Axel Krohne is a Value Investor with a focus on Emerging Markets. With his firm Krohne Capital, he manages an Emerging Markets fund. In our interview series, which was recorded in 2019, we discussed his approach.
In a small series between the years, we are sharing this transcript and some transcripts of evergreen interviews now.
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We have discussed the following topics:
- A typical Investing year
- Axel's country selection
- Countries, that are not that interesting
- Axel explains why he looks for crisis
- Experiences with the financial crisis
- Sector selection
- How to do research and meetings in emerging markets
- The language barrier
- Where can you do the best research? h
- Questions for the management
- Conferences he could recommend
- How to Invest in Emerging Markets
- Disclaimer
A typical Investing year
[00:07:13] Tilman Versch: Dear Axel, welcome back to our interview. What does your typical investment year of yours look like?
[00:17:02] Axel Krohne: Thanks for having me again. And my job consists of two parts; one is sitting at my desk, reading back in San Diego and being pretty antisocial, not meeting with many people, not talking with many people, reading annual reports, reading papers, and watching stocks go up and down. But I do travel to the countries that I invest in. I do try to meet with every single company that I invest in. And so, I’m traveling about – been the last year 2018, I was traveling for three months of the year. I tried to meet with about 100 companies, and 100 management teams a year. And I’ve been last year in about 25 countries, which is a little bit more countries than normal.
Axel’s country selection
[01:13:00] Tilman Versch: How do you select the countries?
[01:17:22] Axel Krohne: Few things first, if I have investments in the country, I want to go there again, meet with the management, shake hands, see if everything’s going as it was the year before. Secondly, I’m trying to find countries that have done poorly where the stock markets are down. And I hope to find investment opportunities there. And lastly, each year, I try to move and force myself to see one or two countries that have not been to before just to expand my horizon and put kind of, put everything in context. Put another little puzzle of the world in there and try to understand how this planet works.
Countries, that are not that interesting
[02:02:19] Tilman Versch: Which countries are not that interesting to travel there again. Like you didn’t find it well?
[02:02:19] Axel Krohne: Your value comes and goes. I mean, for example, my favorite country to travel to is Vietnam, a very fascinating, fast-growing economy, and the food is great. And it’s yeah, it’s a great place to see. Having said that, there was a period of seven, eight years where I never went there because stocks were not, not cheap enough, or before that, I was not – I’ve not been into Russia for the longest time. And then the oil prices fell, the ruble fell, and Russian stocks became very attractive. And then I found myself going there once or twice per year. So, it depends. And the fund in general, so what’s your favorite, the favorite market that you’re in? It just always depends on the price. So, in one year might be 30% of the portfolio might be in Vietnam or Russia. And two years later, it’s none. And it’s not that I like Russia anymore, any less, or Vietnam or whatever country it’s just prices become attractive. And then they become unattractive again, and then you rotate into something where you see more upside opportunity.
It just always depends on the price. So, in one year might be 30% of the portfolio might be in Vietnam or Russia. And two years later, it’s none. And it’s not that I like Russia anymore, any less, or Vietnam or whatever country it’s just prices become attractive. And then they become unattractive again, and then you rotate into something where you see more upside opportunity.
Axel explains why he looks for crisis
[03:28:07] Tilman Versch: On what criteria do you select your traveling plans or when there’s something screen to you as cheap?
[03:28:07] Axel Krohne: You know, I look, I look for a crisis. I’m the master of disaster when the country is in the news for all the wrong reasons. That’s when I’m getting interested. That’s when I look for stocks. And that’s when there are the biggest opportunities to find something. When the news is great, the sun is shining, everybody loves it. And there are five different conferences each year by every investment bank in Moscow, it’s probably a bad time to invest there because stocks are dear. So, I want to go there when the last conference is canceled and nobody else wants to go there.
I look for a crisis. I’m the master of disaster when the country is in the news for all the wrong reasons. That’s when I’m getting interested. That’s when I look for stocks. And that’s when there are the biggest opportunities to find something.
Experiences with the financial crisis
[04:12:05] Tilman Versch: Investing for 15 years by your fund, you experience in financial crisis. How was it for your countries?
[04:22:16] Axel Krohne: Financial crisis, I think for all of us who’s lived through it, survived, it was extremely painful. That includes me, the fund, despite being valued and all that stuff and being with great companies that dropped 50% and stocks became cheaper than I could have ever imagined, was the most painful period of my life. And the stock markets collapsed, the currencies collapsed, but the countries actually did quite well. I mean, most of those countries did not experience a recession, but the stock markets still did do poorly because of foreign investments. Because people were selling, they need just the liquidity. And whether they got that from New York, London or Norway, they didn’t care.
Sector selection
[05:15:25] Tilman Versch: When you’re in the country, you’ve selected certain sectors, you’re most interested in, can you name the sectors, please?
[05:23:27] Axel Krohne: I liked, I used to say, BBC, “Bank BS and Cigarettes”, though I had to promise my wife I won’t say that because she said it’s bad sectors and I shouldn’t. So maybe I called it “Bank BS in Cement” or so. I’m believing the world is getting a better place. I believe there’s a middle class growing in countries where there was no one. And those are people who are going to have their first checking account. They used to say their first cell phone though everybody’s got a cell phone. But I mean, many countries, poor countries with cigarettes, for example, was sold by the stick one cigarette at a time, now people got money, they can buy five cigarettes, a whole pack of cigarettes, and it’s just, it becomes better and wealthier. And people have money to wash their hands with soap. And they’re going to use those products, and they get electricity without refrigeration. And they can drink milk that they couldn’t before when they just had milk powder. So, without – despite everything, all the bad news that one hears, when one reads the papers about wars and crisis and disasters, I think it’s just noise, the world is getting better, which are every day with very few exceptions. And it’s just that these days, we’re still used to good news.
In general, they were not, we can’t tolerate wars between countries, which used to be the norm. But now it just doesn’t happen anymore. I mean, Ethiopia was in the 80s the basket case, the place of mass starvation, and now the fastest growing economy in Africa. So, it’s doing very well managed, and it’s just a distant past. But people still think about those old pictures when they think about those countries. And that’s why it pays off to go and see and visit the countries and see that they’re doing well and come back again a few years later and see them changed.
It’s just a distant past. But people still think about those old pictures when they think about those countries. And that’s why it pays off to go and see and visit the countries and see that they’re doing well and come back again a few years later and see them changed.
[07:29:04] Tilman Versch: I’ll try to sum it up. So, you’re looking for countries that are growing and you want to invest in the services and the goods the emerging middle class wants to consume?
[07:41:14] Axel Krohne: That’s correct. Yeah.
How to do research and meetings in emerging markets
[07:44:16] Tilman Versch: If you look at the typical meeting you have in these countries, how do you get in contact with the companies? And how do the meetings play out?
[07:55:18] Axel Krohne: The meetings get organized by somebody else. So, I find companies that seem to be cheap on paper, when I look there, I see a screen, screens on Bloomberg, I read the end report, I look through the past performance of the operation they see. And everything seems to be checking out that I got to what looks like a good company, trading at an attractive price, then I would call my broker in New York, Auerbach Grayson, which gives me access to the entire planet, and tell him, “Hey, I’m just seeing those five cheap stocks in country A,” whatever it’s called and I said, “Please organize meetings for me with those five companies next month and while you’re at it, since I’m flying around the world, please make I want to see everybody else as well.” And then they will organize meetings with all the listed companies that are there that are available. And I’m going to see everybody and see if I want to hear many different stories because I’m just here. The goal is once I want to see one company, they’re going to tell me everything’s going to be great. So, I want to talk to the bartender, I want to talk to the taxi driver, and I want to talk to the competitors and just get confirmation to get a more complete picture.
[09:22:22] Tilman Versch: So, you talk to get as much information as you can get the countries you’re visiting.
[09:29:19] Axel Krohne: I’m curious, and I want to understand it a little bit better. Yeah. And I mean, it’s quite amazing, actually, in those small countries, how much one can learn in a short period of time if you talk to a lot of people, right? I mean, you can – because you’re not on vacation, you’re not on the beach where you just order [09:47:18 inaudible] but you’re actually talking to the executive teams, the CEO, the CFOs of large companies. You see the local politicians at the bow of the Hyatt in the evening and you talk to them, and you meet with somebody from the central bank. And you see the factories and talk to the workers there. So, you get a fairly accurate picture without often being too disappointed there that too often – don’t get it wrong – and that’s why I don’t invest in China or India because I could spend 10 years, I still have no clue what’s going on.
The language barrier
[10:28:06] Tilman Versch: How do you deal with the language barrier?
[10:31:20] Axel Krohne: You know, everybody speaks better English than I do. All in Africa, people speak English everywhere, in Latin America, all the management teams, everybody’s educated in London and New York. And a few places where it’s tough, where you need 10 translators and which can result in frustration is some Asian countries, Japan, Korea, Vietnam, Vietnam, especially government-owned entities, they are the management, they’re probably old school, they are not educated in the US or Europe, and Korea, Japan, but Philippines and Indonesia, everybody speaks English. So, English seems to be a pretty good language. And annual reports many times as well, in English are bilingual.
Where can you do the best research? h
[11:21:28] Tilman Versch: Are there any groups or sources you get the most worth, the information with the most worth by?
[11:31:24] Axel Krohne: Yeah, I mean, it’s the CEO, the CFO of the companies. I mean, they tell you the longer-term plans or strategies and just whether it holds – it’s plausible that the profits they made in the past are going to be this similar or higher in the future or not. So, you talk to them about what their vision is, they say, “Oh, I’m very optimistic.” But then they’re not investing and probably maybe they’re not as optimistic as it says. So, you want to say, “Okay, where do you put your money? Do you own shares? What are your expansion plans, what’s the competition?” And again, after getting all this and getting [12:11:13 inaudible] and understanding about the business, and it’s assumed to be simple businesses, then you talk to the competitors and ask them and verify and talk to the people to the little street traders and ask them “How’s business? How are you doing?” to verify.
Questions for the management
[12:28:09] Tilman Versch: What questions are on your checklist to talk with management?
[12:34:26] Axel Krohne: Capital allocation is probably the big one. You make money, what do you do with it? And it can be anything from business is great, we’re going to build a new factory to, maybe businesses not so great, but we’re going to, we make the money, we pay dividends, which is fine with me to low times are happening in some crazy places, especially in Vietnam, say, “Oh, business is great, but the real estate market is doing great. So, we’re going to become real estate developers now.” And then I know it’s time to run if everybody starts to think they’re the next Donald Trump real estate developers, and it always ends in a disaster because inevitably, if you’re making soap, you might not know that much about building high rises.
Conferences he could recommend
[13:25:21] Tilman Versch: Are there any conferences on emerging markets you can recommend?
[13:32:03] Axel Krohne: Yes, I mean, there are few, there are many conferences. There’s one for Eastern Europe, put on by Erste Bank each year in September in [13:43:23 inaudible]. I mean, there’s – but a lot of times when there’s a conference, it probably means there’s a low of interest already in the market and it’s probably the wrong time to invest. And the smaller companies typically don’t come to them. It’s companies that the larger ones have investor relations departments, and they have a story to tell. So, I’d rather prefer to go there, have the inconvenience and flying to Indonesia and spending countless hours in the traffic in Jakarta, and meet with a company that will not bother coming to New York, I think you need to, you need to do that.
[14:28:15] Tilman Versch: That’s good information.
How to Invest in Emerging Markets
[14:32:09] Tilman Versch: Based on the information you gave in our interviews, it would be quite interesting for some of our listeners may be to do a similar investment like you in some emerging markets, and companies. Is there anything they could easily do and how could you invest in Indonesia, for example, or in Cambodia?
[14:55:27] Axel Krohne: It’s not easy. No, it’s not easy. And that’s why I’m doing it because a lot of people don’t want to bother with it. They don’t want to bother flying to Jakarta. And they don’t want to bother having to translate open accounts and translate currencies, all things, they’d rather buy ADRs in New York or London, but those stocks are much more expensive because they’re easy to invest in, and therefore more competitively priced, more efficiently priced. So, my wife always used to laugh whenever we visited a new country, and we always go to a bank and open a bank account, because I wanted to invest in the stock exchange. So, I’d say for individual investors, just have some fun and don’t do your vacation in Spain but go to Tel Aviv or go to Cairo or wherever you want to go and open a bank account and transfer the money and buy stocks on the local stock exchange and it’s for individuals typically the process is very simple, and typically you’ll get your money back with a nice return.
For individual investors, just have some fun and don’t do your vacation in Spain but go to Tel Aviv or go to Cairo or wherever you want to go and open a bank account and transfer the money and buy stocks on the local stock exchange and it’s for individuals typically the process is very simple, and typically you’ll get your money back with a nice return.
[16:10:29] Tilman Versch: Thank you very much. [16:12:03 inaudible]
Disclaimer
Finally, here is the disclaimer. Please check it out as this content is no advice and no recommendation!
