Emerging market fund managers don’t come much bigger than Mark Mobius. Over the years, his investment knack has seen him rise through the ranks of the Franklin Templeton behemoth, inspiring his own manga comic strip along the way. His frontier fund is about to reach the $1bn mark after just three years in business and he plays an active role managing a suite of emerging markets funds worth approximately $50bn combined.
So when Mobius says he is bullish on Mena, you are inclined to sit up and take notice. “The Mena region is going through incredible turmoil,” says Mobius, executive chairman of the Templeton Emerging Markets Group. “A lot of these stocks have come down quite a lot so there will be opportunities going forward, which I think are going to be quite interesting. We’re definitely looking at it very carefully and hoping to do more and more with the Mena countries.”
Mena is already strongly represented in the Franklin Templeton Frontier Markets Fund – at the end of H1 it was 37.74% weighted towards Mena, with high exposure to the UAE (7.22%), Saudi Arabia (8.65%), Qatar (7.11%) and Egypt (6.68%), where Mobius has a particular interest. During the recent political unrest, Templeton actually increased its investments in Egypt (which it views as a frontier rather than emerging market due to the restrictions on investment). “We’re still very much involved there,” he says, singling out the current low valuations as an attractive proposition.
“In terms of countries, of course, Egypt is the dominant one,” he adds. “We are already investing in Egypt and we expect to do more and move forward.”
Eye on the storm
Templeton’s emerging markets investments have never shied away from risk. Part of the Franklin Templeton Group, the firm made its first emerging market investment around the time that Mobius joined more than 20 years ago. It currently runs funds including the Templeton Asian Growth Fund, Templeton BRIC Fund, Templeton China Fund, Templeton Emerging Markets Fund, and Templeton Global Emerging Markets Fund, all of which Mobius manages.
However, it can probably afford to take more risks than others. At the end of July 2011, parent company Franklin Resources (Franklin Templeton Investments) reported preliminary month-end assets under management by the company’s subsidiaries of $747.2bn, up $144.3bn since the same point the previous year.
Mobius is now looking to the next big Mena investment opportunity and the Arab Spring effect has thrown out a few unlikely contenders. “Eventually, with Libya getting its act together, it will take time, but that will be an interesting market,” says Mobius. “They do have a stock market in Libya and that’s an example of what could be done.”
In fact, Mobius paid a visit to the Libyan stock exchange prior to its suspension on 20 February, describing market conditions as strong. So what would need to happen in Libya to encourage an opening investment from Templeton? “They have to get the legal system in order, and then they have to have some form of law and order to begin with,” says Mobius. “I think that will happen and when it does it will present a great opportunity." He adds that the firm is also keeping an eye on Syria because of the potential implications on Lebanon, an “important market”.
“We’re going through a tremendous amount of change and it’s going to be very interesting,” he adds. “I think there’s going to be a lot of opportunities in the region.”
But there are limits to his risk-aversion. “Geopolitical risk is very important obviously because if there is a lot of turmoil, no law and order, that’s not conducive to having a good capital market,” he adds. “But the main factor we look at is the situation with regards to the foreign exchange control and capital control generally. So we want to make sure that we are going to be able to get money out as well as in.
“That is, I would say, the critical factor. When Chavez came into Venezuela we got out because we felt that it was going to be very risky for us to have money in there because he is going to be nationalising and so forth. So I think that’s probably the most critical aspect of when we look at political risk. Of course, we are used to turmoil and all kinds of problems like you see in some of these countries, but that doesn’t frighten us as much capital controls.“
Common strategy
At the moment, Mobius’ Mena investments are focusing on two key areas: commodities and the consumer area. Nickel, palladium, platinum and coal are seen as safe bets, as well as an ongoing interest in oil. “We do believe that oil prices are going to continue trending upwards,” says Mobius. “Now of course there will be loads of fluctuations around that long-term trend but we believe that oil prices will continue to trend upwards, and therefore we want to have exposure to that sector.”
According to Mobius, his underlying investment strategy is no different in Mena than any other part of the world. “The focus is on companies,” he says. “We try to identify those companies that have good managements, that are growing, that have a growing market share, etc. Then we look at these companies from the context of the local political environment – in other words, what is going on in the country that will impact this particular company. We do that regardless of where we are, whether it be in Egypt, Hong Kong or India, we use the same technique.”
Bottom-up investment strategies are nothing new among Mena fund managers, but Templeton-level success has evaded many of the local players. Far from being the fault of the fund managers, Mobius believes the macro environment has played a fundamental role in Mena’s faltering fund industry. “The global financial crisis has not really impacted them as much as the disturbances in the Middle East, so I would say to a great extent they’ve been isolated in that sense,” he says. “What has impacted them is the political problems, rather than the global economic problem. There’s a long way to go and there’s a lot more recovery that’s going to come around the corner.”
Mena optimism
“I’m generally very optimistic about the current situation because we think there are lots of opportunities at this stage of the game,” adds Mobius. While there is still plenty of room for change, most notably the opening up of the Saudi market to foreign investors, he fully intends to grow Templeton’s Mena presence over the long-term.
“We have an office in Dubai and we look very closely at the UAE,” says Mobius. “That’s an important area for us. Then we have some investments in Qatar – the banking sector in that part of the world is interesting for us – and then after that it would be Egypt and Saudi Arabia. In Saudi Arabia we have quite a lot.”
Although the frontier fund holds more than 8% in Saudi, this exposure is limited to swaps and p-notes. “We don’t like that arrangement because, although we’re dealing with very large banks and brokers and so forth, we prefer to go in directly to minimise any counter-party risks,” says Mobius. However, he believes that it is only a matter of time before the Tadawul opens up fully to foreign investors. “I think they will gradually open up and become more liberal, but only time will tell,” he adds.
While Mobius is certainly committed to the region, in the short-term, Templeton has no plans to launch any new Menaspecific products. “It may happen in the future, but we have nothing right now,” he says. But his commitment to the frontier is unlikely to waver. “The nice thing about what’s happening in frontier and emerging markets is that the situation’s totally different to what’s happening in Europe,” he adds. “In terms of debts, GDP, these countries are in better shape. They have much more in prime reserves. So there’s a combination of things that put these countries in a very very good position and investors are beginning to wake up to this reality. I think that it’s a good place to be.”
