Sanlam financials fund manager Kokkie Kooyman highlights some of the opportunities in the sector which can be found lower down the market spectrum.
Emerging market equities tend to be quite volatile due to their low levels of liquidity. Hence, when there is demand, share prices tend to move up sharply, and similar when the opposite happens.
Yet, when you look through the volatile share price movements they have consistently grown their earnings. Especially many of the smaller financial companies have enviable track records.
The top 15 small cap emerging market shares in our financial fund have generated a compound return for investors exceeding 24% since 2004, and are yet only on a forward Dec 2013 PE ratio of 7.6
Three common factors
Three common factors tend to drive their earnings:
* Demographics: most emerging markets have very young populations, which means that for the next few years each generation will outnumber its predecessor, hence providing an underlying driver of increased demand
* Low debt exposure: generally large parts of the population have not had access to banking products or the possibility to borrow money. Hence the growth potential is still huge.
* Industrialisation: the shift from rural to urban as well as increasing focus on better education, is industrialising these countries, creating more and more “white collar” salaried jobs, which facilitates the deepening of the financial sector
Below are few that we’ve held or hold in our funds with enviable 10 year track records in terms of delivering 18%+ compound net asset value per share growth (measured in US$), but still have their best growth years ahead of them AND remain mispriced:
Two of the top 10 focus on providing investment services to the growing upper end of the middle class and the deepening and widening of financial markets.
Panin Securitas provides financial services such as underwriting, brokering and investment management, investment advisory and other related services in an under-penetrated and rapidly growing Indonesian market.
It has grown its net asset value rate of 24.1% since listing in 2001 and whilst its share price increased at a compound rate of 39%!. It has a number of Morningstar 5 star rated funds and the most exciting about this little gem is that the Indonesian investors have only started the journey of investing in equities.
A similar company in Turkey (but much further in its development) is Is Yaterim Menkul Degerler (Ismen Securities). Ismen has the advantage that it has Is Bank as a parent who can be used to provide better reach via its 100 strong branch network. Similarly to Panin it had grown its net asset value per share at a compound rate of 23% since 2002 with the Turkish market still in an embryonic stage.
Most of the other high growth emerging market smaller cap stocks in the financial services space with good track records to consistently growing their earnings and generating a high return on capital are involved in one way or the other in lending to the unsecured market.
However, each is unique in their way of servicing their market and or minimizing risks of lending in that market. Above all, they have excellent data systems as administering high volumes of low value transactions is a key to success.
The ones we like most tend to have stuck to an unchanged business model: Tisco in Thailand via second hand vehicles; BFI and Adira via “2-wheeeters or 4-wheelers”, Compartamos in Mexico and not to ignore: World Acceptance Corporation in the USA.
The most interesting one is Manappuram Finance Ltd, a non-banking finance company in India. Manappuran is effectively a pawn broker but accepts only gold jewellery as collateral.
It lends up to 70% of the scrap value of the jewellery and due to the fact that the gold price has been so strong in rupees over many years, its bad debts have been miniscule. The risk associated with investing in smaller shares was highlighted when a fraud was discovered in two of its branches and the share price more than halved.
It is no surprise that India with 800 million people living below the breadline also provides the most exciting growth potential. No discussion of small cap emerging market financial services companies can be complete without mentioning Shriram Transport Union and its sister company Shriram City Union.
Shriram Transport Union finances truck operators, the lifeblood of India’s transport system and has built up an almost unassailable brand and presence via its system and the way it services its clients. The fact that the entire top management team started right at the bottom means that everybody in the business understands the business model.
Two that are totally different are Kruk SA (Poland) and DBA Telecommunications (Asia) Holdings.
Kruk is young and has an as yet untested business model but makes its money by providing debt collection services for third party companies and acquires non-performing debt packages from banks and pursues their collection for its own account.
DBA on the other hand is now well established but only at the beginning of its growth path. It is only indirectly involved in the financial services industry as it provides intelligent payment services in China and operates smart terminals nationwide and designs and manufactures smart card vending machines.
After many years of investing, it turned cash flow positive this year with a commensurate jump in its share price, but remains very undervalued.
Kooyman's Sanlam Global Financials fund has returned 45.9% over the last three years versus a 15% rise in the benchmark