Jonas Daly:
Fantastic. Very good. And then portfolio, you did touch on some names there. So, just briefly kind of how your portfolio is currently positioned, call-outs on the countries, and then some of the names.
Ian Tabberer:
It's really very much a stock-driven portfolio. More than 50% of the portfolio's in the top 10 holdings. I think, so one of the interesting names that people might not be aware of is a company called Cipla. So, Cipla's the second largest holding in the Australian unit trust. It's an absolutely fantastic business, has three divisions within it. One division sells to the US international market, it's about 15% of revenues. Cipla is a leader in generic sort of asthma products, so a bit like the blue inhaler. And those products are quite difficult to manufacture. So, the FDA has kept a sort of a limited number of suppliers for that market, so it should have a good long-term profit opportunity. And they've also been able to develop some novel technologies there as well. So, that's a business that's growing well, around 15% of revenues.
Interestingly, Cipla has its history in supporting the Indian population. Mahatma Gandhi actually sort of encouraged Dr Hamied, who is the founder of the business, to grow this business, support the needs of the Indian population after the British left the country in sort the late 1940s. So, 60% of the business is supplying generic and pharmaceutical products to the Indian population. It's never had a year of negative volume of earnings growth because there's, again, a long-term tailwind. GDP per capita in India is currently about $2,100 for a year. So again, as the Indian sort of consumer gets more money in their pocket, they're able to afford better quality healthcare, and that's really helped. And then finally, the final part of the business, it has an international sales to the likes of South Africa, other parts of Asia. Cipla really has a sort of philosophy of helping people. It was the business that broke the Western patent monopoly on HIV antiretroviral drugs, and has won a lot of support for being able to supply sort of novel medicines to those people who need it in difficult parts of the world.
Jonas Daly:
Great. No, that's a great summary. And just in regards to ESG, there's been a lot of ESG talk in the market and I think everyone's had enough of all the greenwashing that's going on, but how do you approach ESG at Skerryvore?
Ian Tabberer:
It's interesting. We worry a lot about the industry and the greenwashing, and we think actions speak louder than words, so we try to make sure that we're engaging properly. We're not that keen on the term E, S, and G. We'd rather think of sustainability. E, S, and G, to us, it's very narrow. What we really think is businesses need to be sustainable, that they need to have business models that are producing sustainable cash flows and meeting requirements of all constituents. So, that could be the environment, the workforce, the shareholder. So, all parts of ... effectively, all of our stakeholders need to be treated equally and sustainably. So, we prefer to talk about sustainability rather than E, S, and G, which can be a bit narrow.
Jonas Daly:
Yeah, definitely. So, in regards to the sustainability of some of these businesses, are there any particular businesses that you've seen in the emerging market space that aren't doing it well?
Ian Tabberer:
Yes. So, there's actually quite a few examples of businesses that we would avoid and actually, that speak to the risk of greenwashing in the industry. There's a business called Norilsk Nickel. You quite often find it in investment portfolios. It's Russia's largest producer of nickel. Nickel goes into electric batteries, batteries going to go into electric cars. All great, wonderfully sustainable from a thematic perspective. However, when you look at it bottom up with any level of detail, it's an absolute and utter shocker. So, the owners of the business got there in a very nefarious way. So, you've got unaligned business owners and founders that are effectively very well-aligned to the Kremlin. You can read about it, but I think they kind of employed government at some point in the history of the Russian transition. So, they acquired the business in rather sort of a nefarious manner.
And secondly, it was also responsible for the worst spill of diesel in the Arctic. They need diesel to effectively do the mining of the nickel in Siberia. And they're effectively, the impact of climate change led to the thawing of the permafrost from which the diesel containers sit on. And so, it's actually responsible for the largest diesel spill in Siberia. It's like an environmental disaster. Obviously, you won't see that at all on their website, and they're probably sort of deemed to be an ESG leader, but it's why we think you really have to be very careful and take a really bottom up, sort of an honest approach to these businesses, because what looks green might not necessarily be.
Jonas Daly:
Definitely. And it sounds like, as you say, you need more letters than just the three for ESG. It sounds like, in the likes of Russia and some of these other countries and even developed countries, they need to look at a number of different aspects.
Ian Tabberer:
I think if Glen was here, I think he uses this phrase that I really like. It's talking about price to integrity. Effectively, that's the key. We're looking for businesses that operate with integrity. And what makes our strategy unique and pretty much quite difficult to replicate is the fact that you can't go to a Bloomberg screen, onto Google, and look for a price to integrity. So effectively, a lot of the work that the investment team is doing is actually looking back at history and seeing how these businesses, owners, how have they treated minority shareholders, how they’ve treated the environment, how they’ve treated the workforce through time. Have they shown consistent integrity through that?
Jonas Daly:
Absolutely. And look, it is just part of your risk management process, by the sound of it, and it's not something you've just all of a sudden doing just because it's, ESG's all the rage. It has been part of your investment process at Skerryvore.
Ian Tabberer:
Oh, I mean, it's absolutely key to us ... it's why we talk about being sort of fair-minded and far-sighted investors. Being fair to all constituents is absolutely key. So, we just think it's an absolute key part of sustainability, and that's why E, S, and G is just a bit too narrow for us.
Jonas Daly:
Absolutely, fantastic. And obviously, not giving up returns at the same time, so you're making sure that you're still getting good returns out of good-quality businesses.
Ian Tabberer:
Well, that's actually the irony. We have been able to, over the long term, generate more units of return by taking less units of risk; effectively, by avoiding these really significant potholes. If you were an investor in Norilsk Nickel, you've lost all your money. It's effectively been delisted on the Russian stock exchange. So, by avoiding those permanent losses of capital, we can help generate long-term absolute returns, and that's key to the way that we invest and focus on investing in emerging markets.
Jonas Daly:
That's right. And it's clear now in the numbers more recently too, that you do not draw down as much as some of the other funds, or the index, during times of volatility, so that's a credit to you and your investment process.
Ian, thank you very much for joining us today on our podcast. It's been fascinating talking to you and hearing some of your thoughts on how you're approaching emerging markets. It's great having Skerryvore on board as a boutique at Bennelong Funds Management. Thank you, and safe travels back to Scotland.
Ian Tabberer:
Great, thank you. Thanks for having me.
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