In light of the COVID-19 pandemic and the current climate crisis, society at large has come to increasingly recognise and demand that businesses fulfill their responsibilities to stakeholders beyond shareholders. These expectations are being extended to the investment industry, with clients, regulators and society at large expecting fund managers to play a key role in ensuring that both they and the companies they invest in are contributing to a more socially- and environmentally-responsible global economy.
Having spent six months away from the desk, I explored, among other things, the rugged and beautiful landscape of Scotland’s Western Isles, where I reflected on twenty years of investment in Latin America.
Economic stress and political ‘randomness’ are on the increase in emerging markets. Once more, foreign investors shall end up disappointed by the failure of accounting revenues and ‘adjusted’ profits made in emerging markets to translate into hard-currency cash in clients’ hands.
The MSCI EM Latin America Index declined over the past year and the strategy protected capital a little better, though also declined. Since inception the strategy has returned over four times that of the index.
Our enthusiasm for global emerging markets (GEM) has always been based on finding, and investing in, the best managers and owners of businesses rather than following top-down tailwinds or the latest fashions. This is based on the general premise that capital preservation is key to making positive long-term returns in GEM.
Our enthusiasm for the prospects of Latin America is based on the general premises of the advantages of low cost production and consumption potential and the growing rejection of inward-looking political policies.
The printing presses of central banks have gone into overdrive this year in an attempt to ward off the greatest economic and social uncertainties most of us have ever encountered. One of the very early consequences of this unprecedented action has been the widening of various distortions in stock markets. One such distortion is the large difference between stocks wearing the label
‘value’ and those preferring to don ‘growth’G1. The discrepancy in performance between growth and value has rarely, if ever, been wider than it is currently. This is the case globally and emerging markets are no exception.
The financial panic of 1825 has been described as the ‘first modern financial crisis.’ It resulted in a major banking crash across Britain, economic recession and multiple bank failures, with ripples reaching as far away as Latin America. There were many associated bankruptcies, including the world’s best-selling novelist.
‘Enormous initial dividends were paid on these modern trust companies, with the result that in the nicely arranged match between founders and shareholders… the founders romped home while the shareholders were nowhere.’ The Bankers Magazine (1893)
Life was madness, nightmare, desperation, chaos. Extreme inflation or hyperinflation is in the news as price rises in Venezuela hit the stratosphere. The cataclysm of hyperinflation is both a symptom and cause of deep-rooted economic and political malaise. The example of Germany in 1923 may be an instructive historical example for investors today.
The Tequila Crisis is a classic example of an emerging market financial debacle. After years of strong returns for equity investors, the Mexican currency and stock market crashed in 1994. An examination of the reasons for this crisis provides a number of lessons for equity investors today.
London, 1969. A shop assistant at Harrods makes a fortune from her investment in an unknown Australian mining company. A major nickel find has resulted in a speculative bubble in Australian mines. The Poseidon mining boom, as it is now known, offers a number of lessons for investors today.
The Nifty Fifty was the name given to a group of US growth stocks which performed very strongly in the 1960s and early 1970s, becoming symbolic of the spirit of the times. They traded on stratospheric valuations over many years. How do the valuations of the Nifty Fifty compare with the FANG stocks of today?
The mania for buying and selling tulip bulbs in the Netherlands during the 17th century was arguably the earliest asset bubble in history and the precursor of financial manias over the following centuries. Tulipmania still provides valuable lessons for investors today.
In October 1878 the doors closed at the City of Glasgow Bank, one of Scotland’s largest financial institutions. The bank’s demise, which was the biggest banking failure in the UK until the global financial crisis of 2007/8, highlights a number of issues around investing in bank shares.
Debt binges are common in financial history - huge accumulations of debt by companies, individuals or governments. The deflation which may follow in their wake can transform economies and societies. A lesser known example occurred in Scotland in the 17th century when Highland chiefs amassed a mountain of debt.
On 24 November 1898 the Scottish whisky firm of Pattisons was given a clean bill of health by its accountants. Thirteen days later Pattisons went bust, marking the end of the whisky bubble of the late 19th century. At their trial, which was a major media event at the time, it emerged that the brothers behind the company were swindlers of the first rank, pursuing every accounting scam in the book.
Perhaps the worst financial scam in financial history. In January 1823 a ship sailed from Leith in Scotland with 200 settlers bound for Central America. Two months later, when they reached their destination, the colonists were shocked to find virgin jungle rather than the mature settlement described by the scheme’s promoter. They were victims of a cruel fraud.
Rue Quincampoix, Paris, 1719. The French capital was in the throes of something unprecedented in history – over the summer, the dirty, narrow street in the heart of the city became the epicentre of world finance, a veritable vortex of share trading. A new financial and cultural phenomenon had appeared on the scene – the stock market bubble.
In 1696 a Scottish company raised a huge amount of money in an early financial mania. The company attempted to establish a colony in Darien in Central America. It was an unmitigated fiasco and every penny of the capital was lost. Scotland’s greatest corporate disaster highlights the importance of management, franchise and financials in any commercial enterprise.
As part of our investment philosophy we say that we invest in quality companies. We develop this further by saying we invest in companies with sound financials, strong franchises and responsible stewardship. What do we actually mean by this?