Transcript(En anglais seulement)
Emerging markets are in many ways the last frontier of stock and bond investing for Canadians. But they shouldn't be. Welcome to Personally Invested, I'm your host, Dave Richardson. In 1820, Southeast Asia alone was responsible for 55% of the world's economic output. That number dropped to only 15% by 1950. By 2020, the IMF projects that that number again will exceed 40%. And that does not include the amazing things that are happening in the Middle East, Africa, Emerging Europe and Latin America.
If you believe in the adage that investors should grow where the growth is, then emerging markets is a place many Canadian investors should be looking at for their portfolios. However, because of the diversity of options in emerging markets, having the right expertise on your side is important. In this episode of Personally Invested, I'm joined by Philippe Langham and Laurence Bensafi. In his role as the Head of Emerging Market Equities at RBC Global Asset Management, Phil oversees a team in London that manages over 5 billion dollars in assets for Canadian investors.
Laurence is a critical part of that team with a specialty in the very interesting area of dividend paying stocks in emerging markets, something I think will be particularly interesting for Canadian investors. When you listen to our discussion, you'll get a sense of their experience, and a team approach they employ to unlocking this last frontier of investing for Canadians. And they are a lot of fun too. Enjoy.
Phil and Laurence, thanks for joining us today. Great to have you here, we're here in London. One of these days we're going to get this format right and do these interviews in a pub. (Laughs)... But... we... we're here in a studio today... emerging markets is a fantastic story and we ... I'm over in London on a trip and, so we wanted to get you together, 'cause you're based out of London with your teams, managing emerging markets in a lot of different ways.
And the emerging markets story as we say is something that Canadian investors really should be... should be on, and maybe have been reluctant to get there, but for you it's... emerging markets are natural. You've always... it's... an area where you're comfortable, you understand the opportunity. What... the... we were talking earlier, Phil, you were... you're from London, but I asked you, the "Philippe," as the spelling, the French spelling of... of your first name, because my daughter's name is Isabelle, and we use the French spelling, as opposed to... some of the more popular derivatives, but the "Philippe," where does that come from, Phil?
Well, my mother was actually born in Morocco, and French was her first language, she moved to London when she was about 22 or 23. So, actually it's... at home, I spoke both French and English for my first five years, but once I started school, I actually refused to speak French after that, which was a big mistake of mine... (Laughs)...
I have the same experience growing up... I grew up in Montreal and lost all my French when I moved to Toronto. It's not a smart thing to do. Of course, Laurence... your French is fantastic. 'Cause you're from Toulouse, correct?
I'm from Toulouse, but often people ask me: "Wow, your French is really good, where did you learn?" I say: "I'm French." (Laughs)... So, clearly, I've got kind of a weird accent that is kind of a mix from the south of France and then I lived in Paris for seven years. Then I've been in London for 13 years, so, I've got like a mix... and I probably speak half French, half English, even when I speak French, so...
And one of your parents is Algerian.
Yeah, my dad is Algerian and my mother is half Italian and half French.
Wow, so... we've got... an interesting combination of backgrounds, now is that what, in some ways, that emerging market background in... is that what led you to an interest in emerging markets in any way?
Well, actually for me, when I left university, I qualified as an accountant. At that time, accountancy was a main financial qualification that existed. I then went travelling to Asia for a year, and really that's when I fell in love with emerging markets, I fell in love with the dynamism, the different cultures, the real feeling that people had in terms of wanting to be successful. Um, and I very much wanted to get a role that combines my financial background and the dynamism and the different cultures that I saw, and was very fortunate at that time to get a role as an Emerging Market Analyst.
And that's really the essence of the excitement that investors should have about emerging markets as well, correct? It's... there's just amazing things going on in these parts of the world...
That's right. There's always... there's always different things going on. Um... Really no, for us... in our jobs, no two days are ever the same. Um, and really the whole story about emerging markets is the growth that we see... 20-25 years ago, emerging markets represented something like 30, 35% of Global GDP, it's now 55% of global GDP. So, really a very exciting area to be in.
Yeah. And you obviously have a similar statement... did you... you did not start working in the emerging market area, how did you... get into this part of the markets?
No, that's true. I... I actually started to work more covering global equities, and I started to do a little bit on Asia, and I was like: "Wow! It looks really interesting compared to, you know, always the same companies when you cover Europe or the U.S." as, exactly what Phil said, for us, every day we come up with new companies we never heard about actually, because there's constant new, even countries are coming up, we've been investing recently in countries where I've never invested before, like Bangladesh or Argentina, so... there's always something new and it's very, very exciting, and...
One thing that is important, when I talk to investors a little bit everywhere (?), people tend to have a very big home bias. So, when I go in Canada, people have a large portion of their portfolio...
Canadians actually are among the worst in the world in terms of having a home bias.
But I tell them, you know, it's the same everywhere. Go to France, they own French equities, and we talk in the U.K. to clients, so... it's totally normal, so... it's normal, but it's a shame because you miss out on a lot of great opportunities as Phil said, so... We see also our job I think in kind of... educating people, but in a good way, just telling them: "Look, I know it looks a bit scary from the outside, but we've been to the countries, we've been covering those countries for a very long time, and there are a lot of good things in those countries, and your portfolio can really benefit from exposure."
And that's the essence of one of the... one of the things I remember hearing you say, many years ago, is this whole idea that, when you say you're going to find, you're investing in a new country for the first time, or a company that you may not have heard of... that's really the opportunity you have as an investment manager to add that extra edge because... there's not a lot of people following some of these companies.
...so you can apply that great background you have, and...
No, absolutely, I think, um, if you look at different areas of global markets, a lot of people would say that a lot of areas have become quite, quite efficient. Um, but emerging markets and particularly smaller emerging markets and smaller emerging market countries, are one area that really are truly inefficient. And one area where it is possible for active managers, uh, who do their homework, who do their research to be able to add value, absolutely.
Yeah, and just the whole idea of efficiency and inefficiency is, you know, for a company on the S&P 500 in the U.S., there are hundreds if not thousands if not tens of thousands of people who are covering these large, large stocks. But, as you say, a small company in Bangladesh, maybe not so, so there could be something great happening, and the market just isn't realizing, and you flush it out, and you go and visit it, correct?
Yes. Totally, yeah, we do... we do about 500 company meetings a year, overall, so, eight of us on the team, we visit two to three countries per year, each of us, so that's a lot of companies we visit in the end, and then we go on the ground, Phil, you were in Bangladesh, only last month...
Well yeah, there's actually... yeah, I went to Bangladesh last March, so, about a year ago, first time I've been there. Um, really very exciting, very dynamic country, um... large population and it very much felt to me like India 15 or 20 years ago. You can really feel, I mean GDP per capita is still extremely low in a country like Bangladesh. But the opportunity for growth, the low penetration that you see in a lot of different industries really makes it very interesting and... so few analysts cover companies in... in that area, so a very exciting opportunity.
Yeah, and six months ago that was your... your favourite emerging market, is that still the one you like or has something else popped up on the...?
We like... we actually quite like frontier markets in general at the moment. Um, we did feel with frontier markets, um, three or four years ago, that evaluations looked quite, quite extended. So it's actually frontier markets, so the emerging markets, those emerging markets at an earlier stage of development, um, and these can present quite interesting long-term opportunities. Um, what we saw three or four years ago was a large number of frontier funds got launched chasing really what is quite a small number of different companies and valuations got quite stretched. Now that's very much changed over the last two or three years and...
And we've seen emerging markets, overall, outperform frontier markets, and we feel that a lot of the opportunities in frontier markets have more recently been overlooked. Bangladesh is... is a great example. The Bangladesh market hasn't done too much while emerging markets overall have been quite... quite strong. Um, so, you know, this is, uh... some of the areas where we can at the moment find good opportunities.
Now, Laurence, you specialize in an area that I think a lot of Canadians would be surprised even exists. Canadians love dividend paying stocks - there's tax benefits to investing in Canadian dividend paying companies. And there's also a consistent strong performance of dividend stocks relative to the rest of the market. We don't think of emerging markets as a place to go and get dividends. How... is this a real opportunity? And why is this something that people don't know about?
Yeah, you're right, I think, you know, emerging market has changed a lot over the last few years and it's true that, a few years ago, people were investing in emerging market and the number of companies was fairly small, people were after growth and quality, which is a great way of investing in the asset class, but that was about it. And right now, we feel that there's many other ways of investing in emerging market and if you mention looking at frontier or looking at small cap and also looking at the dividend segment that we feel is really interesting because, actually, more and more companies are paying dividends in emerging market. But overall, they're still paying less, but they grow... the dividends are growing fast, and when you see dividend growing fast, you've got a rerating story for the companies because obviously they are worth more.
So... we find this a very interesting angle. It's also a way of buying into more kind of value companies and, again, that's a segment that is very underinvested... underowned in emerging market. When you look at... again, you were talking about your Canadian exposure, people would have Canadian dividend, Canadian value equities, but they don't in emerging markets, so it really means there are some opportunities that have been overlooked. So, we really like that segment.
Yeah, and it's that growth in dividends that key. Those are the stocks that outperform, and I forget who coined the phrase: "You can't fake a dividend." Right? You have to pay a dividend out to... and, and... so, that means when a company is consistently growing and they have to make that payment, that's showing that consistent, that track record of growth, and... do you see the same thing in emerging markets?
Yeah, it's absolutely the same. We like the quality of the dividend element because, for us, that's a sign of quality, as you said. In emerging market, some companies don't have the best company governance, uh, and sometimes, if you look only at earnings, you can see things that... or even say this, you can manipulate a lot your revenues, right? But dividends is cash that is paid out of the balance sheet, so as you said, you cannot fake it. So, we see it really as a sign of a good quality of a company. If a company can increase year after year their dividends, um, that's very positive and usually you see value creation for the shareholders or capital appreciation, as well as dividend payments.
So, an interesting way for investors to get into emerging markets, and they may have that... again, like you said, that perception that they can play around with the numbers, we're not really sure if that profit's real, but with a dividend, you've got to pay it. So... small caps, though, Phil... (Laughs)... If an investor in Canada is worried about going outside of Canada, maybe even to the U.S. or to Europe, when you start to talk about emerging market or frontier companies that are small cap, is that just the last frontier of risk for an investor?
It's interesting. People would naturally perceive emerging market small caps as being risky. What's interesting, actually, is if you look at the whole emerging market universe, um, small caps actually are lower risk than large caps in emerging markets. Um... the reason is... I mean, first of all, they have lower volatility, they have a lower beta with the MSCI World, a lower correlation with the MSCI World... And the reason is, first of all, that they tend to be far less followed. Also, if you look at emerging market small caps, they tend to be in, uh, much less cyclical sectors, so not so much in the materials, energy sector, much more in the domestic sector, sectors such as, um...
...consumer discretionary, consumer staples, health care, financials. The other thing is that what you see with the emerging market small caps is that they tend to be family-owned. Family-owned companies, um, over the long term tend to perform well, far less if it's State-owned enterprises, which tend to be much more cyclical and often are not run for minority shareholders. So, all reasons, but interestingly enough, despite the fact that emerging market small caps actually have tended to outperform ever the longer term, they actually offer, surprisingly enough, lower risk. Yeah.
So, I know the question everyone's asking. Particularly people who are... who are listening. What's your favourite place that you've travelled to in this capacity?
Um, I enjoyed going to, um... the very early stage... emerging markets and the frontier markets. So, for me, um... I was fortunate enough to go to Vietnam when it first opened up. Um, Laurence mentioned Bangladesh - I found that absolutely fascinating, I was there last year. And she also mentioned somewhere I also went to last year, Argentina. Argentina's been almost uninvestable for several years, really because of... um... sort of very poor... politics. That's changed the game in the last year or so and... I really found Argentina very fascinating and, for me, a lot of these countries that have relatively small number of investors at the moment, which are relatively undiscovered, for me, are the most fascinating.
Same for me, one of my favourite countries is South Africa. First, it's one of the most beautiful country in the world. But also, when you consider how the country functions... with this kind of equilibrium between of course the... the white population that owns pretty much everything but still the black population that is the majority and is in power, but is really struggling, and the kind of... the struggle, I would say the country's in, was being one of the richest in terms of resources. So... I think I'm really... I was there just also in December, and we went there just before the change in power... and... it's really fascinating to see what's going to happen as a next step because this country should be really one of... you know, one of the best in the world in terms of... wealth and potential.
So, I think that's really one we follow very closely and we find, actually, some of the best companies really in our countries in South Africa, very, very good managements, um... and franchises, so um, it's... it has to be one of our top countries as well.
Canada is very beautiful too, you know? (Laughs) And the International Monetary Fund back in the early 1990s said we were an emerging market at that point. So, we've come a long way since then. So, you can see how things can develop very quickly. Let me just finish off, because you work so well together. And you... you came to, at different times to the firm. What have you learned from working with Laurence?
One of the things that, you know, I would say for me was important in terms of bringing our team together was very much to have a diverse team. So, a diverse team in terms of gender, in terms of backgrounds, in terms of personality. I really didn't want to have a team of people identical to myself, thinking the same way as myself. I've always felt it's very important for us to have, as a team, a culture of discussion and... and debate, to have different opinions. Um, Laurence has, you know, much more of a... a quantitative background, a contrarian... background... a value background. I've always tended to focus on areas such as management, high-quality compounding companies.
So, it's great that we can have, as a team, a discussion with different points of view, um, and Laurence has really been instrumental in terms of bringing that to our team.
Yeah. Diversity in a portfolio is important, which is one of the themes of adding emerging markets, but it's also so important in teams managing money. We've just seen that so much... and... and you look at the success that you've had, it's definitely been a big part... you, you learned anything from Phil the Thrill? (Laughs)
Not really... (Laughs)... You know... (Laughs)...
After I said all those nice things as well... (Laughs)...
You know, I mean... Absolutely, I've always had, Phil mentioned it, when I started back a long time ago in more global equities, I always had this kind of contrarian kind of value background, and... I learned so much from Phil. Now, every time I look at a stock, I got this little voice here: "What would Phil say?" Because I mean... (Laughs)... He is an amazing investor, right? He has an amazing track record and he's... he's really thinking differently from other people, which I think is how you add value, so when I look at something, I always have that little voice, it would be like: "Oh, no, don't look at this company, it's rubbish..." So... it's really... it's really great for me.
The other thing is that Phil is an amazing manager. I mean... you are always an amazing manager of people, but that's... so key I think, because you can be, you know, the best fund manager, but if you cannot manage your team, you know, properly, um...
Well, thank you, Laurence, you've never said that to me before. (Laughs)...
You'll never get anywhere, right, because you're going to be on your own and you cannot do anything on your own, right? So, Phil has built a great team and people that love working with him really, that would do anything for him, almost. (Laughs)... Uh... so, I think that... and it's very rare, it's very rare I think that you find a really great fund manager and a great manager. And I think that's been really... the main reason for the success of the team is that Phil has those two qualities.
I'm blushing now. (Laughs)...
It's true, when you sit amongst the team, it's an incredibly, and it's diverse viewpoints, a lot of ideas being passed around and in a very open environment and that is the... the hallmark of a good leader and... at the top of the group, Phil, so... It's too bad this is a podcast... (Laughs)... So, we'll... we'll do a different approach here. We'll be a bit contrarian, instead of going to a lovely pub in London, why don't we go find a sophisticated wine bar with some lovely French wine for... (Sounds good!) Laurence and we'll finish up the day there (Let's do that, let's do that.) Thanks, thanks for joining me.
Thank you, Dave.
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