Fresh back from the semiannual ACM due diligence conference in Washington, D.C., I would like to expand on a topic that my colleague Dave Ruff touched on during our presentation highlighting ACM’s international and global strategies. International equities generally trade at lower multiples than U.S. equities, and while that may suggest opportunities, investors should take extra precautions where foreign companies are concerned. We were asked why we travel. Why is it important to meet with companies on their turf? What is the benefit to investors?
Yes, we have fat passports. Yes, we go to lots of interesting places. Yes, it makes for good stories. No, it is not glamorous. Well, it was for the first two or three trips. Yes, it is grueling. Yes, we have had every imaginable travel mishap. And, yes, it is immeasurably beneficial to our investment process. A few vignettes from our thousands of in-country company visits, tours and meetings will illustrate the importance of these visits and provide samples of how these trips can sway an investment decision and help to build our first-hand knowledge base.
The Baltic region is seldom thought of as an international ice cream mecca. It does, however, have a population that enjoys ice cream, especially in the summer. The dominant local supplier made use of its frozen food distribution system year round by concentrating on frozen fish in the cold months and ice cream in the warm months. Full utilization of its asset base made for better profitability and lower earnings volatility: both desirable traits. Unfortunately, their quality control was not quite up to snuff. At the end of the factory tour, my sample said “Chocolate.” Inside it was gritty, icy, and red: definitely “Strawberry.” Sorry, not investing here.
South Koreans love their soju, the local vodka distilled from rice or sweet potatoes. During a company meeting and tour, the firm touted its dominant brand and market share and ready access to raw materials. Frequently, a company in such a position can easily raise its prices in order to pass through higher input costs. Believing this to be the case, Dave asked about price hikes and was surprised to learn that government approval must be granted for distillers to raise prices. Where we would have assumed pricing power existed, regulation pulled the rug from under our feet. Avoid this industry.
A Tale of Two Terminals
On a trip to Moscow, I saw a demonstration of a payment terminal, similar to an ATM. Users can pay bills, transfer money between accounts, transfer funds to other users, etc. Essentially, it’s a full-function self-service bank kiosk. The adoption rate is high and going higher. People love using them: they’re fast and free. So what’s not to like? Looking around, there were other machines in the lobby. I asked the impertinent question: “What are those other kiosks?” Answer: “Oh, they do the same thing, but they’re not on our network.” As it turns out, there is no switching cost to the customer and they perform the same functions, also for free. Competitive advantage to the company is zero. Sorry, next.
The opposite experience occurred in East Africa. mPesa is the ubiquitous mobile-phone-based payment system in Kenya. Users can put cash into the system or take cash out at any mPesa kiosk, and they are everywhere. Seeing first hand the company’s near monopoly gives a level of confidence that would not be possible otherwise.
A concern was raised during the Q&A session regarding language during our travels. Fortunately for us, we speak English. But we do have some language ability beyond that: Dave’s wife makes fun of him when he attempts to say anything in Thai; I always throw out a greeting or two in German, Spanish, or Russian. And we both know how to say “beer” in just about every country we’ve ever visited. The fact of the matter is, English is the common language in international finance: it’s simply a fact. All the conferences we attend are held in English and we have translators accompany us when a meeting or tour is conducted in the local language. Companies that issue ADRs (American Depositary Receipts, or the U.S.-traded security we use to invest in many international companies) are required to issue their financial reports and statements in English. Fortunately, the language barrier is low.
Investing in a broad country index fund will generally include the bad with the good. By selecting individual stocks we hope to avoid the bad. These few examples give a flavor for what we look for, what we glean from our trips: issues that aren’t readily apparent come to light when we visit a company. Sometimes what we pick up on is a subtle nuance that tips the balance in favor of one company or against another. Sometimes it is an in-your-face corporate governance issue that steers us away from a shady operation. Regardless of pros or cons, our travel is invaluable and it makes us better investors. At the end of the day, that is what we aim to pass on to our clients.