Axa Investment Managers bets on entrepreneurs
Guillaume de Corbiac is co-fund manager of Axa WF Framlington Emerging Markets Talents. He joined Charles Firmin-Didot and his original Talents fund in March 2004, after two years working in Paris and Singapore. He has participated in the Emerging Markets Talents fund's development since its inception in 2005 and manages stock picking for the fund.
The fund has $150 million under management and runs alongside the Talents Global Equities fund (with $500 million in AUM). More than half the assets in the EM fund are invested in Asia, which includes 30% in China (including Hong Kong) and Taiwan. The fund is available in Singapore for professional and high-net-worth investors and was registered in Hong Kong on August 4.
These innovative products invest in entrepreneurs' listed companies, with the premise that entrepreneurs, family businesses and the like perform better than the markets in the long term.
The EM Talents fund is 76.33% up in the year to September 30, compared to a 56.39% gain in its benchmark, the MSCI Emerging Markets index, but it lags the benchmark over three years (down 11.79%, compared to +9.02%). As a result of its investment philosophy, it is mainly invested in small and mid-cap companies and has a low exposure to oil companies, commercial banks and utilities.
Axa Framlington is Axa Investment Managers' research-based judgmental equities boutique, based in Europe.
To back entrepreneurs, you must presumably need strong and well-established on-the-ground market knowledge and connections?
It's not about knowing the people personally, but about knowing their track record and analysing their past decisions, what's driving them, their vision; about whether they will still be there in 10 or 20 years. Does the entrepreneur identify enough with their company to be behind it for the next 20 years?
We invest in entrepreneurs or families led by someone willing to move forward with the business. If we're considering the second generation -- say, the son or daughter of the founder -- he or she has to have shown something by himself or herself, in terms of decision-making, resisting pressures, being independent enough to launch a new venture when nobody believes in it.
The most important things are independence and courage. The rest, for us, is pure speculation -- we cannot know if their projects will work or not, but having a long-term approach with such investments is a good strategy to benefit from the growth of emerging markets.
Entrepreneurs are there to design their business model -- we never tell them which model to use. We have an interest in relying on their expertise, because they know what they're doing, they tend to have a lot of their money invested; usually they are the founders. They have shown in the past they are able and talented. It's also in the interest of the entrepreneur to be left alone. Our job is to find good people who have good projects and to support them.
It can't be easy choosing the right companies -- there must be a lot of pitfalls?
When you limit your investment universe to these types of companies, you have a much narrower investment universe. But you also support some responsible entrepreneurs, which represent a valuable asset class in itself. Our selection process then helps us select those with the best track record and ethics.
Some listed entrepreneurs can indeed be tempted to manipulate the markets or their figures, or manage some other business on the side; you will always find people me who will do that. But when you do a proper analysis of what they did in the past and follow them over years, you dramatically minimise the likelihood of investing in bad guys. Over the past eight years we have found a large number of sound entrepreneurial stories.
In the emerging-markets talents fund, we have selected 1,500 names of entrepreneurial companies as a database and we already have a shortlist of 400. The portfolio tends to contain around 90 to 100 stocks at any one time, with the largest current holdings including [Chinese vegetable producer] Chaoda Modern Agriculture, run by Kwok Ho, and [Zhang Jimin's] West China Cement.
We have had up to eight people in our team feeding our global database. They were on the ground in their home markets -- for example, one in China, one in India. We hired them not for their financial background but for their ability to understand the culture, investigate and find information that when you're sitting behind a Bloomberg terminal in London you may not see.
It is risky; every venture is risky. An entrepreneur's track record and expertise is no 100% guarantee they will succeed in their new projects, but we believe that people who have at least 10 years of good records are likely to build outstanding companies.
We also have many checks in place to make sure we minimise the risk; checks on whether there are potential conflicts of interest, for example -- how much money they have invested in other projects. We like to invest in holding companies where we can benefit from every new deal.
How can you be sure the entrepreneurs are being totally transparent and honest?
We have met with many of them in one-on-one meetings and always cross-check information we gather. We read a lot and speak to as many people as we can, including brokers and other people in the industry. We also ask entrepreneurs in different sectors who they respect the most in their sector or in other countries -- in other words, who inspires them.
For example, our database of 1,500 emerging-market names did include Satyam Computers [where there emerged an $800 million fraud by founder-chairman Ramalinga Raju], but not[Chinese electronics company] Gome [whose founder, Huang Guangyu, faces an insider-trading charge]. The Gome entrepreneur never made it into our list of companies, as he clearly had many conflicts of interests with other companies.
Satyam was a different case. Raju was on our shortlist as a good IT entrepreneur in India. But just before the news of the fraud came out, he made a deal with his son's private company, which immediately triggered a warning for us. We decided to remove the company from our shortlist until the situation is clearer.
Even if the company obviously never made it back in our shortlist, the irony is that it has indirectly become part of our investments, as it was bought back at a discount by Mahindra & Mahindra, a best-in-class Indian family-owned company that we have had in the portfolio for several years now.
We can't say we know everything about every entrepreneur in our database -- we do get surprises. But we do everything we can to apply a consistent approach, and all the entrepreneurs we trust and hold in the portfolio have passed tough due diligence.
How do you decide when to buy or sell companies?
We generally don't invest when the market cap is below the net debt. Most of our companies have net debt of around 40% of their market cap on average, which is actually lower than the market. We also impose liquidity constraints on ourselves, such as being able to sell more than 50% of the portfolio within three days.
We tend to buy companies from the shortlist when the company or entrepreneur himself buys back their own shares, as that indicates the entrepreneur and board members are confident in their company and that they feel it's cheap. If the entrepreneur can re-invest personal money, that also suggests he or she doesn't have too much personal debt that could potentially force him or her to sell the company to banks.
At the moment, some are selling a little bit because the market has rallied a lot; it is clearly a good time to reduce their stake if some of them have personal debt. But most of those in the portfolio are holding their stake or even buying, which confirms our confidence in current valuations.
What's the take-up been like so far for the EM Talents fund in Hong Kong?
Jean-Luc Eyssautier, head of funds distribution for Asia at Axa IM: Initial conversations have been very good. We've got some people who want to do some cross-content with their clients and some private bankers who want to put it on their platform. And we hope that if the fund continues as a top-quartile fund this year, we can get some good results.