Bottom Up Is Better For EM
Iben says that his firm seeks bottom-up opportunities around the world and is overweight in EM. The Kopernik Global All-Cap Fund (KGGIX), he said, is currently at 40% emerging markets, whereas the MSCI All Country World Index holds only 11% in emerging markets. He said he sees a lot of attractive valuations here in things like telecom and railroads compared to their American counterparts.
“Even after this bounce, many of these companies are right back to where they were a dozen years ago,” he said. When talking about the superiority of emerging markets, he uses a company like Verizon as an example. It’s a telecom company in a triopoly with a decent P/E ratio offering a product, cell phones, that people aren’t going to give up. “Yet if one is willing to go into the emerging markets, they can go to Korea with Korea Telecom. ... They can go to China with China Telecom and get similar companies. … There, instead of 12 times earnings you can get single-digit P/Es, so double-digit earned yields, and that’s without the margins that Verizon makes, so their margins go up, so then there’s a lot more potential.
“Verizon has no tangible book value. The two Asian players I just mentioned are just over half of book value. So they are way cheaper on earnings, way cheaper on book value.” When you look at price paid per customer, Verizon is six times more expensive, he said. “I.e., Verizon’s margins need to be six times higher to justify. So we see not only better valuations but much more growth potential.”
In transportation, he said his fund used to own U.S. and Japanese railroads, but now holds a railroad in China-Hong Kong, which has suffered because of the turmoil. “Instead of paying six times book value for Union Pacific we pay less than book value for Guangshen [Railway], a passenger railroad. … The U.S. utilities, they’re trading at 30 times earnings; we are paying three times earnings for an electric distribution company in Russia [Federal Grid] and we’re paying about six times earnings for a hydroelectric generation (RusHydro), also in Russia. And pretty similar for hydroelectric in Brazil (Eletrobras).” In Russia, you can get Gazprom with three times earnings, he added.