Emerging markets theory

As a category of equity investment, emerging markets may be considered to have begun in 1986 under the sponsorship of the International Finance Corporation (IFC), an arm of the World Bank. David Gill, then head of its Capital Markets Division, convinced the IFC to invest in equities in some of the strongest countries the World Bank was financing with debt, initiating private involvement in what had largely been a public domain. The Emerging Market Fund, which Gill started, gave its investment mandate to Capital Group in Los Angeles, a firm that now manages $75 billion in these markets. David Fisher has successfully managed this group since the early days.

But no one epitomizes the emerging market manager better than Mark Mobius of the Templeton Emerging Markets Group. Mobius meets the requirement for physical stamina of an emerging market investment guru. Now in his sixties, he is in top physical shape to maintain the pace of fifteen-hour days, seven days a week. From a childhood in the United States, he has been based in Hong Kong since the 1960s and travels on a German passport. His scope is global with more emphasis on the fast-growing economies, like Asia, that especially challenge an investor when reminded that volatility is two-way.

Mobius is a hard-headed investor in markets that do not usually inspire confidence. His tough valuation bottom-up discipline demands that investments sell at no more than five times earnings five years hence. And the cheaper the better for him. He is a fundamental investor who visits companies and studies the businesses, while fretting little over the country's macro issues (see Value Investing, Economic Forecasting and Politics and Investing). Since his techniques are common to the well-schooled analyst, he has to find different markets and different industries from other analysts. He is often out of step, buying investments that look like they may continue to decline. It is discipline the old-fashioned kind.

Mobius is a frequent commentator on emerging market investing and has written a well-received book, Mobius on Emerging Markets, which summarizes his keys to success:

Hard work and discipline: the more time and effort put into researching investments, the more knowledge will be gained and wiser decisions will be made.

Common sense: the clarity and simplification required to integrate successfully all the complex information with which investors are faced.

Creativity: looking at investments from a multi-faceted approach, considering all the variables that could negatively or positively affect an investment. Creative thinking is also required to look forward to the future and forecast the outcome of current business plans.

Independence: when making investments, it is most unlikely that committee decisions can be superior to a well thought-out individual decision.

Risk-taking: investment decisions always require decisions based on insufficient information. There is never enough time to learn all there is to know about an investment and even if there were, equity investments are like living organisms undergoing continuous change. There always comes the time when a decision must be taken and a risk acquired.

Flexibility: it is important for investors to be flexible and not permanently adopt a particular type of asset or selection method. The best approach is to migrate from the popular to the unpopular securities, sectors or methods.