Stuart Fechner:
Hello everyone, and thank you very much for joining us. My name's Stuart Fechner from Bennelong Funds Management, and I'm very pleased today to be joined by Ian Tabberer from Skerryvore Asset Management all the way over in Edinburgh, Scotland. Thanks for joining me today, Ian.
Ian Tabberer:
Thanks very much for having me.
Stuart Fechner:
A question for you off the bat, Ian, it's great to have you back in Australia with us, but you’re visiting in our winter as opposed to summer. What's going on with that?
Ian Tabberer:
It's actually so nice that you've actually managed to give me some Edinburgh summer weather. So I left Edinburgh, and arrived in Sydney, and it was 25 degrees in the evening. So your winter was warmer than my summer. Where I left Edinburgh, it was 17 degrees and raining. So I think I can see the Skerryvore team immigrating to Australia pretty shortly.
Stuart Fechner:
There you go. Well, we're more than happy to have you and any other members of the team here as often as we can work it. Ian, you've recently written a paper titled Harnessing the Spending Power of Over Four Billion People. I just wanted to delve into that, and discuss that a little bit. There's quite a bit of a theme or closer look you've had at demographics around the world. How do you incorporate the demographics and population of emerging market countries into what you do at Skerryvore?
Ian Tabberer:
So the problem I think we all face as emerging markets investors, and for us particularly at Skerryvore in communicating the opportunity, is that we are very much bottom up investors. We're looking at businesses, we’re looking for aligned business owners who are able to capture the spending power of this four billion people. The problem though, is that the market, and the index particularly, points you towards countries. So, if we take our minds back to the noughties, we've talked about the BRICS, so Brazil, Russia, India, China, and South Africa. However, as we look forward, I think we're very cognisant that actually that doesn't encapsulate the really attractive long-term emerging markets opportunity that we see today. In fact, there's actually 45 countries that we can invest in as investors in emerging markets when you combine both the emerging market and frontier countries. So I think we're looking at a different way of communicating what the long-term opportunity is from a bottom up perspective.
Stuart Fechner:
Okay, interesting. You mentioned the BRICS. I'm not sure whether you have an acronym or not today – that doesn't really matter, but if it's less about the BRICS per se than it was 20 years ago, are there particular regions or countries that are sort of utmost interest for you because of that demographic trend?
Ian Tabberer:
We're less interested in countries, and more interested in people. And there's a gentleman by the name of Hans Rosling who wrote a book called Factfulness, and he talked about the PIN code for the world. And the PIN code for the world is effectively how the global population looks. So the PIN code at the start of this century was 1-1-1-4. So that's one billion people in the Americas, one billion people in Europe, one billion people in Africa, and four billion people in Asia.
Now, by the end of the century, he recognised that actually the PIN code of the world was going to be 1-1-4-5. So there's four billion people about to enter the world over the next 50 to 70 years. That incremental growth of an extra billion people in Asia will interestingly be driven by India, Indonesia and the Philippines, and the Chinese population is likely to shrink because of the impact of the one child policy. And then equally there's going to be another three billion people in Africa. So if you think about where the growth, or where all the investors in the market, and the index is pointing towards, we think it's pointing you away from actually where the long-term sort of people opportunity is, if that makes any sense.
Stuart Fechner:
No, absolutely. I know with your management style and portfolio, there's very little reference in that regard paid to the index, which is fair enough. So you're certainly more forward looking than backwards looking, which is, I guess, what the index tells us.
Within the paper, Ian, there's a couple of sections there, the first one in regards to the hierarchy of emerging wealth. What's that about, and how do you look at that in the context of looking for attractive companies?
Ian Tabberer:
Sure. Basically what we've done is we've taken inspiration from Maslow's hierarchy of needs. So this was a paper written in the 1950s. Now, academically, it's come under quite a bit of criticism, but I do think it kind of helps as a sort of a lens from which to assess the emerging markets opportunity. So Maslow identified that humans are self-actuating. You want to continue to get the best out of yourselves, but you need to meet certain needs before you go up to the next stage. So you effectively have physiological needs – health, safety, water, food – then you want community, and then you have self-actualising needs, sort of psychological needs around status. And I think if you can look at the emerging markets opportunity from that sort of lens and mindset, then actually it throws up some really interesting businesses and opportunities as we see the next four billion consumers coming into our sort of market.
Stuart Fechner:
And one of the other sections, it's probably a decent lead on from that, is psychological safety in regards to power, and the importance of brand, and that brand matters. Can you explain that, and perhaps give us some examples of brands you're referring to or hold within the fund?
Ian Tabberer:
Sure. So effectively, Maslow said that status is really important to people. And effectively we buy brands and certain goods because of the status that it infers on you. So a really good example is the car industry. So the car industry globally has about 14 major players who've consolidated the market, but there are 60 brands. So if we just thought that a car was sort of a unit of transport that was going to get us around from A to B, then they would all look the same, a bit like trains and buses do. But actually cars look very different, and it's because they show our status and our wealth.
And there's a really good example in India. So about five to 10 years ago, Tata Motors launched a brand called the Tata Nano, it was going to be the cheapest car in India, and sold at $2,000. And it was sort of marketed as this dream to offer better transportation for the Indian population. Now, they planned to build 250,000 of these cars for the Indian population, yet peak sales were only 20,000. And the reason why the sales were so disappointing is because nobody wanted to buy a cheap car, nobody wanted to be seen as cheap. And so therefore brand really does matter. What does the message that the good that you are buying or selling infer on your status? And so I think brands are really important. You can see that both in developed markets and emerging markets. We shouldn't really sort of underestimate its importance.
Stuart Fechner:
So you don't see too much challenge in the current environment, or too much difference, I should say, in the macro inflationary challenges, where I'm sure brand does matter as well as pricing power for companies to be able to maintain their margins. Does that sit or is viewed any differently, do you think, in the emerging markets world compared to the developed world?
Ian Tabberer:
It's fascinating. This might sound a bit glib, but as emerging markets investors, we've been facing inflationary markets. This is just part and parcel of operating in emerging markets. So there's actually a very good financial historian by the name of Russell Napier who we recommend reading. He also runs the Library of Mistakes in Edinburgh. And he basically says that actually if you're a developed market portfolio manager, you should be located in Brazil because effectively the conditions that you're going to see in developed markets are very much like they are in Brazil. So very inflationary.
So we as emerging markets investors invest in inflationary environments, and actually core to our investment philosophy and process is buying businesses with pricing power. It's one of the reasons why we have so much capital allocated to consumer related areas and own shares in certain brands, for example, Colgate India. Amazing pricing power is a necessity. You have a relationship with it. You don't necessarily shop on price, so you're able to pass through these highest cost of goods sold. And actually that's been a real key driver for the returns of the portfolio over the last two years, is actually the number of our businesses that have been able to pass on these commodity pressures, yet maintain volume growth. But it really is key to what we're looking for.
Our portfolios are really designed to almost, in many ways, take advantage of the inflationary environment. So, a good example of that is we own a large number of retailers, so convenience stores, pharmacy chains. And effectively these are business models that pass through inflation. Emerging markets have historically been inflationary, and these business models are very well-designed to cope with that. So actually in many ways, we think that there's a large number of business models that can really thrive in this more inflationary environment.
Stuart Fechner:
It sounds as though it's a good combination of the right quality companies being able to tap into both that four billion people opportunity, but having the right brand, and pricing power at the same time. In that regard a little bit, and the world's well and truly opened up again post the Covid period, what has the team perhaps done in terms of travel, country visits, company visits? Was there a particular hit list that you were waiting to open up and visit?
Ian Tabberer:
Yes, Glen has a lovely phrase that I quite like that he says, "Investing is a full contact sport." And we really believe that going out, and meeting the companies, seeing what they're doing, and actually meeting competitors, and sometimes it's quite good to meet businesses that you might not like that you might think, "They have challenges," to understand the strengths of the businesses you own in your own portfolio. So seeing a wide range of businesses is something that we're really keen to do all the time.
So the investment team’s back out on the road. We've had trips to Mexico, South Korea, Taiwan. We've also had a couple of investment team members out in India. I think we're very keen to go back to China. That's on sort of the hit list. And then also probably an investment trip to Africa. There are interesting developments in Africa, particularly in Nigeria recently with the change of the president. So there's lots of opportunities, and we're very keen to get back on the road, and pleased to be doing so.
Stuart Fechner:
Sounds like busy times as always. And perhaps thinking since early this year, the last six or seven months, I know typically you're a fairly low turnover investment manager, not too much turnover in the portfolio, sort of long-term patient growing opportunities. Have some of the recent portfolio changes been perhaps more due to the quality aspect of companies changing, or more about price changes where there's perhaps been some value emerging in companies that you were keeping an eye on and liked, but they've become more attractive in a price sense?
Ian Tabberer:
Portfolio turnover has been very low, and actually we've sold two stocks and bought one year-to-date. So turnover is probably lower than normal at the moment. In many ways, turnover has been driven by more risk awareness at the moment, and this absolute return mindset that we have. So the two businesses that we sold were both located in Turkey. We bought these businesses about two and a bit years ago when they were very attractively valued. They were exporters and could benefit from weakness in the Turkish lira, plus actually bottom up idiosyncratic drivers. So one of them is a key maker of electric vehicles for Ford, and they won a number of contracts to basically provide and lead on new EVs for white vans in Europe. So a great bottom up business opportunity.
However, I think we're conscious we've made significant gains in these stocks, and that the election that we were likely to see this year, that we've just effectively gone through, basically put the risk of the Turkish lira depreciating significantly. There are sort of a number of weaknesses in the Turkish economy because of the very high inflation rate, and promises that have been given on sort of deposit accounts, and the rates of return. So there's a significant sort of unfunded liability potentially in Turkey. So being aware of that potential risk, we have gone back and looked at our models. We've increased the discount rate that we apply to those business models because of effectively some significantly higher kind of country market based risk. And that led us to reassess the target prices, and realise that the stocks weren't actually offering us an ability to make a 10 to 12% return. So we sold those.
Equally, under the hand though, there's a great bottom up idiosyncratic retailer in Greece that we're invested in called Jumbo. Jumbo is the most amazing business. It has a gross margin of 52%. Now, it might not sound a lot in many ways, but it's higher than Apple. There's only Lululemon that has a gross margin higher, at 57%. And this is sort of like a dollar store. And we’d really admired the business owner for a long time, but we were slightly skeptical, I suppose, about the long-term growth opportunity outside of Greece. And what we've seen over the last couple of years and following the business is that actually they have a great long-term growth opportunity in Central Europe. They've started to open stores in Romania, Cyprus, and there's other parts of Central and Eastern Europe that they can expand into. Really attractively valued. So kind of quite a unique idiosyncratic kind of long-term growth opportunity in a retailer that both has high gross margin, so good pricing power, and is able to pass on inflation. So I think sometimes some of these ideas, it was a good opportunity for us to sort of sell our Turkish holdings, then invest in this Greek business. So it timed out quite nicely.
Stuart Fechner:
I always find it interesting to hear some of the company names, and what and why and how you'd look at them, and how they compare.
A final couple of questions. In the portfolio typically hold around 50, 55 stocks, little bit lower, so around the 50 mark. But I know there are many more opportunities out there. You have a quality watch list of companies depending on price, but they're of quality you'd be happy to invest in at the right price. How many companies out of interest are on that watch list?
Ian Tabberer:
So we sort of publicly state that the watch list is 350 to 400, but we're actually about 408 currently, and that's increasing. So we have a research meeting every Thursday, and I got the pack ahead of that, and I can see there's even more names that are going on. So there are a lot of attractive business models. I think one of the things that we've been helped with is that in the top 10 of the stocks, our businesses and stocks are performing both really well, and actually still look really attractively valued.
So one of the reasons why the turnover of names hasn't been so high is that some of the significant holdings we have are actually both performing well, but actually look really attractively valued, so the likes of FEMSA, some Mexican convenience store operator, Cipla, the Indian healthcare business. We actually think they've still got quite a bit of significant runway of sort of long-term appreciation to go. So it means that we're going around looking for new quality ideas, but equally the barrier to entry, or competition for capital is really high at the moment, which is why turnover has been so low because we're relatively comfortable with what we've got in sort of the top end of the portfolio.
Stuart Fechner:
It sounds like a terrific and very comfortable place for the portfolio to be at the moment. Ian, thank you so much for joining me today. Great to have you back in Australia, and I always enjoy speaking with you. And thanks for the insights provided in the paper, Harnessing the spending power of over four billion people. All the best on your travels home.
Ian Tabberer:
Thanks very much for having me.
