Mobius: You've got to fight your way out
Managing director of Templeton Asset Management, he is responsible for almost 25 funds that span emerging markets around the globe and have assets under management of more than $10 billion. In 1997 and 1998, Mobius was named by Reuters the No. 1 global emerging markets fund manager. He received this accolade despite the crisis last year that crippled most emerging markets and caused many of his funds to drop in value by more than 20%. Mobius said that he saw the crisis ultimately as a buying opportunity and believes that after a one-two year bear market, emerging markets are ready for a bull run. Mobius has invested in Poland for the past five years. Here, Templeton's largest holdings are in Telekomunikacja Polska (TPSA), Bank ¦l±ski and Prokom. A constant traveller, he spends most of his time flying to different markets on a private jet, Mobius recently took a break from his late-night work to speak with the WBJ's Małgorzata Halaba and David Reilly about where he sees markets heading, the lack of corporate governance in the region and his investment philosophy. The following is an edited version of their conversation.
Q: In the past few months there has been growing sentiment that the global financial crisis has ended. Do you share this enthusiasm?
A: Yes, I do. I think the markets are going to be doing very well. But I'm concerned that the lessons we've learned will be forgotten. Everybody will forget about any kind of reform, corporate governance.
Q: How does Poland fit into this picture?
A: Well, Poland being one of the emerging markets will pick up from this and will benefit from this general trend. The problem here is that the policies in Poland are relatively restrictive. Of course, we applaud the excellent regulations. The central depository structure is quite good, but there are also many constraints on what people can do and cannot do. Your market is not as free, as dynamic, as it is in other parts of the world.
Q: What do you consider to be the main constraint?
A: I would say taxes is one. To encourage investments, you've got to give tax incentives. Second is the pension fund legislation. Again, they need to give tax benefits to people, so that like in the United States people know they can save for their retirement without paying tax on capital gains. Benefits to companies that go to market are needed, and the acceleration of privatization is the third one. We don't have enough companies big enough to buy.
Q: Looking at the region but excluding Russia, where would you place the Polish market in terms of opportunities, and is it fully priced or not?
A: Because of the crisis you can write off Kazakhstan, Kirgistan. You can write off Romania, Bulgaria, Slovenia, Slovakia. Forget them, they are off the map until at least the next really screaming bull market occurs in emerging markets. Forget even about the Baltics, with a few exceptions, a few companies. So what are you left with after that? You are left with Poland, Hungary and the Czech Republic. The Czech Republic now has a new government who is regressing back into old socialist ways. So they've got a sort of gangster-socialist mentality that's prevalent in Russia and everybody's trying to fill up their pockets as fast as they can, while they can, using the old apparatchik structure, and it's not very friendly to investors. So you don't want to get involved in that sort of thing. In the case of Hungary, there are limits. It's a relatively small country and corporate governance stinks.
Q: How is corporate governance in Poland?
A: Like in Hungary. It doesn't exist. When you have the government doing what they are doing, in the cases we know about, in practice you don't have corporate governance because the government itself is involved in violating basic rules of corporate governance for minority shareholders. However, there is a basic, high moral standard in the country, with a basic legal infrastructure which is not too bad. And this is the reason why people have confidence in Poland, because they realize they've got some fundamental rights that are respected in the country. But it really hasn't penetrated the capital markets at this stage of the game for minority investors.
Q: What's your feeling about the profitability of publicly traded companies here? It definitely lags behind Hungary.
A: This is one of the reasons why I mentioned not enough supply, so that there is not enough variety of companies that truly reflect what's happening in the market. (And) a lot of these companies are formerly state owned or still controlled by the state. And state companies tend to show low profitability. (There are) political appointments, you have all types of excess employment. So they're not really trying to create wealth, they're trying to keep people employed and you have a lot of other agendas. Also, there is a tendency toward regulatory structures that favor strategic investors rather than minority investors.
Q: Do you think that's a preference in the way the market is developing, or is it also because there is a lack of strong regulations to protect minority shareholder interests?
A: Not enough regulations to protect minority shareholder interests. And the other problem is, of course, that the government acts as a referee and a player in the market. So you have situations like when the government wants to sell a controlling stake in a company and under other regimes you would normally say O.K., you are getting control over this company, you have to make a general offer at the same price, to everyone. But here it's not required for the government to do that. So the government gets paid a higher price and that leaves the minority investors stuck with a new strategic investor who they may not like.
Q: That's what happened in Bank Przemysłowo-Handlowy (BPH) ...
A: Yes, BPH is a good example (in which the government and the European Bank for Reconstruction and Development/EBRD sold at higher-than-market prices in transactions that were not open to other investors.)
Q: Did you consider or would you still consider a lawsuit in regard to BPH?
A: No. Because we found that lawsuits don't pay. They are very expensive, time consuming and as a fund you often don't get favorable treatment in the local courts. We had that experience in Brazil, in Hungary, in the Philippines.
Q: Like the government in the BPH deal, the EBRD received a better price than other investors. What's the role of the EBRD here and should it be here?
A: I think the EBRD should be concerning itself with building infrastructure and creating an environment for the capital markets, so they can function efficiently. The problem is not a shortage of money. The problem is how to create an environment that is attractive. This should be their role. Like a bond market. Where is the bond market? Why isn't there a bond market. Because nobody is taking the initiative to create the bond market, create the conditions. These are the kinds of things the EBRD should be doing. The EBRD, as far as we can see, is just another merchant bank, (except) it gets preferential treatment to the disadvantage of minority shareholders and other banks.
Q: So you feel you are at a disadvantage when it comes to the EBRD?
A: Yes, very much so. I think some of the things they do are fine, but overall the EBRD, IFC, all of them, have got to change the whole way they view these markets, to get maximum benefit out of the money they do have. Because they do have limited amounts of money. And they should use it to create an environment for a very liquid, transparent capital market.
Q: Just to clarify, what now are your holdings in Poland?
A: Actual holdings? BPH, Bank Handlowy, Bank ¦l±ski, BRE Bank, Elektrim, Impexmetal, Mostostal Export, Optimus, Prokom, Rolimpex, TPSA, Warta, Żywiec, WBK (Wielkopolski Bank Kredytowy).
Q: There is another one you had until very recently and this is something we all are very curious about - BIG Bank Gdański. You started a whole avalanche of events by proposing a shareholders resolution to shift control of a 24% stake in the company from management to all shareholders. Was this move planned to bring in a new strategic investor?
A: We made the proposal because we felt the shares should really be in the hands of shareholders, not in the hands of management. Because of that we felt if they are in the hands of management, not that the management won't do good things, but that there could be a change in control without our knowing it, so that would impact our thinking about the bank.
Q: Did you have any reasons to think this would happen?
A: You know, there are always rumors and talk, but we didn't have any concrete evidence. But we thought that a precaution would be good, to turn the shares over to the shareholders. And there was some resistance on the part of management, they didn't like that idea. So we decided, well we've got to take matters into our own hands. We had this large stake, almost 10%, and we started looking for possible buyers who we knew were interested. And that's what happened. And that's the reason why liquidity is so important. If you are in a situation where you're not sure what the management is going to do and you want an exit, unless you have liquidity, it's very difficult. And that's why you have to look for a strategic investor.
Q: When you said you started to look for buyers, you mean in relation to the 10% that you held, or a strategic buyer for the bank as a whole?
A: For a while for what we held.
Q: Is it true you sold your holdings to Deutsche Bank?
A: I don't know if I'm allowed to say that. (Later in the interview Mobius confirmed that Deutsche was the buyer.) Anyway, for us it was a good move because we were getting a good price.
Q: What price did you sell at?
A: A 30% premium to the market from where we started. The good news is that so did everyone else, it's not a matter in which only one of us was able to get out at a higher price. Anyone who wanted to get out could have sold.
Q: According to our calculations you made about $40 million. Is that right?
A: Yes, something around that. More and more, out of necessity, we have to do this sort of thing. We had to make a strategic move because the market is just not liquid enough. Otherwise we would get stuck if something happens. We had confidence in BIG BG's management, but we thought the direction might be changing. Given the experience we had with BPH, we felt that we didn't want to get that kind of experience again where they sell out twenty-something percent of the treasury shares at some ridiculous price and we would be left out.
Q: I'd like to clarify one thing that has been attributed to you, that recently you have changed your approach in looking at companies, so you look at management first.
A: Yes. We always looked at management, but not as intensely as we do now and not as aggressively. That's what we're doing globally. We've become much more aggressive.
Q: What emboldened you to become more aggressive?
A: It's not a matter of being emboldened, it's a matter of being trapped. You are against the wall in a corner and there is no way out, you've got to fight your way out. If you are a small, tiny fund, you can sell your way out. When you're big, you've got to fight because there's no way out, there's no liquidity.
Q: Looking at BIG BG and some other companies, where do you see the most dynamic Polish management?
A: I think the most exciting management now is at Elektrim. (Barbara Lundberg) seems to have her act together and is really trying to change the culture. That's exciting. I'm not saying it's the greatest bargain in the world, but I think that's an example of what's needed in Poland. You need more people like that, who are going to say, 'O.K. I'm going to shake this tree a little bit, move in a different direction, change the culture of the company.'
Q: How much of Elektrim do you own?
A: Not very much, a few percent.
Q: Looking just at your Eastern European fund, over the past year it is down 21.2%. How badly did you get hit in this crisis in 1998?
A: Rather badly in almost all of our funds. But we kept on buying things at low prices and that helped. Now our big global emerging market funds are up 20, 30, 40%. That's what it's all about, going in when things look bad and buying.
Q: How much of a haircut did you take?
A: On these downturns, in just about every one, the haircut was 20%.
Q: Actually, I mean you personally.
A: I own the funds, so I get hurt like everyone else.
Q: Looking at different sectors, you have a lot of bank holdings and obviously the market here is weighted toward banks. What's the new hot sector? Would it be telecom, computing, internet?
A: I think it's gonna be telecoms, and that's a global trend, because what's happening is that the internet people are beginning to realize that they need to have the pipeline, they need to have the connections. And the telecoms people also realize that they have highways, so to speak. So I think telecoms will probably be important. Here I suppose TPSA is not the most dynamic company in the world ...
Q: You're a shareholder, change it.
A: We're thinking about that (laughs) ... Nevertheless, by virtue of their monopoly power they can do a lot. So I think that's one area that's exciting. We are not crazy about some of the internet ideas because I think it's gone completely haywire, it's gone too far. We're very much value investors. We don't believe in companies that keep on spending money without any hope of getting richer in the short term.
Q: How difficult is it to find a value investment in a market like Poland?
A: It's pretty difficult to find screaming bargains. It's not easy. In some ways we're going to have to create them.
Q: How do you do that?
A: By stirring up shareholder value. By kicking the management and saying, 'Look, if you don't perform, get out.' But there are limits in what we can do here.
Q: What's the key benchmark you look at when you are valuing a company?
A: Five year earnings, that's the most important. What is this company going to be earning per share in five years. And looking at that we assess what are the growth prospects.
Q: Even though you're a value investor, would you see any similarities between investing in the risky emerging markets that you do and the internet in the sense that it is the newest emerging market.
A: I don't see the parallels in the sense that's it's a very narrow field. Of course, it looks like it has great potential. If emerging markets are built on a hope, the internet is really built on a hope. These are dreams. So if you look at it, my opinion is that emerging markets have much more stability, much less volatility than internet. Because with the emerging markets, I have much more diversification.
Q: In the past few months there has been growing sentiment that the global financial crisis has ended. Do you share this enthusiasm?
A: Yes, I do. I think the markets are going to be doing very well. But I'm concerned that the lessons we've learned will be forgotten. Everybody will forget about any kind of reform, corporate governance.
Q: How does Poland fit into this picture?
A: Well, Poland being one of the emerging markets will pick up from this and will benefit from this general trend. The problem here is that the policies in Poland are relatively restrictive. Of course, we applaud the excellent regulations. The central depository structure is quite good, but there are also many constraints on what people can do and cannot do. Your market is not as free, as dynamic, as it is in other parts of the world.
Q: What do you consider to be the main constraint?
A: I would say taxes is one. To encourage investments, you've got to give tax incentives. Second is the pension fund legislation. Again, they need to give tax benefits to people, so that like in the United States people know they can save for their retirement without paying tax on capital gains. Benefits to companies that go to market are needed, and the acceleration of privatization is the third one. We don't have enough companies big enough to buy.
Q: Looking at the region but excluding Russia, where would you place the Polish market in terms of opportunities, and is it fully priced or not?
A: Because of the crisis you can write off Kazakhstan, Kirgistan. You can write off Romania, Bulgaria, Slovenia, Slovakia. Forget them, they are off the map until at least the next really screaming bull market occurs in emerging markets. Forget even about the Baltics, with a few exceptions, a few companies. So what are you left with after that? You are left with Poland, Hungary and the Czech Republic. The Czech Republic now has a new government who is regressing back into old socialist ways. So they've got a sort of gangster-socialist mentality that's prevalent in Russia and everybody's trying to fill up their pockets as fast as they can, while they can, using the old apparatchik structure, and it's not very friendly to investors. So you don't want to get involved in that sort of thing. In the case of Hungary, there are limits. It's a relatively small country and corporate governance stinks.
Q: How is corporate governance in Poland?
A: Like in Hungary. It doesn't exist. When you have the government doing what they are doing, in the cases we know about, in practice you don't have corporate governance because the government itself is involved in violating basic rules of corporate governance for minority shareholders. However, there is a basic, high moral standard in the country, with a basic legal infrastructure which is not too bad. And this is the reason why people have confidence in Poland, because they realize they've got some fundamental rights that are respected in the country. But it really hasn't penetrated the capital markets at this stage of the game for minority investors.
Q: What's your feeling about the profitability of publicly traded companies here? It definitely lags behind Hungary.
A: This is one of the reasons why I mentioned not enough supply, so that there is not enough variety of companies that truly reflect what's happening in the market. (And) a lot of these companies are formerly state owned or still controlled by the state. And state companies tend to show low profitability. (There are) political appointments, you have all types of excess employment. So they're not really trying to create wealth, they're trying to keep people employed and you have a lot of other agendas. Also, there is a tendency toward regulatory structures that favor strategic investors rather than minority investors.
Q: Do you think that's a preference in the way the market is developing, or is it also because there is a lack of strong regulations to protect minority shareholder interests?
A: Not enough regulations to protect minority shareholder interests. And the other problem is, of course, that the government acts as a referee and a player in the market. So you have situations like when the government wants to sell a controlling stake in a company and under other regimes you would normally say O.K., you are getting control over this company, you have to make a general offer at the same price, to everyone. But here it's not required for the government to do that. So the government gets paid a higher price and that leaves the minority investors stuck with a new strategic investor who they may not like.
Q: That's what happened in Bank Przemysłowo-Handlowy (BPH) ...
A: Yes, BPH is a good example (in which the government and the European Bank for Reconstruction and Development/EBRD sold at higher-than-market prices in transactions that were not open to other investors.)
Q: Did you consider or would you still consider a lawsuit in regard to BPH?
A: No. Because we found that lawsuits don't pay. They are very expensive, time consuming and as a fund you often don't get favorable treatment in the local courts. We had that experience in Brazil, in Hungary, in the Philippines.
Q: Like the government in the BPH deal, the EBRD received a better price than other investors. What's the role of the EBRD here and should it be here?
A: I think the EBRD should be concerning itself with building infrastructure and creating an environment for the capital markets, so they can function efficiently. The problem is not a shortage of money. The problem is how to create an environment that is attractive. This should be their role. Like a bond market. Where is the bond market? Why isn't there a bond market. Because nobody is taking the initiative to create the bond market, create the conditions. These are the kinds of things the EBRD should be doing. The EBRD, as far as we can see, is just another merchant bank, (except) it gets preferential treatment to the disadvantage of minority shareholders and other banks.
Q: So you feel you are at a disadvantage when it comes to the EBRD?
A: Yes, very much so. I think some of the things they do are fine, but overall the EBRD, IFC, all of them, have got to change the whole way they view these markets, to get maximum benefit out of the money they do have. Because they do have limited amounts of money. And they should use it to create an environment for a very liquid, transparent capital market.
Q: Just to clarify, what now are your holdings in Poland?
A: Actual holdings? BPH, Bank Handlowy, Bank ¦l±ski, BRE Bank, Elektrim, Impexmetal, Mostostal Export, Optimus, Prokom, Rolimpex, TPSA, Warta, Żywiec, WBK (Wielkopolski Bank Kredytowy).
Q: There is another one you had until very recently and this is something we all are very curious about - BIG Bank Gdański. You started a whole avalanche of events by proposing a shareholders resolution to shift control of a 24% stake in the company from management to all shareholders. Was this move planned to bring in a new strategic investor?
A: We made the proposal because we felt the shares should really be in the hands of shareholders, not in the hands of management. Because of that we felt if they are in the hands of management, not that the management won't do good things, but that there could be a change in control without our knowing it, so that would impact our thinking about the bank.
Q: Did you have any reasons to think this would happen?
A: You know, there are always rumors and talk, but we didn't have any concrete evidence. But we thought that a precaution would be good, to turn the shares over to the shareholders. And there was some resistance on the part of management, they didn't like that idea. So we decided, well we've got to take matters into our own hands. We had this large stake, almost 10%, and we started looking for possible buyers who we knew were interested. And that's what happened. And that's the reason why liquidity is so important. If you are in a situation where you're not sure what the management is going to do and you want an exit, unless you have liquidity, it's very difficult. And that's why you have to look for a strategic investor.
Q: When you said you started to look for buyers, you mean in relation to the 10% that you held, or a strategic buyer for the bank as a whole?
A: For a while for what we held.
Q: Is it true you sold your holdings to Deutsche Bank?
A: I don't know if I'm allowed to say that. (Later in the interview Mobius confirmed that Deutsche was the buyer.) Anyway, for us it was a good move because we were getting a good price.
Q: What price did you sell at?
A: A 30% premium to the market from where we started. The good news is that so did everyone else, it's not a matter in which only one of us was able to get out at a higher price. Anyone who wanted to get out could have sold.
Q: According to our calculations you made about $40 million. Is that right?
A: Yes, something around that. More and more, out of necessity, we have to do this sort of thing. We had to make a strategic move because the market is just not liquid enough. Otherwise we would get stuck if something happens. We had confidence in BIG BG's management, but we thought the direction might be changing. Given the experience we had with BPH, we felt that we didn't want to get that kind of experience again where they sell out twenty-something percent of the treasury shares at some ridiculous price and we would be left out.
Q: I'd like to clarify one thing that has been attributed to you, that recently you have changed your approach in looking at companies, so you look at management first.
A: Yes. We always looked at management, but not as intensely as we do now and not as aggressively. That's what we're doing globally. We've become much more aggressive.
Q: What emboldened you to become more aggressive?
A: It's not a matter of being emboldened, it's a matter of being trapped. You are against the wall in a corner and there is no way out, you've got to fight your way out. If you are a small, tiny fund, you can sell your way out. When you're big, you've got to fight because there's no way out, there's no liquidity.
Q: Looking at BIG BG and some other companies, where do you see the most dynamic Polish management?
A: I think the most exciting management now is at Elektrim. (Barbara Lundberg) seems to have her act together and is really trying to change the culture. That's exciting. I'm not saying it's the greatest bargain in the world, but I think that's an example of what's needed in Poland. You need more people like that, who are going to say, 'O.K. I'm going to shake this tree a little bit, move in a different direction, change the culture of the company.'
Q: How much of Elektrim do you own?
A: Not very much, a few percent.
Q: Looking just at your Eastern European fund, over the past year it is down 21.2%. How badly did you get hit in this crisis in 1998?
A: Rather badly in almost all of our funds. But we kept on buying things at low prices and that helped. Now our big global emerging market funds are up 20, 30, 40%. That's what it's all about, going in when things look bad and buying.
Q: How much of a haircut did you take?
A: On these downturns, in just about every one, the haircut was 20%.
Q: Actually, I mean you personally.
A: I own the funds, so I get hurt like everyone else.
Q: Looking at different sectors, you have a lot of bank holdings and obviously the market here is weighted toward banks. What's the new hot sector? Would it be telecom, computing, internet?
A: I think it's gonna be telecoms, and that's a global trend, because what's happening is that the internet people are beginning to realize that they need to have the pipeline, they need to have the connections. And the telecoms people also realize that they have highways, so to speak. So I think telecoms will probably be important. Here I suppose TPSA is not the most dynamic company in the world ...
Q: You're a shareholder, change it.
A: We're thinking about that (laughs) ... Nevertheless, by virtue of their monopoly power they can do a lot. So I think that's one area that's exciting. We are not crazy about some of the internet ideas because I think it's gone completely haywire, it's gone too far. We're very much value investors. We don't believe in companies that keep on spending money without any hope of getting richer in the short term.
Q: How difficult is it to find a value investment in a market like Poland?
A: It's pretty difficult to find screaming bargains. It's not easy. In some ways we're going to have to create them.
Q: How do you do that?
A: By stirring up shareholder value. By kicking the management and saying, 'Look, if you don't perform, get out.' But there are limits in what we can do here.
Q: What's the key benchmark you look at when you are valuing a company?
A: Five year earnings, that's the most important. What is this company going to be earning per share in five years. And looking at that we assess what are the growth prospects.
Q: Even though you're a value investor, would you see any similarities between investing in the risky emerging markets that you do and the internet in the sense that it is the newest emerging market.
A: I don't see the parallels in the sense that's it's a very narrow field. Of course, it looks like it has great potential. If emerging markets are built on a hope, the internet is really built on a hope. These are dreams. So if you look at it, my opinion is that emerging markets have much more stability, much less volatility than internet. Because with the emerging markets, I have much more diversification.
