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Investors interact daily with ideas, services, products, and companies, yet often fail to effectively link their success to investment opportunities. It can be argued that identifying investment opportunities is about much more than just numbers. It can also be about having a perspective and mindset that cultivates a sense of where to look and what to look for. This is especially true of the multi-dimensional endeavor of international investing.
In his global travels, Commonwealth Funds President and Head Portfolio Manager Rob Scharar – who is also President of the advisor FCA Corp of Houston Texas - has observed first-hand the value of having a very practical lens focused on the business activity on the ground. Through his decades of direct investments and participatory business consulting expertise in a wide group of frontier and emerging markets, his firm has developed local knowledge and practical business experience with access to ongoing on-the-ground insights. He has taken this knowledge and perspective to offer investment opportunities not easily accessible to most U.S. investors providing increased opportunities for portfolio diversification.
It is for this reason that we went to Institute member Rob Scharar to get a year-end update on his business activities and investment perspectives on the eclectic mix of international funds he manages separately focused on Africa, Australia/New Zealand, and Japan, as well as a real estate fund and diversified global fund. We are particularly interested in learning from his experiences and unique viewpoints on these international markets in the wake of the ongoing coronavirus pandemic and what he sees as opportunities.
Hortz: What has been your experience in dealing with the pandemic and its ongoing restrictions in travel?
Scharar: Despite Covid’s lock down of most international travel, 2021 was the most active global exposure I have had in my career thanks to technology coupled with our deep and diversified contacts created through years of on-the-ground travel. While sharing a meal or in person contacts are missing, we have learned to use programs like Microsoft teams to personalize the interactions and our global contacts have come up with many innovative ways to enhance the experience. We now can meet with multiple parties, share documents, pictures, tour facilities even with live walk-arounds where we are shown real-time business activities and join business discussions in progress.
Our prior contacts welcome the opportunity to catch up real-time because our involvement is not limited to being physically in the country and we have increased opportunity to interact. In establishing new business relations - which we look forward to building on in person when conditions permit - we believe a combination of virtual and in person will provide even greater future opportunities.
Hortz: Can you give us a brief recap on some of your current perspectives on some of your key investment areas of Africa, Australia/New Zealand, global real estate, Japan, and Latin America?
Scharar:
Africa - South Africa: Despite its resources (the world’s largest producer of platinum, gold, and chromium) and maturing industry sectors (robust energy, transport and financial sectors), South Africa has endured a period of declining growth over the last several years due to several challenges. For example, the country is plagued by frequent electrical outages due to their only electricity provider Eskom being hampered by aging equipment and mismanagement; it’s sovereign debt rating being downgraded by both Fitch and Standard & Poor’s to non-investment grade; and there is a growing shortage of skilled workers due to elevated levels of emigration to the United Kingdom, Australia, New Zealand, Canada and the United States.
Despite the challenges, there are several bright spots to watch for as the second largest African economy seeks to build on its status as a market with a developing consumer class. Their challenges are also driving innovation, as some companies turn to renewable energy sources, particularly with their emerging solar power industry providing an opportunity for significant growth. South African companies continue to lead growth and economic integration across Africa giving them a distinct advantage over international companies in terms of capitalizing on opportunities in the region. Kenya Airways also signed a Strategic Partnership Agreement with South African Airways (SAA) on November 25 concluding an important milestone to jointly launch a pan-African airline group by 2023. The signing of this agreement will see both companies working together to expand passenger traffic, cargo opportunities, and could be a major help in bringing increased access to resources and business collaboration for the continent.
Australia/New Zealand: Though often overshadowed by the more densely populated East Coast, which includes Melbourne and Sydney, South Australia deserves serious consideration as a travel destination, whether for business or pleasure. In a trip to the region, I visited the Barossa region just outside Adelaide, Australia’s premier wine area. During his visit, I met with wine producers and farmers where I witnessed examples of innovation by family businesses that were adjusting to their competition by rethinking how they produce and/or market their products. I met with owners of Hutton Vale Farm and Elderton Wine, which openly shared their philosophy on how they run each arm of their businesses in a sustainable manner while at the same time entwining them together as a whole and how successful family businesses innovate.
These trips we have taken over the years continuously validate an axiom that we believe in at the Commonwealth Funds which is that small and medium size publicly traded companies offer great opportunities for those willing to investigate to find and get to know them.
Global Real Estate: Real Estate is much more than bricks and mortar. To be a successful investor in the real estate industry, it is important to not only analyze and understand the industry-specific economic indicators, but also to understand the second and third order effects of their impacts. Trends outside of customary performance metrics could also soon come into play.
Tangential industries like timber stand to benefit. Timber represents more than 30% of the material cost of single-family home construction. Companies that have vertically integrated the timber, land rights and manufacturing components of the supply chain not only have higher correlations to the residential housing sector, but also tend to outperform pure-play timberland owners. Exposure to these kinds of real estate assets can lower risk profiles and increase overall portfolio returns. The immediate impact of sector-specific economic data is important and drives the high-level investment decision-making process, but a long-term outlook and consideration of real estate related industries beyond the bricks and mortar can prove to be just as valuable, if not more so.
Japan: For more than three decades, I have invested in mid-cap companies in Japan, such as niche manufacturers with a limited investment following in the United States. I have learned from meeting Japanese CEOs in person in cities like Fukuoka that Japan’s niche manufacturers secured a solid global market share in part because of the concept of monozukuri, which entails a commitment to produce excellent products and improve their systems and processes continuously.
Defined as the “art, science and craft of making things,” monozukuri is most clearly evident in Japanese niche manufacturers, most of which are managed independently, exercise excellent risk management, possess unique institutional knowledge, operate in a market with high entry barriers and rely on tight supplier networks. They have been run that way for a long time and many have no investor following in the United States.
We try to bridge that gap. Because we have a fund that invests in Japan, our goal is to invest in a portfolio of companies that does not only mirror the market index, but rather provides a diversified exposure to Japanese stocks that are not easily accessible to U.S. investors.
Latin America: While Argentina, Mexico, and Brazil have been criticized for their economic response to COVID-19, Peru, Chile, and Colombia are frequently referred to as models for economic growth in developing nations. Chile and Peru especially, prior to 2020, had experienced steady and impressive GDP growth levels throughout the 2000’s and have avoided the pitfalls of corruption that oftentimes hampers Latin American countries. Additionally, the relatively liberal environment in both countries has meant that both fiscal stimulus and vaccine programs have been used to allow the countries to experience quick recovery from the pandemic.
The current outlook is that Brazil, Chile, and Peru are the most interesting Latin American countries from an investment standpoint. Regardless of which country one chooses to focus on, sectors like mining, agriculture, energy extraction, and in some areas, manufacturing are key across Latin America. Peru and Chile are internationally significant mining economies, extracting a large portion of the world’s gold, silver, and copper. Brazil has spent significant resources to develop their large-scale industrial sectors in recent history and is home to Embraer, the world’s third largest producer of commercial aircraft. The country also contains a strong number of industrial centers and is expected to undergo large-scale diversification of their economy beyond natural resources in the near future. In Chile, the government has spent significant resources, as well, to diversify their economy beyond the mining sector and projections have high hopes for the transportation and tourism sectors, as well as the food and beverage manufacturing sectors.
Hortz: How do you determine the right companies to invest in especially as many areas you focus on are in more frontier or emerging markets?
Scharar: FCA Corp, the Funds advisor, has formulated a “three R’s” test: real companies, real products, real financials. In its most basic form, I would define these terms this way:
Real Products - the business produces goods or service that are explainable, needed by consumers, and are commercially profitable and scalable
Real Companies - governance and respect for shareholders - things like the clarity of the shareholder reports and company mission-focus, dividends, breadth of board experience
Real Financials - Whether the company reports using US GAAP or IFRS, the financials should be understandable, cash flow is still important as well as EPS, and real asset backing part of the value never hurts. Comparing the companies in the same industry requires an understanding of the differences in reporting standards.
Hortz: Can you give us a few investment examples of how your practical, ground-up business environment experience provides a different perspective versus what many competitors see who are primarily using top-down models and economic screens?
Scharar: For over 45 years, our investment approach has relied on the development of local knowledge and business experience. Through direct investment, business development and consulting opportunities in many of the countries we invest in, we feel we have gained access to a steady stream of on-the-ground intelligence that informs Commonwealth’s fund portfolios. This has led us to firms like:
IKE - When we first visited the New Zealand company, their focus was on selling the equipment, but the real story became selling as a service to utilities the data their equipment can generate. In a world of increased green energy, no matter what the source, for the near term it will be delivered by electric power lines on electric poles.
Capitec Bank - Early on we realized that Africa has a large number of unserved banking customers. South African based Capitec took a simple concept, efficiently banked the unbanked, and has not looked back since.
Hoya Corporation - The Japanese company’s clear mission statement coupled with its focus on health care and technology that impacts daily lives caught our attention.