After years of roaming
the globe in search of potential investments, James Morton, chief investment officer of CIM Investment Management Ltd. in London, has concluded there’s a hotbed of opportunities in emerging markets. And, he says, most clients are probably significantly underexposed.
“I suggest people have 50% of their investment assets exposed to emerging markets,” says Morton, whose company, CIM, is an independent firm. That level of exposure may sound aggressive, he says, but clients are tied in more ways than they realize to the fate of their home countries and, therefore, need the diversification and extra growth potential that emerging markets offer.
“Most people make their employment income in their home country, and that’s usually their biggest source of income. At the same time, their largest asset is usually their houses, and that’s located in their home country,” he says. “Their third-biggest asset is typically their retirement plans, and with this they can be more creative and diversify geographically.”
Morton is the lead portfolio manager of Toronto-based Mackenzie Financial Corp. ’s newly introduced Mackenzie Cundill Emerging Markets Value Class Fund, which he is managing according to the deep value, contrarian style that defines the Mackenzie Cundill brand.
A 30-year veteran of investing, Morton is also lead manager of the $1.4-billion Mackenzie Cundill Recovery Fund, which got the nod as Global Equity Fund of the Year at the 2003 and 2005 Canadian Investment Awards. Introduced in November 1998, the fund has shown an average annual compound return of 19.3% for the five years ended April 30, handily beating the global fund group average of 6.7% and the MSCI EAFE’s average of 9.2% (in Canadian dollars). Mac Cundill Recovery has been closed to new investors to keep it small enough to enable Morton to invest in some small, less liquid companies.
Morton believes growth prospects in developed countries — particularly European countries, the U.S. and Japan — are dramatically inferior to those in emerging markets. The developed countries tend to be plagued by aging populations, low birth rates and poor government finances, which will be worsened by an increasing pension burden as the proportion of older people swells.
“Many parts of the developed world have shrinking populations, and their future growth is limited,” he says. “The emerging markets have youthful populations, with an appetite to make money and a determination to improve their standard of living. These people have no qualms about working hard; they are highly motivated and driven to succeed. They’re at a much lower level, in terms of having their wants met — and that’s a great driver. We’re fat and happy in the developed world.”
He points to the push in France for a 35-hour workweek as indicative of a reluctance by people in developed countries to work as hard as those in emerging markets.
WORKING AT MIDNIGHT
“In Vietnam, for example, they work the equivalent of a 35-hour day. I have brokers calling me at midnight from their offices,” Morton says. “The population is young, the government has a financial surplus and it’s not bur-dened with giant pension liabilities. Some people find it scary to invest in countries that are far away and culturally strange, but that’s where an experienced fund manager comes in.”
With his new fund, Morton will be investing in a variety of emerging markets, including Indonesia, China, Malaysia, Latin America, Russia, Africa and Ukraine. He will also take advantage of companies that may be listed on exchanges in places such as Canada or Britain but are doing business in emerging markets. He is currently avoiding India, where, he says, valuations are high, inflation is high, interest rates are rising and real estate is “a bubble waiting to be pricked.
“We are unlikely to be active in India in the near term,” he adds. “We are waiting for a lower entry point.”
As with Mac Cundill Re-covery Fund, Morton expects his emerging markets fund to be a concentrated portfolio of his best ideas. In the early days, he expects to hold no more than 30 companies, although he may raise his limit to 50 stocks as the fund expands. Morton limits the amount of assets in any one company to 6% of fund assets, and will start selling if a company exceeds this amount “even if I really love it.
@page_break@“Things can go wrong at any company and you can’t know all things,” he says. “In emerging markets, particularly, you need a greater degree of diversification. You can expect things will go wrong at one or two companies, but the other portfolio constituents will more than make it up.”
Morton was born in London and resides there — when he’s not on the road checking out investment opportunities in faraway places, which takes up about a third of each year. In the past, he has worked and studied in other parts of the world, including Australia and a few U.S. cities, among them Boston and New York.
Morton first became an advisor to the Cundill team in 1996, when he met company founder and chief investment officer Peter Cundill while researching a book called Global Guide to Investing. Morton is the author of three other books: Investing with the Grand Masters, Investing with Young Guns and Prince Charles: Breaking the cycle, the latter an assessment of the accomplishments of the British prince, published on his 50th birthday.
Morton’s career has spanned the financial services spectrum: commercial banking, corporate finance and investment management. He has worked for firms such as New York-based Citigroup and merchant banker Samuel Montagu Inc.
From 1991-1996, Morton was managing director of London-based Chel-verton Investments and Chelverton Investment Management Ltd. He became investment director of London-based money manager European American Securities Inc. in 1996, before founding CIM in 2005. CIM manages a line of offshore funds under the CIM name, as well as third-party funds and private accounts.
Morton obtained a bachelor of arts in law from Cambridge University in 1970, a master’s of business administration from Stanford Business School in 1975 and a master’s degree in Third World economics from the Stanford Food Research Institute in 1979.
As a strict value investor, Morton likes to buy stocks trading at a discount to asset value, a discipline he says is “the No. 1 mark of the Cundill approach.” He also assesses debt, dividends and cash flow, as well as price/earnings and price/sales ratios. But in emerging markets, particularly, it’s important to look beyond the numbers.
TAKING A MACRO VIEW
“In some markets, the financial reporting is not as accurate as it could be,” he says. “It’s important to do detailed, bottom-up numbers analysis. But the financial aspects are just the platform, not the entire building. We also take a macro view of the overall economic and political environment in which companies are operating. And the quality of management is important.”
In assessing management, Morton looks for people who act as “stewards of the business,” who are not working just for personal gain but for all shareholders. He looks for people who are honest, hard-working, open to dialogue and who deliver on promises. Time on the road is spent meeting people and seeing operations for himself.
“In Kazakhstan, for example, you can’t be an activist shareholder — you’ll get crushed,” he says. “You have to have confidence in the management team.”
Rather than looking for companies that fit into overriding global themes, Morton buys “opportunistically.” He doesn’t spend “one nanosecond” thinking about market indices or market-timing. He is critical of fund managers who claim to take an active approach and who charge fees for it but are essentially closet indexers.
“We can’t participate in obvious themes such as environmental issues, as valuations on companies in this industry are outside our limits,” Morton says. “As deep value managers, we tend not to be in fashionable places. People who are paying fees to active managers expect lots of work, and we are certainly active. Our portfolios don’t contain a lot of household names, and there’s a good chance they won’t be correlated to the market.”
Morton expects a possible 20% overlap in holdings between the Recovery and Emerging Markets funds. Although Emerging Markets Fund may invest in recovery candidates, it will have a broader field of opportunities from which to choose. Morton will turf a company from the portfolio when it ceases to meet his value criteria. But this may take time, as many companies expand and improve their prospects, and continue to represent value as their price rises.
“Providing they maintain the potential for attractive returns, we prefer to hold companies for long periods, as we know the business and the management,” he says.
Although emerging markets already have a few years of attractive returns under their belts, Morton sees many years of superior growth ahead, albeit with ups and downs along the way.
“Making money is easier in emerging markets, as they are less efficient,” he says. “In addition, a lot of currencies have been undervalued, and as they strengthen, they can boost returns.
He says the biggest risks are no longer financial but, rather, political or environmental.
“I worry about things like a bird flu epidemic, the U.S. nuking Iran or a move toward U.S. trade protectionism as the balance of power shifts to emerging countries such as China,” says Morton. “Those are the potential dangers.” IE
Uncovering a hotbed of emerging-market opportunities
CIM’s James Morton points to emerging markets’ hard-working, young populations as drivers of growth
- By: Jade Hemeon
- May 29, 2007 October 30, 2019
- 11:53