"You need to have practical, local business knowledge in truly understanding the big picture and the subtle nuances of the operating environments in the markets you are investing in." - Robert Scharar, Commonwealth Funds
[International and especially emerging market investing requires a rather open and expansive mindset - along with an uncommonly focused set of perceptive eyes. The word “vision” comes to mind because you have to be able to see beyond the normal, conventional way of thinking and apply your core knowledge and training to a foreign environment. Developing that vision has a series of challenges and dimensions to account for - unusual market dynamics, cultural differences, varying business operating standards and quantumly diverse economic and historical forces at play in each foreign market. Investment decisions need to be wrapped around totally different contexts that are inherent in each market and that are also dynamically changing as well. For without this clarity of mindset and vision, it is easy to not see the forest for the trees, the benefits within the chaos or the opportunities hiding in plain sight. With it, you can position yourself as an investor to benefit from the specific pathway to growth that each foreign market is on.
Now here is where this gets real interesting - How do you build that needed mindset and vision for foreign markets and emerging economies? Different perspectives have led to starkly different investment approaches being applied to international and emerging market investing today.
To better understand and explore this active, international investment mindset and vision component, The Institute for Innovation Development reached out to Robert Scharar, President of Houston based FCA Corp, a boutique financial planning and investment advisory firm. He is also President and Portfolio Manager at Commonwealth Funds which has an unusual mix of international portfolios including an Africa Fund, Australia/New Zealand Fund, Japan fund, global Real Estate fund and a diversified Global fund. We were particularly interested in learning from his experience and his unique journey in developing the mindset and vision behind his eclectic international offering.]
Hortz: What led you to create fund portfolios in this rather eclectic mix of investment areas?
Scharar: Family ties to New Zealand dating back over a century led to me visiting New Zealand in the late 1970’s. I was fascinated by the small economy and stock market and the ability to grasp how that country functioned in manageable bites. I even bought a few stocks for myself. This led to doing some direct investment for clients in New Zealand equities but the complexities - different tax rules, foreign exchange, increased regulatory complexities, and cost of individual accounts - made this difficult. Sensing an opportunity to apply our New Zealand expertise, in 1991, we launched the New Zealand fund (now Australia-New Zealand). In the mid 90’s, similar direct investment, business development and consulting opportunities presented themselves in a number of African countries which led to a growing knowledge of the unique opportunities in that continent.
Based on these experiences, we developed local knowledge and business experience, had access to ongoing on-the-ground information and started offering investment opportunities not easily accessible to most US investors and that would offer increased portfolio diversity. To ensure that we would accomplish this, we decided to not construct our portfolio’s to mirror local/regional indices, but rather looked for small or mid-cap securities not easily found or accessible to most US investors - stocks whose values could be influenced as much by local factors as the up and downs of the “global markets” and not duplicate a typical US investor’s current portfolio.
Hortz: What have you learned about investing in these international markets that you weren’t aware of previously?
Scharar: While having access to a Bloomberg terminal puts everyone on equal footing in getting “the numbers”, we very quickly realized that the internet cannot provide authentic experiences that can drive our decisions. Going to places and seeing first-hand the culture, consumers, and businesses gives a person the insight necessary for a disciplined investment approach. We learned that you need to have an active, experienced business perspective in making investment decisions. You need to have the practical, local business knowledge in truly understanding the big picture and the subtle nuances of the operating environments in the markets you are investing in.
The advisor, FCA Corp, had the good fortune to be able to search out and develop working business projects and partnerships in the many regions we eventually launched and offered mutual fund and other investment opportunities in. This allowed us to bring a real-world perspective on both the business and market environments of these regions. For example, our participatory international business experience includes consulting on building ports in Africa and the Caribbean; negotiating a large capital purchase in China; building and operating hotels and shopping centers in Africa and New Zealand; partnering with a Japanese real estate group; advising an Australasia tourism company; engaging insurance and banking firms in Africa, Australia and New Zealand; energy projects in Africa; working on accounting and audit reports under IFRS (International Financial Reporting Standards); preparing foreign income tax returns; goodwill education missions; and export/import trade negotiations. For example, being part of building a shopping center in Africa exposed us to the underlying opportunities in that industry and gave us real insight in the growing consumerism on the continent.
Hortz: Can you tell us about some of the companies that can illustrate for us what you see as truly unique investments in unusual environments or timing opportunities that investing in these areas provide?
Scharar: As to a timing theme, all you need to do is travel outside the US and you begin to appreciate how expanded travel to and within these developing regions can impact them. While overall travel trends are projected to grow, by 2030, the Global Sustainable Tourism Council stated that almost 60% of travelers will arrive in a country with an emerging economy. While hotels and airlines would seem the obvious way to participate, it can also meaningfully impact infrastructure, service providers, retail, food, human resources and financial companies. Specific local companies can be identified who will be best prepared to reap this benefit.
The high growth rates of the middle class from low levels in these regions provide other unique opportunities. In fact, between now and 2050, Africa is expected to account for about half of the world’s population growth, which translates to more than a billion new consumers in the African market. A great example of a company on this wave is ShopRite Holdings, LTD (SRHGF). They started out in South Africa with 8 stores in 1979 and have grown to 2,738 outlets in 15 countries across Africa and the Indian Oceans islands to become Africa’s largest supermarket retailer. Great management, acquisition strategies, use of technology and focus on customer service should help them continue to grow very competitively in this region.
Hortz: As a business innovation Institute, I’m particularly fascinated with new technologies, business models, and particularly with the unique nature of third world innovation. Can you tell us what you are uncovering as to innovative managements and companies?
Scharar: The truth is that there are many examples of innovations in technology applications and new business model experimentation that are unique to some of these emerging regions. African companies have already been early global leaders in bringing the ability to buy life insurance or move money around on your mobile phone like MPESA did way back in 2007, skipping traditional growth paths and adoption cycles versus the historical paths of other mature countries. In general, the creative use of cloud storage, web-based meeting tools, online education, and internet delivery of products and services is already having a huge impact in these regional growth prospects.
Capitec Bank (CKHGY), as one example, is a retail-focused bank in SouthAfrica that has been very successful due to its use of technology and direct to customer online and cellular business model. Capitec’s strategy is to deliver a low-cost alternative to traditional banks that successfully has increased its share of transactional retail clients. The bank provides simple savings and loan products, with transparent and affordable pricing and convenient, customer-centric services.
Another example is IkeGPS Limited New Zealand (IKE.NZ) which is a technology company that designs and manufactures measurement solutions - smart laser-based field tools, mobile software apps and industry specific cloud software solutions for measuring, modeling and managing assets for a number of major industries like communications. They are a global leader in perfecting data capture technology specific for field pole measurement for over a decade. Their IKE4 device uniquely combines six best-in-class sensors, calibrated specifically for utility pole measurements that address the growing big data capture and analysis needs of a number of major industries and their increasing regulatory requirements.
Hortz: How would you recommend advisors think about diversification from your experience and utilize your funds for their clients’ portfolios?
Scharar: We bring this real world business-focused perspective not just to our country/continent funds, but it also tilts our investment selections in our global fund and real estate fund that helps complement index funds and index hugger fund managers and thereby is meaningfully additive to overall portfolio diversification. Our portfolios add another dimension to standard “diversified” portfolios with very distinct investment options.
One should not also overlook the emotional factor in investment selection. A traveler to New Zealand must leave with a positive feeling about the country’s beauty, functionality and unique growth prospects. If you travel in Africa and take time to meet the people and look at what is happening in some of the cities, you come away with an appreciation that the continent is getting its act together and in fact promises huge economic potential as the consumer class grows. You could consider our fund as participating through “stock” investing in that future.
The Institute for Innovation Development is an educational and business development catalyst for growth-oriented financial advisors and financial services firms determined to lead their businesses in an operating environment of accelerating business and cultural change. We position our members with the necessary ongoing innovation resources and best practices to drive and facilitate their next-generation growth, differentiation and unique community engagement strategies.
The institute was launched with the support and foresight of our founding sponsors - Pershing, Voya Financial, Ultimus Fund Solutions, Fidelity, and Charter Financial Publishing (publisher of Financial Advisor and Private Wealth magazines). For more information click here.