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Episode Summary:
In this episode, we interview Michael McGaughy, Head of Research at Hong Kong based Fusion Wealth Management. Fusion manages Research Alpha – a long-only, absolute return equity fund that invests globally in undervalued quality companies, particularly in emerging and frontier markets. Research Alpha's investments run the gauntlet of places that give conventional investors nightmares – think Argentina, Egypt, and Nigeria.
During his time in Indonesia, he covered one company’s share price as it bounced back over 200x (Astra International, see show notes) in the wake of 1997 Asian Financial Crisis, helping him see past the forex, inflation, and political instability woes that put off other investors. Research Alpha has since outperformed the MSCI Emerging Markets Index by honing in on three criteria for investing:
People: look for companies owned and managed by good people making sound capital allocation decisions
Structure: avoid confusing corporate structures which allow controlling shareholders to transfer cash away from minority shareholders
Value: maintain a global outlook, look for idiosyncratic crises outside of developed markets and hunt for quality companies at generational low prices
Buying at generational lows often means picking up bargains when everyone else is heading for the exits. The bigger the market draw dawn the higher the average 3-year nominal return:
60% drawdown = 107% return
90% drawdown = 156% return
Of course, there is the obstacle of infrastructure in these hard-to-reach markets. Michael explains that by finding a knowledgeable, passionate local broker who is themselves invested in the market can bridge that gap.
But what about forex risk, the bogeyman of EM/FM investing? Michael asserts that at times of currency weakness, local investors plough more into equities to protect their wealth, therefore driving up asset prices. If you time the market really well and buy before a currency recovers, then your forex upside can even cancel out any subsequent market drawdown.
We also delve into the cases of Egypt and Nigeria. In Egypt, privatization of state-owned entities and the rollback of fuel subsidies has made it one of best performing markets this year despite its currency woes. In Nigeria, the recent election of President Bola Tinubu has ushered in reforms to electricity generation, fuel refining and subsidies that have already borne fruit in the form of more than 40% stock market rally.
Audio Stamps:
00:52 Intro to Michael McGaughy.
01:59 How Michael got started in emerging market investing.
04:00 Michael’s research process (“People, Structure and Value”) leading to his fund’s outperformance.
10:31 Assessing family-owned businesses (Sinar Mas and Astra International) in emerging markets.
12:25 What makes investing in crisis markets attractive and how to go about assessing the long term stabilities of emerging market economies?
16:42 What makes specific crisis markets investable and how do you know that one of these markets that are going through crisis are safe enough to park your money?
19:52 How difficult is it to setup the appropriate investment infrastructure locally in frontier and emerging markets?
21:54 Any brokers that can provide direct exposure to emerging or frontier markets.
23:26 Michael’s thinking behind managing currency volatility.
27:55 Case study on Egypt – Can the current administration attract FDI? What reforms are happening?
32:06 What sectors or areas do you see growth in the Egyptian market?
34:19 GB Corp (GBCO.EY), formerly Ghabbour, a family-run business turned regional car manufacturer powerhouse poised for a potential turnaround.
38:48 Case study on Nigeria – What encouraging signs are seen from the country?
41:55 How are Nigeria’s various reforms including liberalization of the electricity sector and refining initiatives going to benefit the investment landscape? What types of industries will benefit from changes?
44:03 How to get in touch with Michael McGaughy.
45:12 Concluding remarks.
Additional Resources:
Michael McGaughy’s Blog (Minority Report)
Astra and Sinar Mas – 22-Year Performance Comparison
Meb Faber Research – What Happens When You Buy Assets Down 80%?
Disclaimer: This research/podcast is for informational, entertainment, educational, and/or study or research purposes only. The information contained herein or discussed does not, should not, and cannot be construed as or relied upon and, for all intents and purposes, does not constitute or provide professional financial, investment, or any other form of advice. This research/podcast does not and should not be construed as an offer to sell or the solicitation of an offer to buy any securities or any other financial instruments in any jurisdiction, including where such actions are illegal. This research/podcast is not intended for publication in jurisdictions where it would violate laws. The research/podcast does not consider individual investment objectives or financial positions and merely expresses the opinions of its authors. Any investment involves taking substantial risks, including (but not limited to) the complete loss of capital. Every investor has different strategies, risk tolerances, and time frames. You are advised to perform your own independent checks, research, or study, and you should consult a licensed professional before making any investment decisions. The assumptions and parameters discussed or used are not the only reasonable ones, and no guarantee is given for their accuracy, completeness, or reasonableness. No promise is made that any indicative performance return will be achieved. The research/podcast is derived from public information sourced by Pyramids and Pagodas. No representation or warranty is given for the reliability, completeness, timeliness, accuracy, or fitness of this research/podcast, nor is any responsibility or liability accepted for any loss or damage. The authors (Pyramids and Pagodas) and/or key persons involved shall in no event be held liable to any party for any direct, indirect, punitive, special, incidental, or consequential damages arising directly or indirectly from the use of any of this material.
Ep 6. Finding opportunities in crisis – Interview with veteran emerging and frontier market investor, Michael McGaughy