Thursday, November 26, 2015

Donald Yacktman: "Viewing Stocks as Bonds"

Investment Philosophy
  1. Good businesses that dominate their industry
  2. Shareholder-oriented management
  3. Low purchase price

A good business may contain one or more of the following:

  • High market share in principal product and/or service lines
  • High cash return on tangible assets
  • Relatively low capital requirements allowing a business to generate cash while growing
  • Short customer repurchase cycles and long product cycles
  • Unique franchise characteristics

                                                   High Cyclicality          Low Cyclicality

Low Capital Intensity                  Media                        Consumer Staples

High Capital Intensity                 Capital Goods           Utilities

Secular growth, not cyclical growth preferred.

Published on 30 Jul 2015
Drawing on his four decades of experience, Don Yacktman identifies the three key characteristics of value stocks. In this talk, he shares his investment philosophy along with the lessons he has learned from the markets and from life.

About the speaker:
Don Yacktman is Partner and Portfolio Manager of Yacktman Asset Management. He began his career at Yacktman founding the company as its President, Portfolio Manager, and Chief Investment Officer. Since founding the company Don has been awarded the 1994 “Portfolio Manager of the Year” by Mutual Fund Letter. Don has also been nominated by Morningstar as Fund Manager of the Decade in 2009, and finalist for Morningstar’s Domestic-Stock Manager of the Year award in 2011, and “Portfolio Manager of the Year” in 1991. Don holds an MBA with distinction from Harvard University.

Sunday, November 22, 2015

Replicating Walter Schloss' Investment Technique

Picking Stocks like Peter Lynch

8 Rules for Picking Perfect Value Stocks

Tim Melvin's 8 Rules

1.  Book value matters
2.  Buy maximum pessimism
3.  Do not do what everyone else is doing
4.  Margin of safety is critical
5.  Scale into stocks (Double down at liquidation value)
6.  React; don't predict
7.  Patience is Profitable
8.  Do not play just because the casino is open

Valuation: Four Lessons to Take Away

Published on 17 Feb 2015
The tools and practice of valuation is intimidating to most laymen, who assume that they do not have the skills and the capability to value companies. In this talk, I propose to lay out four simple propositions about valuation. 

The first is that valuation is not an extension of accounting, insofar as it is not about recording the past but forecasting the future. 

The second is that valuation is not just modeling, where people put numbers into Excel spreadsheets and pump out values. A good valuation requires a narrative that binds the numbers together. 

The third is that valuing an asset or business is very different from pricing that asset or business, a difference that is often blurred in practice. 

The fourth is that luck plays a disproportionate role in whether you make money off your valuations. Put differently, you can do everything right and still walk away with nothing or worse at the end.

About the Author
I view myself, first and foremost, as a teacher. I do teach valuation and corporate finance not only to MBAs at Stern but to anyone who will listen (on iTunes U, online and on YouTube). I love to write books, teaching material and blog posts. After 30 years of teaching finance, I still find it fascinating as an interplay of economics, psychology and number crunching.

Q&A starts @ 56 minutes of the video.

As an investor, you will believe price will ultimately moves to value.

Price can deviate from value for an extended period.

It is all a matter of perception, like pricing a painting by Picasso.

Sometimes it takes so long to happen, there is no point in waiting especially for a trader.

It is almost a given if you are an investor, you have a longer time horizon.

An interesting answer by the Professor to a question at 60 minutes of the video.  
"Investing takes work.  If you don't have the time, don't over reach.  You don't get rich through investing.  You get rich by doing whatever you are doing. Investing is about preserving what you made elsewhere and growing it."

Wednesday, November 18, 2015

Here’s what Warren Buffett said how he got so rich

Here’s what Warren Buffett said when Tony Robbins asked him how he got so rich

Billionaire Warren Buffett hasn’t always been as incredibly rich as he is today — in fact, 99% of his wealth was earned after his 50th birthday. Everyone has to start somewhere, even the wealthiest, most successful people.
The investing legend has been slowly building his fortune over the years, and today, the 85-year-old billionaire is one of the richest men in the world, with an estimated net worth of over $60 billion.
How did he come to earn such a mind-blowing amount of money?
Motivational speaker and author of “MONEY: Master The Game,” Tony Robbins, decided to ask him.
“I asked Warren Buffett — I said, ‘What made you the wealthiest man in the world?’” he tells entrepreneur and business coach Lewis Howes in an episode of his podcast,”The School of Greatness.”
“And he smiled at me and said, ‘Three things: Living in America for the great opportunities, having good genes so I lived a long time, and compound interest.”
Buffett has always been an advocate of keeping things simple and focusing on the long-term — that’s why he recommends low-cost index funds
One of the keys to Buffett’s wealth is simply time — 60 plus years of smart investing has allowed him to reap the benefits of compound interest.
Compound interest is when the interest earned on your investments earns interest itself — it’s what causes wealth to rapidly snowball, and in Buffett’s case, snowball to billions and billions of dollars.


What does P/E mean? Future P/E is the Key

P/E ratio or price earnings ratio of a stock refers to the market multiplier.

P/E ratio is calculated by dividing the current market price of a stock by the previous year's earnings per share.

Generally, a low P/E would mean that a stock is selling at a relatively low price compared to its earnings.

A high P/E would indicate that a stock's price is high and may not be much of a bargain.

The P/E of one successful company may be very different from that of another successful company if the two companies are in different industries.

High-tech companies with big growth and high earnings generally sell at much higher P/Es than low-tech or mature companies where growth has stabilized.

Some stocks can sell at very high prices even when the companies have no earnings.  The high prices reflect the market's expectation for high earnings in the future.

Future P/E is the Key

A knowledgeable investor recognizes that the current P/E is not as important as the future P/E.  

The investor wants to invest in a company that has a strong financial future, that is, invest into its earnings potential..

In order for the P/E ratio to be helpful to the investor, much more information about the company may be needed.

Generally, the investor will compare a company's ratios for the current year with that of previous years to measure the growth of the company.

The investor will also compare the company's ratios with those of other companies in the same industry.

Friday, November 13, 2015

Great, good and gruesome businesses of Warren Buffett (Capital Allocation and Savings Accounts)

Buffett compares his three different types of great, good and gruesome businesses to "savings accounts."  

The great business is like an account that 

  • pays an extraordinarily high interest rate 
  • that will rise as the years pass.

A good one 

  • pays an attractive rate of interest 
  • that will be earned also on deposits that are added.

The gruesome account 

  • both pays an inadequate interest rate and 
  • requires you to keep adding money at those disappointing returns.

Read also:

Wednesday, November 11, 2015

Layoffs in Malaysian banks a symptom of slowing regional economy


Jayant Menon, a lead economist at the Asian Development Bank said banks would need to undertake cost-cutting measures due to slowing economic growth in the region. — Picture by Saw Siow Feng

Jayant Menon, a lead economist at the Asian Development Bank said banks would need to undertake cost-cutting measures due to slowing economic growth in the region. — Picture by Saw Siow Feng
KUALA LUMPUR, Nov 1 — The recent string of restructuring by several banks in Malaysia is due to an unexpectedly bigger impact from slowing economic growth in the region amid falling government revenues, analysts have said.
Asian Development Bank lead economist (trade and regional cooperation) Jayant Menon said the sluggish economy in the region, chiefly in China but with a larger than expected effect on its trading partners such as Malaysia, would affect many sectors of the economy, including services like banking.
“With dwindling government revenues following the oil and commodity price decline, the government-linked banks can no longer expect large subsidies to weather the slowdown, and will need to undertake cost-cutting measures, such as retrenchments, to remain competitive,” Jayant told Malay Mail Online.
Bloomberg TV Malaysia reported on Tuesday that Hong Leong Bank Bhd announced its mutual separation scheme on October 21, following other banks like CIMB Group Holdings Bhd, RHB Capital Bhd and Affin Bank Bhd that had laid off workers.
Government-linked CIMB Group Holdings reportedly cut 11.1 per cent of its total workforce earlier this year, or 3,599 employees, while RHB Banking Group reportedly said last September that there was no specific target on the number of staff that RHB Capital would retrench.
RAM’s co-head of financial institution ratings Wong Yin Ching noted that some Malaysian banks have embarked on merger and acquisition exercises over the last few years that have resulted in a bigger workforce, besides relying more on technology.
“Hence, as banks pursue greater cost efficiency in this increasingly competitive environment, we have seen various measures being implemented to reduce their workforce.
“These have been undertaken with greater urgency now given the softer earnings outlook in this more challenging economic environment with slower loan growth and continued margin compression,” Wong said.
Maybank Investment Bank group chief economist Suhaimi Ilias also pointed to the mergers and acquisitions in the banking sector that have led to excess staff, like at CIMB Investment Bank following the Royal Bank of Scotland (RBS) Asia Pacific acquisition, as well as the RHB-OSK and Affin-Hwang mergers.
“Amid pressure on interest income and intense competition for fee-based income, banks have to manage their costs-income ratio (CIR) and boost revenue per worker as well as overall productivity.
“The future of banking is also changing as information and communication technology play increasing role in the provision of services,” Suhaimi said.
- See more at:

Tuesday, November 10, 2015

Why buy growth?

Why are investors obsessed with growth?  

The answer is straightforward.

More than anything else, growth drives sustainable increases in earnings and cash flow.

And these factors determine a company's real worth and hence, its stock price.

What is growth?

When we talk about growth, we are basically talking about a company selling more goods ands services this year than it did last year, and expecting to sell even more the following year.

Increasing sales aren't the only way for a company to grow the bottom line.

It could, for a while at least, cut expenses and "do more with less."

It could buy back its own stock and decrease the denominator used in the earnings per share calculation (as long as this amount outweighs the loss of interest income from the money used to repurchase the share).

But there is only so much fat to trim, and if a company is going to see its profits - and ultimately its stock price rise over the long term, it must grow the top line.  

Why buy growth?

With the right principles and patience, you can hope to identify companies that are likely to turn a high growth rate - or an anticipated high growth rate - into a sustainable force to drive future cash flow for a long time, thus giving you a huge payoff for your diligence and effort.

Rapid growth can lead to big returns .... or painful mistakes. Be knowledgeable.

Growth is a strategy in which stock pickers may have a better chance of success.

Buying growth with a broad-brushed index approach is a formula for underperformance, but some smart choices can lead to outperformance.

Value companies

A good value investment will rise in price because the market will eventually take notice of it - either because people become more widely aware of its performance or because they recognise that its problems are being corrected.

As the market corrects its earlier impressions, the stock rises, sometimes dramatically.

If it is to continue to rise, however, the company has to do more than show it is worthy of recognition.  It has to perform ... and grow.

Some "value" investments actually have great growth potential, while many will at best turn in tepid growth even if all goes well.

Growth companies

The best growth companies, however, will achieve phenomenal expansion.

And the very best can keep it up for years, letting you grow wealth while deferring taxes.

That kind of long-term, high growth is what creates 20-baggers an even 100-baggers.

A single investment like that can transform your portfolio - your whole financial future, in fact.

And you are unlikely to find such a company without identifying extraordinary growth potential.

These businesses aren't just looking to succeed in an established industry.  They want to shake things up.

Two Catches

1.  Rapid growth usually doesn't last long.

Some companies mange to grow sales at an exponential rate (over 100%) for a year, maybe even several.  But maintaining that pace eventually becomes impossible.

If they are successful, companies naturally mature to a state of slow growth.

They evolve into the kind of large, steady companies that offer steady, but usually not large, returns.

Using a growth strategy means finding companies that can sustain extraordinary growth longer than the market realises and expects, either because you have caught it early in its growth cycle, or because it has such strong structural advantages that it maintains a dominant position in its industry.

2.  The market tries to anticipate the future.

You may have heard about companies being "priced" for future events, including an expectation that future earnings will be a lot better than the ones you see today.

Sometimes predictions are too rosy; sometimes they underestimate what a company can do.

When they are too optimistic, high-priced stocks crash down to earth.

When they are too cautious, an "expensive" stock can keep rising sometimes for years.

We want to find the latter.


If you own equal amount of ten stocks and one drops 50%, your portfolio goes down 5%.

If you own equal amount of ten stocks and one goes up 500%, your whole portfolio increases in value by 50%.  From just ONE stock.

You can apply that logic on whatever scale you like - a concentrated portfolio of just a few stocks or a less-volatile portfolio of 100 stocks.

With diligence, patience and the right approach, you will find stocks that go up 500% or more.

Of course, you will also pick some that go down 90%.

But is it not true that value stocks beat growth stocks?  Yes, they do  ... broadly speaking.  Unless, that is, you pick the right growth companies.

These rapid growth companies are a part of your broader approach to wealth creation.

Monday, November 9, 2015

An Exclusive Interview with Professor Aswath Damodaran

Small and mid-cap stocks showing better results

“I personally think that if investors spend time and look at each individual company, they will see good investable companies,” chief executive officer Datuk Tajuddin Atan told reporters on the sidelines of the Focus Malaysia Best Under A Billion Award event recently.
He said while the big listed companies and the top 30 are investable, the focus will be on the small and medium-cap companies that are growing and have good potential.
More cash injection into the capital market will help improve its performance, he said, pointing out that a few companies are already giving good results as well as providing clarity in their plans.
“Investment by ValueCap Sdn Bhd (the government-owned fund manager) by looking at the fundamentals and their performance would improve the market especially in terms of liquidity,” he added.
Inter-Pacific Research Sdn Bhd head of Research Pong Teng Siew was quoted as saying small and mid-cap stocks had performed quite well.
“Investors are still in a holding mode, on expectations that ValueCap will start investing in the equity market in late November or early December.
“No one is selling ahead of that. Once the investment starts to come in then we can expect the market to climb,” said Pong. — Bernama

Read more:

Small-cap, fbm 70 to continue drive Bursa M’sia until year-end

He said this was based on the current pattern where a lot of local fund managers participated in buying activities this month, which was ‘unusual’ as historically the market would take a breather in November after a good performance in October.
“What is happening now is quite interesting because there are a lot of liquidity in the market and the investors seem to be optimistic on the performance of the shares,” he said.
Zulkifli, who is also MIDF Head of Research Department, said this to reporters after a luncheon talk featuring MMC-Gamuda KVMRT (T) Sdn Bhd, hosted MIDF Investment here today.
The persistent buying interests in small-cap and FBM 70 stocks had resulted in an increase in prices for about six to seven consecutive days, he said.
He said the local sentiment has improved, probably due to the share prices which had fallen significantly and buyers were now comfortable to go in.
“We are quite optimistic the market is resilient and the potentials for it to progress next year are positive based on the recent trend,” he said.
Zulkifli said fundamentally, Bursa Malaysia was all right and everybody agreed that the ringgit was undervalued and did not reflect the fundamentals.
He said the research house has reiterated its target for the benchmark FBM KLCI next year of around 1,850-point level. — Bernama

Read more:

Maybank Investment Bank issues 16 new call warrants

KUALA LUMPUR: Maybank Investment Bank Bhd has issued 16 European style cash-settled call warrants over ordinary shares of Bumi Armada Bhd, Dayang Enterprise Holdings Bhd, Dialog Group Bhd, Petronas Chemicals Group Bhd, SapuraKencana Petroleum Bhd and UMW Oil and Gas Corporation Bhd.
The warrants will be listed today with an issue size of 100 million each, the investment bank said in a statement yesterday.
It said the issuance targets sophisticated investors looking to profit from the volatility of the oil and gas sector following the US Federal Reserve’s decision to hold an interest rate hike, thus contributing to the market uncertainty which impacted the global currency market.
“This is a contributing factor that could drive up the volatility of share prices in the oil and gas sector,” it said.
Furthermore, it said, a proposal by Venezuela to reduce oil production and boost oil prices in a recent Organisation of Petroleum Exporting Countries (OPEC) meeting also did not go through, and industry players would be looking to the next OPEC meeting, expected on Dec 4, for some guidance. — Bernama

Read more:

Heftier cigarette prices bad news for BAT’s earnings in coming quarters

Pricier cigarettes may lead to further down-trading BAT’s flagship brands, Dunhill and Kent which will now retail for RM17 per pack, while its value-for-money brands will now sell for RM15.50 per pack. — Reuters photo
Pricier cigarettes may lead to further down-trading BAT’s flagship brands, Dunhill and Kent which will now retail for RM17 per pack, while its value-for-money brands will now sell for RM15.50 per pack. — Reuters photo
KUCHING: Analysts are less optimistic on cigarette maker British American Tobacco Bhd’s (BAT) outlook following the announcement of a price hike for its brand cigarettes.
On Tuesday, the government increased the excise duties on cigarettes by 12 sen per stick to 40 sen per stick. Consequently, BAT increased its retail prices by RM3.20 per pack across the board effective yesterday.
This translates into an increase of 16 sen per stick. Its new premium product, Shuang Xi brand, will be priced at RM18 per pack. Overall, this brings BAT’s year to date  increase in cigarette prices to RM3.50 per pack, or 17.5 sen per stick.
Analysts at MIDF Amanah Investment Bank Bhd (MIDF Research) expect earnings for BAT to be impacted in the midst of a challenging outlook for cigarette players in general.
“We expect the price hike to impact its earnings for 2015 due to the possibility of a volume drop in November and December months,” it detailled in a note yesterday. “Historically, the volume would most probably rebound after two or three months of experiencing a decline.
“However, in this current environment, with the growing presence of vapes (electronic cigarettes) and the still widely accessible illicit cigarettes, we believe that it would be an uphill challenge for BAT’s volume to rebound to its current levels.”
Although MIDF Research believe that the demand for cigarettes will remain in the uptrend for the longer term, it said it would be “an extremely tough challenge for BAT to maintain its sales volume in the shorter term.
Meanwhile, Affin Hwang Investment Bank Bhd (AffinHwang Research) said pricier cigarette sticks may lead to further down-trading BAT’s flagship brands, Dunhill and Kent which will now retail for RM17 per pack, while its value-for-money (VFM) brands will now sell for RM15.50 per pack.
“Although margins may be maintained, we believe that sales volume may suffer as a result and the risk is that this could develop into a larger shift to illicit cigarettes and potentially e-cigarettes, especially when prices go way past affordable levels,” it said.
“Despite the government’s effort in clamping down the illegal cigarette market, the market share for illicit cigarettes still stands at about one-third of the tobacco industry.”
“We also expect this huge price hike to further support the alternatives, such as illicit cigarette market, as smokers would be hard-pressed in view of the increasing cost of living.
“In view of the massive price hike in cigarettes, there is a strong likelihood for some smokers to either switch to a cheaper brand, illicit cigarettes or shift to vapes as it is now arguably cheaper than smoking conventional cigarettes.”
As such, the research house revised the earnings for FY15 and FY16 downwards by four per cent and 5.1 per cent to factor in the loss in volume due to the price hike.”

Read more:

PetChem beats expectations, 4Q to be another good quarter

KUCHING: Petronas Chemicals Group Bhd (PetChem) performed better than expected in the third quarter (3Q) and will likely record another good quarter ahead, on the back of the recovering petrochemical prices and better utilisation of its facilities.
AllianceDBS Research Sdn Bhd (AllianceDBS Research) said in a report, “We expect 4Q to be another good quarter for the group as petrochemical prices have seen a slight recovery while utilisation is expected to maintain strong with no maintenance activities scheduled.
“In the financial year 2016 to 2017 (FY16 to FY17) we expect utilisation to stay strong as the group has shown sustainable improvements in operational efficiency and the Fertiliser & Methanol (F&M) segment will benefit from steady feedstock supply with a new pipeline.
“This leads us to raise estimates by three to 13 per cent for FY15 to FY17 forecast.”
Aside from that, it pointed out that PetChem had recently announced that it would be acquiring the entire equity in three companies from Petronas for the production of 2.7mtpa of glycols, polymers and elastomers for US$110 million.
“Budgeted capital expenditure (capex) is US$3.9 billion to build the three plants but debt or equity funding has not been formalised yet as there are partners who will be involved. More investment decisions are expected as the group hopes to invest in a more specialised chemical plant as well,” it added.
On its 3Q performance, AmResearch Sdn Bhd (AmResearch) said PetChem’s first nine months of FY15 (9MFY15) net profit came in above expectations largely due to favourable foreign exchange (forex) gains and improved plant utilisation.
“PetChem’s 3QFY15F earnings surged by 65 per cent quarter-on-quarter (q-o-q) to RM916 million mainly due to higher sales volume and realised favourable exchange rate movement, which offset the impact of lower average product prices.
“PetChem’s overall plant utilisation rose to 2QFY15 decreased to 88 per cent from 78 per cent in 2QFY15, in which the group had undertaken a statutory turnaround activity at its Gurun urea facility.
“Management expects FY15F plant utilisation to remain at 85 per cent and rise to 90 per cent in FY16F as the group is expected to undergo normal turnaround activities,” it noted.
Nevertheless, it opined the near-term outlook for product prices remains mixed as a likely improvement in olefins and derivatives, supported by supply constraints by Middle-Eastern plant maintenance activities towards the end of the year, could be offset by softer fertiliser and methanol prices, and dampened by weak demand and crude oil prices.
Aside from that, on PetChem’s project at Rapid, AmResearch said this project, which could later involve foreign equity partners, is expected to cost US$3.9 billion with commencement scheduled for 2019.
“Assuming a project internal rate of return (IRR) of 12 per cent, we estimate that the entire stake in this petrochemical project could generate an earnings accretion of RM1.8 billion or 67 per cent of FY15F earnings,” it added.

Read more:

New product launches, cost efficiency measures likely to support F&N’s growth

KUCHING: Fraser & Neave Holdings Bhd’s (F&N) performance will likely be supported by new product launches as well as cost efficiency measures, analysts say.
TA Securities Holdings Bhd’s research arm (TA Securities) highlighted that weak consumer demand will likely intensify the pricing competition in the food and beverage industry.
It also noted that selling costs, especially advertising and promotions associated costs are expected to surge.
Nevertheless, it pointed out that new product launches together with cost efficiency measures could help F&N in mitigating the expected tough operating environment ahead.
Meanwhile, on its full year financial year 2015 (FY15) performance, TA Securities said that the company’s results came in below its estimates.
However, it noted that F&N’s net profit had improved by eight per cent year-on-year (y-o-y) to RM280.1 million, driven by its dairies units (Dairies Malaysia and Dairies Thailand).
“The segment benefited from both, higher sales (Malaysia at three per cent y-o-y, Thailand at 17.7 per cent y-o-y) and improved margin (lower milk-based commodity cost).
“Excluding the fair value loss from investment properties and the gain from foreign exchange, core net profit was slightly higher at RM282 million (an increase of nine per cent y-o-y).
“Operating profit also grew by of 6.5 per cent y-o-y to RM333.9 million, underpinned by improved margin Dairies Malaysia (an increase of 2.5 percentage points y-o-y) and Dairies Thailand (an increase of 1.3 percentage points y-o-y) segment,” it explained.
However, the research team noted that the group’s blended average operating margin was flat y-o-y, as the margin expansion in the dairies units were offset by margin contraction in the soft drinks unit (down 2.2 percentage points y-o-y to 8.4 per cent).
TA Securities commented that the flat soft drinks unit’s performance was likely due to the floods in the east coast of Peninsular Malaysia in the first quarter of 2015 which negatively impacted demand, soft consumer sentiment post-GST implementation, low post-festival sales, higher trade discounts, and loss of two months modern trade sales of Red Bull (contract expired last September).
All in, the research team maintained a ‘sell’ recommendation on F&N for now.

Read more:

Smaller stocks can shine bright, says Templeton Group

However, Templeton Emerging Markets Group believes within the emerging-markets universe, it sees a number of small-cap stocks with shining potential that should not be ignored.
According to Dr Mark Mobius, executive chairman of Templeton Emerging Markets Group, they have found that as an asset class, emerging-market small cap is one of the most widely misunderstood and underutilised among investors.
“It is often perceived to be a place to avoid in times of uncertainty, but we see things differently.
Many small companies are driven by local market dynamics and are therefore less dependent on global market trends,” he said.
Mobius went on to note that the small-cap emerging-market universe is anything but small—there are thousands of small-cap stocks available to invest in today, and the investment universe continues to expand due to the gradual liberalisation of equity markets to foreign investors and the continued expansion of equity markets through initial public offerings, secondary offerings and privatisations.
Among the many reasons to consider investing in small-cap stocks, smaller companies in emerging markets are generally privately owned, competitively operated, more local and are often larger players in smaller industries, Mobius said.
“Aside from relatively high organic growth compared with most larger companies, industry consolidation and acquisitions by larger companies as well as increased investor attention are additional potential sources of growth which can be independent of the broader macroeconomic environment.
“Many of the stocks in this space are under-researched or unloved, giving us the opportunity to uncover interesting opportunities others may have overlooked.
“We see that as the essence of what investing in emerging markets generally is about—discovering undervalued stocks in burgeoning markets that could rise to become tomorrow’s stars,” he said.
Mobius went on to note that the Asian small-cap space is of particular interest to them, and they have been using recent market volatility to search for opportunities.
“We believe reforms taking place in many emerging markets in the region could prove to be beneficial for smaller companies.
“Additionally, since domestic demand is typically the main revenue driver for small-cap companies, the combination of good economic growth, a growing middle class and lower oil prices—which can help check inflation and support a lower-interest rate environment—could be an added benefit to smaller companies in the region, freeing up consumer dollars to purchase their products,” he added.
Mobius noted that within the small-cap space in emerging Asia, they currently favor consumer-oriented companies given the growth opportunities they see across many markets, as well as health care, pharmaceuticals and biotechnology companies.
He further noted that this of course does not mean these companies are all well managed or worthy of investment.
“Therefore, purchasing small-cap stocks through a passive (index-based) strategy may produce unintended consequences.
“Stocks with poor growth prospects, poor corporate governance or other such factors may be components of a small-cap benchmark index, but they might not be desirable to invest in over the long term,” he said, adding that regular index rebalancing can generate significant portfolio turnover for passive investors.
We strive to generate alpha1 through our bottom-up stock selection process, looking for companies that we think can increase their market cap by a multiple over a five-year time horizon, and we strive for only modest yearly turnover,” Mobius said.
On risk, Mobius pointed out that it is certainly an important part of a discussion about small-cap investing.
“I’ve never met a client who complains about upside risk. What worries clients is downside risk, and this is where we think we add value as active investors.
“Our team maintains an unrelenting focus on quality, seeking fundamentals that are on almost every measure superior to a benchmark index, including higher return on equity (ROE), profit margins and earnings-per share (EPS) growth, lower debt, better dividend yield, and most importantly for us at Templeton, cheaper valuations in terms of priceearnings ratios,” he said.
Mobius noted that contrary to many investor assumptions, the emerging-market small-cap benchmark index, as measured by the MSCI Emerging Markets Small Cap Index, at times has been less volatile than the broader index, the MSCI Emerging Markets Index, as well as the Russell 2000® Index, a US small-cap benchmark.2
“To us, that makes sense because small-cap companies are less correlated with each other, and less integrated into global markets than large caps generally speaking,” he said.
Mobius further noted that there are also numerous inefficiencies in small-cap markets, offering potential for alpha.
In the US, small-cap stocks generally trade at a premium to large caps in terms of price-earnings, due to the higher growth they can provide, he says.
“When you look at emerging markets, sometimes the opposite may be true. In India, for example, small caps are generally trading at a discount to large caps.
“Much of this investment money is what we’d call ‘lazy money’, or passive investment money, concentrated in large-cap index stocks that are not only more expensive but also subject to the volatility generated by rapid inflows and outflows of such foreign investments.
“Accordingly, we have found many undiscovered opportunities in Indian small caps,” he added.
Overall, Mobius noted that small-cap stocks have the potential to offer what is becoming ever-more rare in a slowing global economy—growth—and not only in India.
“Many emerging markets offer this strong growth potential—with many small-cap stocks available to potentially take advantage of it,” he concluded.

Read more: