I catch up with him when he is in Beijing on one of his regular visits, where he is enthusing about the prospects for China.
“A lot of people have been talking about hard or soft landings in China but frankly things are doing fine. This year I cautiously expect fairly good growth of 7% or 8% which is quite astounding for an economy of this size.”
One of the key points he thinks people have missed is that the officials in China, such as provincial governors or city mayors, are incentivised to achieve high growth by being offered higher government posts if they do well and from “subsidiary benefits, so if you are building a road there are a lot of suppliers that have to be paid, if you know what I mean”.
Although this has both negative and positive connotations, he says there is a tremendous drive to encourage investment in road building and the wider infrastructure. “That’s the reason why you have this incredible dynamic economy.”
Local knowledge
Mobius gets a constantly contrasting insight into the way different countries do business. A few months ago he was in Brazil and “there the state-owned companies are not investor friendly, in the sense that they look after the government’s interests first, rather the interests of shareholders and that’s a big difference with China”.
He also has a long-term perspective, having first started running his well-known Templeton Emerging Markets fund in 1987, a year in which the US stock market dropped 22.6% in one day on 19 October and throughout the rest of the world major falls were recorded by the end of October, with Hong Kong down by 45.8%.
In October 1992, Franklin acquired Templeton, Galbraith & Hansberger for a reported cost of $913m, leading to the common name Franklin Templeton. Mutual fund pioneer Sir John Templeton was the owner of Templeton, Galbraith & Hansberger together with his son John Templeton and John Galbraith, who together owned 70% of the firm.
Mobius recalls how Galbraith, no relation to the famous economist, was the brains behind the selling of the Templeton funds: “He just wrote me a handwritten letter, which was really something.”
When people ask us ‘Aren’t you reaching a limit now you are up to $53bn (AUM of Templeton Emerging Markets Group)? Is that not too much?’ The answer is no, because the markets have expanded so much
Galbraith said that he had invested $500,000 in the Templeton Emerging Markets Fund in 1987 and it is now worth in the region of $13m.
“In the meantime he gave away around a million shares and he said even with that he is doing very well, and he wanted to thank me. It was him who was the one that got this business going.”
No limit
Galbraith also reminded Mobius that when this fund was launched in New York, the underwriter Merill Lynch said it would like to increase the amount raised from $100m to $150m, and Mobius had refused to raise it.
“Nowadays, when people ask us ‘Aren’t you reaching a limit now you are up to $53bn (assets under management of Templeton Emerging Markets Group)? Is that not too much?’ The answer is no, because the markets have expanded so much.”
Mobius is keen to talk about the Templeton Asian Growth Fund, which at $19bn is no minnow, and he has recently started running Shariah-compliant portfolios too.
“Money keeps on going in and we do get questions from people saying ‘When do you think you can’t handle any more?’ And frankly we haven’t seen that yet, there are so many new issues coming out. Someone just mentioned to me here in Beijing that one of the big brokers is going to come out with a new IPO or a secondary share listing which will be massive.”
He cites $250bn of new issues in emerging markets coming out last year and points out that in 2010 it was double that, at over $500bn.
“Well over half of it was Asia and a lot of it was China so there is a lot of liquidity out there and plenty of opportunity for finding new issues. It doesn’t mean that you are going to go crazy but there is a lot of liquidity out there.”
Asia goes domestic
So what are the key drivers for growth?
“What’s happening now is that there has been a transition in East and North Asia from export orientation to domestic orientation, so the domestic market is getting to the take off stage where people have enough money for discretionary spending.”
This is why you have seen the reorganisation and modernisation of the distribution chains and some restructuring, and India has allowed the large overseas retailers to come in and establish chain stores and larger retail outlets, he says.
“China is going in that direction already so, at the end of the day, this will be where the growth will be coming from. Exports will continue to be strong but the emphasis will be more on exports within the emerging markets arena and also domestic consumption moving up in every direction.”
The geographical split of the fund has over half the exposure in just two countries, China at 27% and Thailand at 26%.
Mobius maintains that there is so much variety in one particular country like China, that a big range of sectors can be represented such as consumer stocks, raw materials, and transportation stocks.
China weighting
The number of stocks, at 65, is also very concentrated, with Chinese oil and gas company Petro China, for example, at 5.9% of the fund.
“The reason we do this is that we do a lot of intensive research. If we are comfortable with the particular company then we put more money into that company, rather than trying to be diversified for the sake of being diversified. Because even with as few as 65 stocks the diversification is quite wide, because if you look down the top ten stocks you’ve got automobiles, banks, software services, capital goods and so forth.”
The annual turnover of the portfolio is less than 20% and this relatively low figure is matched by a relatively unchanged geographical split over the last year. China, Hong Kong, South Korea and Taiwan have stayed the same proportion, Thailand is up 13% from 23% “mainly because the Thai stock market did so well”, India is down 11.7% from 17% “mainly because of poorer stock market performance”, while Indonesia and Pakistan have nudged up from 12.4% to 12.6% and 4.2% to 4.5% respectively.
Remarkable changes
Much has changed since Mobius first visited China, moving from the “dark ages” of the Cultural Revolution towards a market economy under Deng Xiaoping, the reformist leader of the Communist Party of China.
He says the changes have been remarkable and now the Chinese government is beginning to allow some access to the hitherto restricted domestic, so-called A-share markets, though all the fund’s holdings are currently H shares (shares of companies incorporated in mainland China that are traded on the Hong Kong Stock Exchange) and red chips (stocks of mainland China companies incorporated outside mainland China and listed in Hong Kong) which are listed in Hong Kong.
Even the corporate governance of the state-owned companies is pretty good, he says.
“If you are in business you want to continue to power ahead. And, of course, some companies have problems but the gratifying thing is that they are tackling them very forthrightly.
“One company that we visited, whose name we can’t mention, apologised profusely to us today because they said ‘Our earnings were not as good as we would like and we are very sorry and trying to solve the problem as best we can’. So it gives you a feeling that these people are trying their best to do a good job for investors.”
Thailand is another case of a remarkable turnaround, despite all of the political turmoil in that country.
“We were in debt to Thailand during the Asian financial crisis, which was quite a shock to the system. And then recently the red shirts and the yellow shirts were fighting it out on the streets.
“But despite all that, the market continues to do very well. So, very often the headlines don’t necessary tell the whole story and you have got to be ready to go into some of these countries even if the political environment may seem unstable. There is a certain cultural stability that you see in some of these countries that weathers all these political storms.”
Shariah opportunities
A new challenge for Mobius is the running of Shariah-compliant portfolio versions of the Asian Growth Fund, which means following rules that prevent you from investing in alcohol, tobacco, gambling and companies that utilise interest. The latter puts banks off limits, unless Shariah-compliant, and companies that rely excessively on loans.
“It’s not easy. The scope of your selection is limited,” he says, “China still has the biggest percentage of the portfolio, but South Korea is next and India is only 3%. The sectors are very different with energy, for example, accounting for 36% and retailing just 10%.”
But Mobius says the Shariah system is quite favourable to equities: “It’s really a system which says, look if you want to invest you must share the risk with everybody else. So if putting money in a bank and the bank loses money then you have to share in the losses. If the bank makes money then you will share in the benefits. So that’s a fundamental system which is very good for equities.”
It’s why equity markets in the Middle East and many Muslim countries are quite active. If you want to invest, the only way to do so is to buy property or by investing in a company and sharing the risk and the reward.
Supported by well-regarded analysts from around the world, Mobius gathered the 52 portfolio managers and analysts of the Templeton Emerging Markets Group in Goa, India, earlier this year for their regular conference which they hold every six months somewhere in the world. The analysts are based in 18 offices across Latin America, Eastern Europe, Russia, Africa, the Middle East and Asia.
“Many of the analysts had not been to India and it was a big surprise to many of them because they expected much worse in terms of level of infrastructure.”
Eyes on Africa
Turning to more recent launches, the Africa fund which was up and running from May last year, at $45m is tiny in comparison to the Asian Growth Fund. But is Africa the next Asia?
“Over the long term yes, it’s not going to be easy but we think Africa is going to be very important going forward. And you are going to see tremendous growth. In fact, over the last ten years according to our numbers, of the ten fastest growing nations in the world six of those were African countries. So that gives you an idea of what the potential is.”
Optimistic
As for Europe, where Templeton’s funds have limited exposure to companies with substantial earnings in emerging markets, his belief is “that they will surmount the difficulties that they now have and I believe that they will be able to solve the problems. There have been hiccups along the way like this situation with Cyprus. It was just crazy for them to do that to the depositors and banks. It did not make any sense”.
The nice thing about this business is that you can go pretty long because the more experience you have, the better
His big-picture prediction for the world economy over the next few years is full of promise too.
“I’m very optimistic because of what is happening with the money supply globally. The Japanese have now launched this programme and the impact has been quite remarkable. Interest rates globally are going down and with all this excess supply of liquidity it has to find a home. If interest rates are going down there will be more interest in equities and, of course, emerging markets will get a fair share of that.”
Still excited
Is he just going to keep going and going, never to retire?
“I’ve got no plans to retire. I feel very excited about what I am doing. I like what I’m doing. The nice thing about this business is that you can go pretty long because the more experience you have, the better. So I think I will be continuing as long as my health holds up.”
After Beijing, his three-week schedule takes him on to Macau, Hong Kong, Bangkok, Moscow and Bucharest…
