Variously described as the Indiana Jones of emerging markets investment and, by the Wall Street Journal, as the "reigning king of emerging market funds", Dr Mark Mobius has pioneered investing in the stock markets of high-growth, developing economies.
He launched the world's first stock market-listed fund in 1987, shortly after the term 'emerging market' was coined by the World Bank and with just six markets in which to invest. Mobius runs Franklin Templeton Investments' emerging markets division, which now invests $30 billion globally and has the choice of 40 markets, including all the big emerging economies.
He spends more than 10 months a year on the road, visiting more than 500 different companies and travelling to the more remote destinations by private Gulfstream IV jet. He owns homes in Singapore, Hong Kong, Malaysia, the Philippines, South Africa, Chile and the US, and is the author of Mobius on Emerging Markets and The Investor's Guide to Emerging Markets.
You're primarily a portfolio investor, holding shares in emerging market businesses. How does what you do compare with foreign direct investment (FDI) activity in emerging markets?
Mark Mobius FDI is mainly about majority-controlled businesses and Western companies putting their own people in. Those companies that hire locally and show the ability to adapt to local conditions can do well. But there is a saying that a local fish can swim better than a foreign fish. With portfolio investing, we buy into local management and expertise, and allow the locals to stay in control. In that sense, what we do is more risky.
Hedge funds and venture capitalists have been lambasted as 'locusts' and 'vultures' for their attitudes to investment. Don't portfolio managers deserve a similar label in emerging markets?
Portfolio managers who invest in emerging markets are probably the best thing that has happened to these countries. They have provided the risk - often high risk - capital that was not available before. Foreign portfolio managers deserve even more congratulations since they step in where the citizens of those countries are not willing to put their own money, but tuck it away in foreign banks in developed countries. Ours is money going into economies that wouldn't normally be receiving any money. When we make an investment, we can't then just walk away from it: we have to find another investor willing to buy it off us and very often we're just left holding the bag. Rather than being 'locusts' or 'vultures', emerging market portfolio managers have been the saviours of those markets by having faith in the people of those markets. We're also in a position to improve local corporate governance and other practices. In Brazil recently, we stopped an attempt by the founding family of steel company Gerdau to extract royalties of millions of dollars a year simply for the company's use of the family name.
Despite the recent sell-off, emerging markets have been a great investment success story in the last few years, delivering triple figure returns overall since 2003 and well ahead of developed markets. Will this continue or is it time for another crisis or crash?
Economic growth rates of 7%-10% have also been remarkable and unprecedented over the same period. Some companies are too expensive, but markets aren't. I would categorise the recent sell-off as a healthy correction - bull runs usually have corrections along the way. There should always be concern when stock markets are strong and there's too much optimism. We should always be ready for a surprise, but the problem is that people are unable to see that 100-mile-an-hour train coming. There are always problems and concerns, whether avian flu, the US dollar, the US trade deficit, Iran, Iraq, oil prices, etc. And, of course, emerging markets are affected just like other countries. After such corrections, we normally see consolidation while investors make up their minds and finally a resumption of the upward trend, provided that the conditions are still in place: a continuation of good corporate earnings reports, reasonable valuations and not too much new supply.
Why have Shanghai and Shenzhen stock markets failed to match China's high economic growth?
The main problem with these markets has been regulation - over-regulation, poorly conceived and executed regulation, and distortions caused by those regulations and foreign exchange restrictions. We need to get approval to make investments in (local currency) 'A' shares, which, if approved, then tie us in for a year. Having to tie up your money increases risk considerably; once you are invested, corporate governance concerns are also critical. What is needed is an opening up of the market with fewer regulations, but a strong emphasis on transparency and disclosure.
Where are you most invested in at the moment?
Our portfolios currently have the largest amounts in Korea, China (primarily via Hong Kong), Taiwan, South Africa and Brazil, but we focus on looking for good companies rather than favouring particular countries.
You've a reputation for on-the-ground research. What stands out as the key to business failure and success?
The most common failure criteria rest with the management and the board of directors. If managers or board members are incompetent, corrupt and ignore principles of good corporate governance, then trouble is around the corner. Good management is vital for successful companies. This is not just about knowing their business and looking after the interests of all shareholders; many of these companies have to operate in extremely difficult environments - good management can overcome those problems.
What do you think of the quality of emerging markets business management generally?
Emerging market managers are often better than their Western counterparts because they are forced to confront more problems and challenges - I've been impressed at the fortitude and abilities I've seen. At best, they are flexible, use their wits and in some ways are more worldly than developed country managers. Some also have great success operating in Western markets and are definitely having an influence.
What are the challenges facing emerging markets?
Corporate governance and transparency are the biggest issues. If the idea of a market economy is to endure, there must be good corporate governance and transparency. This is linked to the rule of law, which, in turn, is linked to a philosophy of life and moral framework that put the rule of law above the rule of individuals or relationships. High levels of corruption remain in many emerging markets; while every country has some corruption, the question is the degree to which it interferes.
What about politics - you've said that often the best time to invest is when there's blood running in the streets.
That's when prices can be lowest - although you still need to make sure you can get your money out. A democratic framework is helpful, but it's not necessary - what's important from an investment point of view is the rule of law. Many governments have hampered the development of good corporate governance. Equally, there's too much government interference in business generally and it's a problem that needs to be resolved. Governments should be regulators, not participants.
Are you worried about the leftward trend in Latin American politics?
No, the largest countries - Brazil, Chile and Mexico - are going in the right direction: privatising and reducing restrictions on trade. But we're staying away from Venezuela and we're not invested in Bolivia - not in the current environment.
What distinguishes emerging economies that prosper from those that don't?
The fundamental reason is the ability to attract capital, which, in turn, brings technology and knowledge. Countries that are able to encourage the investment of capital both from their own citizens and from other countries are the most successful in growing their wealth. In order to attract capital, you need the rule of law and the predictability that the rule of law offers to investors. Those countries that want to prosper must improve corporate governance: there is just no other way.
Is Africa just a mess or are there grounds for optimism?
Africa has resources and there is a genuine desire to improve things, so there are grounds for optimism. South Africa is leading the way, but Egypt is simplifying business procedures and promoting foreign investment, and other countries are also taking the right steps. But there are plenty of countries where we've no intention of investing until they get their house in order.
Will some emerging market countries always be poor - 'submerging' markets even?
Some countries will remain poor because they are unable or unwilling to change their mentality regarding the rule of law and how to attract capital investment. Developed countries, too, shouldn't forget those requirements and tax investors too heavily or allow corruption to grow - or capital will exit. Nor is aid the right answer for poor countries. Investment is always better than aid given with no strings attached. Yes, disaster relief is reasonable, but even in these cases corruption has raised its ugly head. It is better to teach someone to fish than to give him free fish. Investment designed to make profits is better.
Has globalisation been a good or bad thing?
It's helped alleviate poverty. Ask India or China whether opening up for trade and investment has helped or hindered. And the world should also be a much better place for China and India becoming leading economic superpowers. Moreover, unless there's a war, globalisation is unstoppable. For some, globalisation is a hateful thing, but for the great mass of mankind it is beneficial. There are negative effects, but these can be reduced if people are prepared to adjust. They must discard ideas, methods and habits that are not relevant to the current global environment - they must be willing to give up the old and embrace the new. Of course, in order to do that they must be educated.
Is the distinction between emerging and developed markets becoming less relevant?
Emerging markets remains a useful label because it helps identify those countries capable of high growth - countries that are at the low end of the economic ladder and have a potential to climb that ladder. In the short term, no emerging market will enter the ranks of developed economies or markets. For investors, they continue to provide diversification and growth opportunities - including exposure to commodities. Nor are they becoming more synchronised with the rest of the world: as the people of emerging markets become wealthier, they will have a greater impact on their markets than foreign investors.
Do you think globalisation has fuelled terrorism?
Not really; terrorism was with us before globalisation became so important. With new means of communications and transportation, terrorism can spread more easily, of course, but the solution may also be found in the faster and more effective surveillance that can be facilitated by globalisation.
Which of the currently closed or undeveloped economies do you see as future 'tigers'?
We're looking at these types of economies now, which means we can't comment. Some countries - and this is usually the case in those with unsavoury regimes - limit or prohibit foreign investment. There's also the problem of foreign exchange and the ability to get money out of the country - we need liquidity.
Under what conditions would you invest in Iraq?
We look for a number of factors before investing in any country: a good banking system so that money can be processed in and out; an ability to get money in and out of the country; a system where shares purchased can be kept safely; a share transfer system that enables delivery versus payment when shares are bought and sold. When Iraq has those factors, then we would certainly want to invest... at the right price.
How should Western companies approach doing business in emerging markets?
The key is faith and commitment. They must have faith in the people and the country, they must be willing to commit adequate resources to the job both in terms of time and money.
...on the rise of emerging market portfolio investment
Foreign portfolio managers deserve congratulations for stepping in where the citizens of those countries are not willing to put their own money, but tuck it away in foreign banks
...on emerging market management talent
They are often better than their Western counterparts because they are forced to confront more problems
...on poor countries
Some countries will always be poor because they are unable or unwilling to change their mentality regarding the rule of law and how to attract capital investment
...on investing in Iraq
Once good banking, share transfer, custodian and other systems are in place, as well as an ability to get money in and out of the country, we would certainly want to invest... at the right price
For some, globalisation is a hateful thing, but for the great mass of mankind it is beneficial
...on doing business in emerging markets
Companies must have faith in the country, and must be willing to commit adequate resources to the job both in terms of time and money.