Dear friends,
We spent a bit over an hour talking with Andrew Foster of Seafarer Overseas Growth & Income. About 50 people phoned-in to listen. Among the highlights of the call, for me:
1. Andrew offered a rich discussion about his
decision to launch the fund. The short version: early in his career, he concluded that emergent China was "the world's most under-rated opportunity" and he really wanted to be there. By late 2009, he noticed that China was structurally slowing. That is, it was slow because of features that had no "easy or obvious" solution, rather than just slowly as part of a cycle. He concluded that "China will never be the same." Long reflection and investigation led him to begin focusing on other markets, many of which were new to him, that had many of the same characteristics that made China exciting and profitable a decade earlier. Given Matthews' exclusive and principled focus on Asia, he concluded that the only way to pursue those opportunities was to leave Matthews and launch Seafarer.
2. He believes that Seafarer has
three distinguishing characteristics. (1) They're obsessive about bottom-up research and don't try to make calls about currencies or regional dynamics as part of the process. They may factor such things in but only because they bear on a particular firm that interests him. (2) Their portfolio is built by a single individual, driven by individual securities, rather than by some combination of multiple overlaps, portfolio sleeves and internal corporate politics. The fact that he's "immensely afraid of failure" leads him to a carefully conceived, concentrated portfolio. (3) Their focus is on sustainable growth, with income. He tried to avoid "high concept" stocks and especially those whose success is largely dependent on the whims of politicians or bureaucrats. His preference is for more seasoned firms with slower, sustainable growth paths.
3.
Income has three functions in the portfolio. (1) It serves as a check on the quality of a firm's business model. At base, you can't pay dividends if you're not generating substantial, sustained free cash flow and generating that flow is a sign of a healthy business. (2) It serves as a common metric across various markets, each of which has its own accounting schemes and regimes. (3) It provides as least a bit of a buffer in rough markets. Andrew likened it to a sea anchor, which won't immediately stop a ship caught in a gale but will slow it, steady it and eventually stop it.
4. On whole, he believes that
equities are more attractively priced than are fixed-income securities, hence he's about 90% equities.
5. As markets have become a bit stretched - prices are up 30% since the recent trough but fundamentals have not much changed -
he's moved at the margins from smaller names to larger, steadier firms.
6. The fund can, but generally
won't, hedge its currency exposure.
7. Following Teapot's question, Andrew suggested that the
devaluation of the yen bears very careful attention ("it's very much worth paying attention to"), at least in part because a falling yen was one of the precursors of the Asian financial crisis in the late 90s.
Apologies to all: at about this point, my 12-year-old discovered that I'd bought a "new" used car today and began celebrating. Part of the celebration involved snatching the phone upstairs from my study and attempting to dial friends.
8. As long as the fund is growing,
yield will look low and tax efficiency will look relatively high. I hadn't thought about it before: he might receive a dividend check in September when he had $12 million in the fund but when he pays it out in December, that check gets spread across a much larger group of shareholders (there was $28 million in the fund then) so each receives less.
9. The fund instituted a second set of
expense reductions, this one voluntary, that they hope to be able to make permanent but they'll have to wait until August to see what's economically possible.
10. He will not invest in firms domiciled in any country where he and his staff cannot safely travel. They need to make face-to-face encounters with management teams, in part to discover the identities and agendas of the actual "control persons," but he won't put his folks' safety at risk for the sake of an investment lead.
Bottom-line: the valuations on emerging equities look good if you've got a three-to-five year time horizon, fixed-income globally strikes him as stretched, he expects to remain fully invested, reasonably cautious and reasonably concentrated.
I'm wondering what other folks heard, too.
David
Comments
The audio is currently available here http://78449.choruscall.com/dataconf/productusers/mfo/media/mfo130219.mp3 and will soon be available on a SFGIX podcast page.
For what it's worth, David
Thanks so much for an excellent job in running the call and asking a great set of questions. these interactions with fund managers are quite valuable. I feel like it gives us a seat at the table in terms of really understanding the nuts and bolts of these funds. Based on the call and additional research I've done on the fund, I plan to invest.
In reference to your note above, he did raise some flags about devaluation of the yen, but also seemed to think that potentially positive change was ongoing in Japan. He is planning a trip there in the near term to look at companies.
Michael