Bill Mann is the Director of Small Cap Research at the Motley Fool. Prior to that, he was the founding Chief Investment Officer for Motley Fool’s investing arm, Motley Fool Asset Management, where he oversaw 3 mutual funds and 7 separately managed account strategies with nearly $2 billion in assets under management. Mr. Mann has an insightful take on the fun (and power) of investing internationally. I have very minimal experience with international investments, so I’m very excited to learn more!
How do you look for competitive advantage in companies outside of the U.S. versus internal, US focused companies?
So believe it or not the process is very much the same, except that in many countries there are additional types of competitive advantages that aren’t available in the US. In the US there are very strong rules that prevent commingling of public and private interests, but in many countries, there are companies that are provided additional protection from competitors. For example, in China online companies have been allowed to develop, like Baidu or JD.com, because the government kept out large foreign competitors. In France companies from yogurt maker, Danone to Evian is considered strategic assets for the country.
I love companies that operate on island or island-like markets. You can find some pretty good businesses and they are, by virtue of their geography, protected from certain competitive forces. One really great example is the Bank of Greenland.
The pros of investing in small island businesses are the competition. Bill Mann talked about the Bank of Greenland. That bank is the only local commercial bank in Greenland. Meaning, other banks are less likely to try and become a competitor because the Bank of Greenland is so well established (I’d hope so since it’s been around since 1967). Having one company that the whole island relies on can be extremely helpful for an investor to seek out the right investment.
Do your investing “guidelines” differ depending on the country you’re looking at?
Yes. You have to be aware that for all of its faults the US regulatory system is by and large the best in the world for protecting individual minority investors. In lots of countries (and not just emerging markets) there is literally a disincentive for the companies to uphold foreign minority shareholder rights as their court systems are quite corrupt. For example, this last year the Chinese Securities Regulatory Commission announced that it was delisting Dandong Xintai Electric for fraud, the first time they’ve delisted a company for fraud in nearly 7 years.
Given that more than 50 Chinese companies were delisted in the US-based on alleged fraud or violation of securities laws, does it even remotely make sense that one's listed in China were paragons of virtue? Not to me.
All that said, I tend to analyze companies on the basis of their audited financial statements and then work backward from there. What I tend to do is place a country-specific additional discount rate on companies in countries I don’t have as much confidence in – let’s call that an omega discount. But at the end of the day, there are 50,000-plus publicly traded companies worldwide, so there isn’t any need in reaching for any one company if you’re the slightest bit suspicious.
What benefits do investors have with investing outside of the U.S.?
The pat answer is diversification, but I don’t spend much time thinking about that. The real benefit to me is that you gain access to situations that are no longer possible in the US. So, for example, Indonesia’s middle class has grown 4-fold in the last few decades, leading to a huge increase and shift in consumption habits. The US is a wonderful economy and I’d never bet against it, but it does not have any potential to bring so many people out of poverty in such short order. Other countries have a natural advantage in certain products and really great companies that are benefitting. So for example, Malaysia is blessed with rubber, petroleum, a moderately priced workforce and a good infrastructure, which are the basic ingredients to give it an absolute advantage in the manufacture of disposable gloves.
Looking at the top five economies in the world (United States, China, Japan, Germany, United Kingdom) which types of moats do better in which economic environments? Is there a pattern?
I don’t spend much time thinking about economic environments, preferring to focus on the companies themselves. That said, it is a simple fact that China and probably India will have larger economies than the US in our lifetimes, so there is a certain benefit to thinking about companies that serve those markets.
Which emerging market interests you the most? What moats have you seen most often in that market?
Probably Indonesia. It has some real corruption problems, but there are delightful businesses based there that are growing at an extremely rapid pace. This might sound weird, but I also appreciate Saudi Arabia as a market.
What’s your favorite country to travel to and invest in?
(Try not to say Indonesia again, but Bali……wow.) South Africa is an interesting market and an absolutely, positively unbelievable place to travel. I stay away from mining and natural resources companies, simply because their costs of capital are high and they tend to have very few moats or pricing advantages. But South Africa is the largest economy and the driving force in Africa, a continent with 1.2 billion people in it.
I have been involved with a group called the Fistula Foundation which has taken me to many places in Africa. The Fistula Foundation helps women get access to surgeries for an easily correctable complication that comes during childbirth. Perhaps because it’s such an emotional thing to see these women literally get their lives back, I have a really deep connection to the time I’ve spent in Ethiopia, Kenya, and Malawi and would return in a second.
Thank you, Bill Mann, for your answers to my questions. This conversation has sparked my interest, and hopefully others, in external markets, and I cannot wait to explore that! I learned a lot, and there is so much more to learn. Because I am extremely new to investing in other markets outside of the U.S., I’ll leave it as the famous Charlie Munger says, “I have nothing to add.”