Opportunities in Global Emerging Markets Charlemagne Capital
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Transcript of Opportunities in Global Emerging Markets Charlemagne Capital
Opportunities in Global Emerging MarketsCharlemagne CapitalJulian Mayo, Director of Investments
February 24, 2005
2Charlemagne CapitalSpecialists in Emerging Markets
Global Emerging Markets Fund
Inception Date: February 24, 2005Investment Objective: The fund seeks long-term growth
of capital by investing in global emerging markets. General Account: $5,000 minimumIRA Account: No MinimumBusiness Account: $5,000 minimumTrust Account: $5,000 minimumUGMA/UTMA: $1,000 minimumABC Investment Plan: $1,000 minimum w/$100
minimum per monthExpense Ratio: Capped at 2.0%
The SubadviserCharlemagne Capital
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The Subadviser: Charlemagne Capital
Independent emerging markets investment management group
Entrepreneurial, with significant institutional backing
Funds under management approx. $2.0 billion*
Strong debt-free balance sheet
Subadviser to US Global Investors Accolade Eastern Europe Fund (ticker: EUROX) – “12-month winner”, Wall Street Journal Best Performing Mutual Fund, as well as the US Global Investors Global Emerging Markets Fund
*as at 31 Dec 2004
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The Subadviser : Charlemagne Capital Assets under management US$ m
Source: Charlemagne Capital
334446
940
2016
0
500
1000
1500
2000
2001 2002 2003 2004
US$
Dynamic growth: all in emerging markets
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The Subadviser : Charlemagne Capital
Charlemagne Capital
Hedge funds$ 154m
Institutional mandates$ 1019m
Private equity$ 217m
OCCO rangeSegregated accounts Private equity portfolios
Long only funds$ 626m
Magna range / Offshore funds
Diversified institutional client base
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The Subadviser : Charlemagne Capital Investment team
High quality, dedicated professionals Significant emerging market experience Alignment of interest with investors Blue chip, institutional backgrounds Strong internal performance driven culture
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Investment Process
Exploit inefficiencies in emerging markets
via a disciplined bottom-up process
focused, low risk portfolios
consistent returns
low volatility
+
=The goal
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Investing in Emerging Markets
The Investment Process: How we invest in emerging markets
The Investment Case: Global emerging markets
Did you know:
Over 80% of people in the world live in emerging markets!
Only 10% of Indians have even seen a telephone!
Investment Process
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Investment Process
OCCO Eastern European Fund
Stefan Böttcher
Lead Manager
17 years experience
Yvonne Yeoh
Manager
Asia
10 years experience
Julian Mayo
Manager
Asia
20 years experience
Andrew Wiles
Manager
EMEA
10 years experience
Samir Patel
Manager
Latam
9 years experience
Stefan Herz
Head of Research
EMEA / Latam
13 years experience
James Hanson
Risk Manager
11 years experience
Clear Ownership Structure - Cover (4 Eyes Principle)
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Investment Process
Listed companies
80% of market cap Best opportunities Special situation
Detailed analysis Quarterly management meetings Propriety database
Risk management
Low volatility High tracking error
Macro Overlay
Focus Stock List
Charlemagne Capital Universe
Portfolio
Emerging Markets Universe
Structured, consistent process
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Check List What it means
Management quality
Corporate governance, track record, strategy, shareholder value focus
Top line growth Market leadership, innovative products
Earnings growth/quality
Lean cost management, consistent operating earnings growth
CF-generation Sufficient internally generated CF
Balance sheet strength
Easy access to finance, low solvency risk
Investment Process: Qualitative Checklist
Focus stock list
Checklist What it means
Disciplined bottom-up research
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Investment Process: Company Research
Forecast periods
Short term cyclical
Normalised / Sustainable
Valuation analysis
Focus stock list: Detailed corporate database
Rigorous stock analysis
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Investment Process: Valuation Analysis
Absolute value
DCF / DDM
Sum of the parts
Relative value
Traditional ratio analysis
vs. Sector
vs. Market
Price target
Price-driven valuation analysis
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Investment Process
Political risk Currency risk
Risk: Significant valuation shift
Avoid
Macroeconomic risk overlay
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Investment Process: Special Situations
Local Offices Corporate Events Local ContactsPrivate Equity
Special situations qualitative screening by fund managers
Company visit by fund manager
Risk adjusted return target
Portfolio(Max. 25% of NAV)
Delivering alpha
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Country, sector and cash limits determined by a maximum tracking error of 15%
Special situations + illiquid stocks maximum 25% of NAV
Stock positions: Core: 3% Max: 9% Min: 1%
Large positions: indication of conviction
Investment Process - Portfolio Construction
Focused, concentrated portfolios managed within risk limits
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Administrative risk Markets must meet criteria such as security of ownership,
currency convertibility, custody, taxation, liquidity
Market risk ‘Four-eyes’ principle – each decision is seconded Constant price screening by dedicated dealer Weekly stock/sector review meetings Monthly macroeconomic reviews Quarterly company visits
Portfolio risk Informed management of risk
Risk management
Investment Process
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Sell triggers: Price change Change of fundamental assessment Superior alternative investment opportunity
Instant implementation
Investment ProcessSell discipline
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OTP: well placed for convergence Banking sector penetration will increase
towards EU levels as interest rates decline OTP is the market leader in all products Expect a further $2bn in mortgage loans to
be added over the next couple of years
Investment Process: Best Team Ideas
P/E ’04E Earnings growth ’04E
OTP 9.5 20%
EU retail banks avg 10.6 10%
Source: Charlemagne Capital / Brunswick UBS Warburg / Merrill Lynch OTP / IMF
0%20%40%60%80%
Deposits RetailLending
Mortgages
OTP
0%
20%
40%
60%
80%
100%
120%
Hungary European Union
Hungary Gross Loans/ GDP 2002
The strategy: example OTP
OTP: Market Share (2003)
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0
2
4
6
8
10
12
14
16
18
1998 1999 2000 2001 2002 2003
m to
nnes
Korean Shipbuilding Backlog
Korean steel mill, dominant domestic steel plate producer Strong core product demand from shipbuilding and construction Management addressing corporate governance discount Stock trading at 3x2004 earnings, 5% dividend yield
Investment Process: Best Team Ideas
Source: Charlemagne Capital
2004 Dongkuk POSCO Global average
EV/EBITDA 1.9x 3.0x 5.8x
3 ½ yrs backlog
The strategy: example Dongkuk Steel
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Leading Mexican home builder Large and growing housing deficit in Mexico Management enhancing margins through better working capital
and better revenue mix Strong cash flow generation due to low capex Valuations justified by its better growth prospects
Forecasts 2004 2005
P / E 13.9 11.5
EV / EBITDA 7.7 6.9
Investment Process: Best Team IdeasThe strategy: example URBI
Source: Charlemagne Capital
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Summary
Fundamental bottom-up approach Lean decision making Disciplined portfolio construction Rigid sell discipline Informed risk management
Investment Process
Investment CaseGlobal Emerging Markets
Politics: better economic management
Economics
Valuations
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Investment Case: Global Emerging Markets
Source: UBS
International reserves now exceed external debt
0
200
400
600
800
1000
1200
1400
1600
90 91 92 93 94 95 96 97 98 99 00 01 02 03 04E 05E
U$bn
Cum Chg in Gross External Debt
Cum Chg in International Reserves
Cum Chg in Short Term Debt
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-3.0%
-2.0%
-1.0%
0.0%
1.0%
2.0%
3.0%
4.0%
86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05
70.0
75.0
80.0
85.0
90.0
95.0
100.0
105.0
110.0
Current Account + FDI % GDP Current Account % GDP REER (rhs)
Source: UBS
Investment Case: Global Emerging Markets
Exchange rates seem undervalued
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GEMs vs Developed mkt cap weighted sovereign yields
Source: UBS
Investment Case: Global Emerging Markets
Spreads narrowed but still room to fall
0.0
2.0
4.0
6.0
8.0
10.0
12.0
14.0
Jan-98 Jan-99 Jan-00 Jan-01 Jan-02 Jan-03 Jan-04
EM Market Cap Weighted Bond Yield US 10 Year T-Bill Yield
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Source: UBS
Investment Case: Global Emerging Markets
Real GDP Growth Current Account (% GDP)
04E 05E 04E 05E
Latin Average 4.6 3.9 0.3 -0.4
EMEA Ave. 5.7 4.7 0.8 -0.8
Asian Average 7.4 6.2 2.6 3.0
GEM 6.4 5.3 1.6 1.3
High GDP Growth
30Charlemagne CapitalSpecialists in Emerging Markets Source: UBS
Investment Case: Global Emerging Markets
Sound fundamentals
-50.0
0.0
50.0
100.0
150.0
200.0
250.0
83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05
$bn
EMEA LatAm Asia ex China China GEM
E E
Current account + FDI: surpluses across the board
31Charlemagne CapitalSpecialists in Emerging Markets Source: UBS
Investment Case: Global Emerging Markets
Cheap relative to world
GEMs vs global 12 month forward consensus P/Es
0
5
10
15
20
25
30
Jan-89 Jan-90 Jan-91 Jan-92 Jan-93 Jan-94 Jan-95 Jan-96 Jan-97 Jan-98 Jan-99 Jan-00 Jan-01 Jan-02 Jan-03 Jan-04
MSCI EMF 12 month forward P/E MSCI World 12 month forward P/E
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Investment Case: Global Emerging MarketsGEMs: Earnings yield gap
Source: Charlemagne
Equities more attractive than bonds
-10%
-5%
0%
5%
10%
15%
Jan 99 Jan 00 Jan 01 Jan 02 Jan 03 Jan 04
Yiel
d
Earnings Yield Gap Bond Yield Earnings Yield
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Investment Case: Global Emerging Markets
Equities look cheap on price to bookSource: UBS
0.00.51.01.52.0
2.53.03.54.04.5
1989 1991 1993 1995 1997 1999 2001 2003
GEM P/BV
World P/BV
GEMs vs Developed P/BV
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Investment Case: Global Emerging Markets
Source: UBSCountry and sector volatility falls – stock selection counts!
0%
10%
20%
30%
40%
50%
60%
Jan 96 Jan 97 Jan 98 Jan 99 Jan 00 Jan 01 Jan 02 Jan 03 Jan 04
sectors
countries
Standard deviation of country vs sector
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* Top and bottom performance out of largest 25 GEMs stocks by market capitalisation
Investment Case: Global Emerging MarketsStock selection matters – yearly performance 2003
Top 5 Worst 5
-50%
0%
50%
100%
150%
200%
Petroc
hina
Relianc
e
Petrob
ras P
N
Petrob
ras O
N
America
Mov
il
Sasol
Yukos
Kookm
in Ban
k
Telefon
os Mex
ico
SK Tel.
+188%
-13%
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Investment Case: Global Emerging Markets
P/E P/BV EV/EBITDA05E 06E 05E 06E 05E 06E
Latin America 9.2x 8.4x 1.8x 1.6x 4.8x 4.5x
EMEA 9.4x 9.5x 1.51x 1.36x 5.0x 4.8x
Asia 10.1x 9.6x 1.68x 1.50x 5.5x 5.1x
GEM 9.7x 9.3x 1.65x 1.47x 5.2x 4.9xUS 16.7x 15.5x 2.66x 2.58x 9.1x 8.7x
Global 14.4x 13.2x 2.08x 1.89x 7.5x 7.2x
GEM discount
-32.4% -29.4% -20.6% -22.0% -30.8% -32.4%
Source: UBS
Model PortfolioGlobal Emerging Markets
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Source: Charlemagne Capital / Bloomberg – 31 Dec 2004
Model PortfolioGeographic allocation
0.00%
0.50%
1.00%
1.50%
2.00%
2.50%
3.00%
3.50%
4.00%
4.50%
Other Colombia Russia Thailand Hungary
Magna GEMs MSCI EM Free Total Net Return Index
Geographic Allocation: Top 5 overweights
Actively managed portfolios
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Source: Charlemagne Capital / Bloomberg – 31 Dec 2004
Model PortfolioGeographic allocation
0.00%
2.00%
4.00%
6.00%
8.00%
10.00%
12.00%
14.00%
Indonesia China Turkey Taiwan Malaysia
Magna GEMs MSCI EM Free Total Net Return Index
Sector Allocation: Top 5 Underweights
Actively managed portfolios
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0.00%
2.00%
4.00%
6.00%
8.00%
10.00%
12.00%
14.00%
16.00%
18.00%
Energy Banks Insurance Property Telecoms
Magna GEMs MSCI EM Free Total Net Return Index
Sector Allocation - Top 5 Overweights
Source: Charlemagne Capital / MSCI – 31 Dec 04
Model PortfolioSector allocation
Overweight
Financials
Actively managed portfolios
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0.00%
2.00%
4.00%
6.00%
8.00%
10.00%
12.00%
14.00%
Materials Food &Beverage
Capital Goods Transportation IT
Magna GEMs MSCI EM Free Total Net Return Index
Sector Allocation - Top 5 Underweights
Source: Charlemagne Capital / MSCI – 31 Dec 04
Model PortfolioSector allocation
Underweight
Materials
Actively managed portfolios
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Thank You!For more complete information about the
Global Emerging Markets Fund and/or Eastern European Fund (EUROX)
or any U.S. Global fund, obtain a prospectus by visiting us at www.usfunds.com or call 1-800-US-FUNDS. Please consider carefully the fund’s investment objectives, risks, charges
and expenses, and read the prospectus carefully before investing. Distributed by U.S. Global Brokerage, Inc.
Foreign and emerging market investing involves special risks such as currency fluctuation and less public disclosure, as well as economic and political risk. This article should not be considered a recommendation for the securities of any company mentioned.
Holdings as a percentage of net assets as of 12/31/04:
Eastern European Fund: OTP Bank Rt. (8.34%)
Although mentioned none of the following companies are held in the Eastern European Fund as of 12/31/04: America Movil, Dongkuk Steel, Kookmin Bank, Petrochina, Petrobras, Posco, Reliance, Sasol, SK Telecom, Telefonos Mexico, URBI and Yukos.
The MSCI EM Free Total Net Return Index measures the market performance, including price performance and income from dividend payments.
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The Disclaimer
This document is issued by Charlemagne Capital (UK) Limited which is authorised and regulated by the Financial Services Authority (“FSA”). 'Magna Umbrella Fund plc is an open ended investment company authorised by the Irish Financial Services Regulatory Authority as a UCITS. It is recognised by the FSA under section 264 of the Financial Services and Markets Act 2000 for marketing to persons in the UK. This document must not be relied on for purposes of any investment decisions. Before investing in any fund(s) recipients who are not professional investors should contact their independent financial adviser and all documents relating to the particular fund(s) such as report and accounts and offering memorandum/prospectus should be read, which specify the particular risks associated with the fund(s), together with any specific restrictions applying and the basis of dealing. The value of any investments and any income generated may go down as well as up and is not guaranteed. Past performance will not necessarily be repeated. Changes in rates of exchange may have an adverse effect on the value, price or income of an investment. There are additional risks associated with investments (made directly or through investment vehicles which invest) in emerging or developing markets. The information in this document does not constitute investment, tax, legal or other advice and is not a recommendation or, an offer to sell nor a solicitation of an offer to buy shares in the fund(s), which may only be made on the basis of the Prospectus/Fund’s Offering Memorandum which can be obtained from the address below. A United Kingdom investor who enters into an Investment Agreement to acquire an interest in the fund will not have the right to cancel the agreement under any cancellation rules made by the FSA. Charlemagne Capital (UK) Limited reasonably believes that the information contained herein is accurate as at the date of publication but no warranty or guarantee (express or implied) is given as to accuracy. The information and any opinions expressed herein may change at any time.
Issued by Charlemagne Capital (UK) Limited - Authorised and Regulated by the FSA.
Charlemagne Capital (UK) Limited39 St. James‘s StreetLondon SW1A 1JDUnited KingdomTel: + 44 (0)20 7518 2100Fax: + 44 (0)20 7518 2198/[email protected]