Dimitrijević Marko - Frontier investor: how to prosper in the next emerging markets

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Table of Contents

FRONTIER INVESTOR

FRONTIER INVESTOR

HOW TO PROSPER IN THE NEXT EMERGING MARKETS

MARKO DIMITRIJEVI

with TIMOTHY MISTELE

Columbia University Press

Publishers Since 1893

New York Chichester, West Sussex

cup.columbia.edu

Copyright 2017 Marko Dimitrijevi

All rights reserved

E-ISBN 978-0-231-54235-7

Library of Congress Cataloging-in-Publication Data

Names: Dimitrijevi, Marko, author. | Mistele, Timothy, author.

Title: Frontier investor : how to prosper in the next emerging markets /Marko Dimitrijevi with Timothy Mistele.

Description: New York : Columbia University Press, 2017. | Series: Columbia Business School publishing | Includes bibliographical references and index.

Identifiers: LCCN 2016000994 | ISBN 9780231170444 (cloth : alk. paper)

Subjects: LCSH: InvestmentsDeveloping countries. | Developing countriesInvestments, Foreign. | Portfolio management. | Risk management.

Classification: LCC HG5993 .D56 2016 | DDC 332.609172/4dc23

LC record available at http://lccn.loc.gov/2016000994

A Columbia University Press E-book.

CUP would be pleased to hear about your reading experience with this e-book at .

COVER DESIGN: NOAH ARLOW

CONTENTS

Imagine you are evaluating a new investment opportunity in a faraway country roiled by civil war and border disputes and considered by most to be rugged and lawless. Most people have heard of this country but have never actually been there, and most of the investment community sees this opportunity as far too risky and unorthodox. But youve traveled there, and youve seen for yourself thatdespite the stories in the mediathe infrastructure is sound and growing stronger, and many of the cities are stable and thriving. The investment opportunity offers mouth-watering upside, so long as the country truly is on a path toward growth and greater stability.

What do you do? Do you pursue the investment shunned by so many of your peers? Or do you look elsewhere, in more established markets, for an investment with more modest potential returns but considered a safer bet?

If I tell you the opportunity in question is in Rwanda, youd likely choose the safer bet. But if I told you the opportunity was in the United States at end of the nineteenth century, suddenly the investment sounds more appealing. Just as it would if I said the opportunity was in South Korea in the 1960s. If you are one of the billion or so people in the world who own a Samsung phone, consider that as recently as 1966 its birthplace had an economy smaller than the Democratic Republic of the Congo. South Koreas economy is now forty times larger than DR Congos and ranks as the thirteenth-largest economy in the world, ahead of Spain and just behind Australia.

Frontier markets, if governed properly, become emerging markets and, eventually, developed markets. Investors who understand and can take advantage of the investment opportunities in todays frontier markets can potentially bolster their portfolio returns and reduce portfolio risk.

How I Started Investing in Frontier Markets

Before we jump into the opportunity that frontier markets offer today, I want to briefly mention my first experiences with frontier countries, what led me to investment management, and how the difference between perception and reality molded my approach to investing.

Although I was born and raised in Switzerland, one of the most developed of developed markets, I come from a frontier market ancestry. My father was a refugee from Yugoslavia, leaving his birthplace and parents in 1954 to seek a better life in the West, first in Italy and then in Switzerland. As a child during the 1960s and 1970s, I traveled to Yugoslavia each summer to live with my grandparents. The summers of my early childhood were wonderfulwhat kid wouldnt want to spend the summer in a sunny seaside village being doted on by his grandparents?but by my teenage years it began to dawn on me just how much the Yugoslavia I knew differed from its depiction in the Western media.

The Western press seemed enamored with the dictatorship of Marshal Tito and its third way between capitalism and Communism. Spending time in Yugoslavia, however, it was clear to me that the supposed third way was actually very close to the Soviet way. Even as a kid, I knew that phones were routinely tapped and that companiesin theory owned by the worker councilswere actually run by Communist Party heavyweights selected by the regime. But because Tito stood up to the Soviets, the Western press ignored his repression at home.

So I came to understand at an early age that the reality on the ground can be very different from the image projected by the media. I learned to believe my own eyes and to check the facts with on-the-ground research. This lesson has stayed with me during my travels beyond Europe while in college and throughout my career. On trips to Latin America in the late 1970s and early 1980s, to the Peoples Republic of the Congo in 1982, and to China in 1990, I noticed a similar gap between what I saw in the news and what I saw for myself. Some trips taught me that the on-the-ground reality can be significantly better than the perception from a distance; some trips, like those in the summers of my youth, taught me just the opposite.

My interest in investments began when I was an undergraduate at the University of Lausanne. I had saved a few hundred dollars, which were earning very little interest in my bank account. So I asked an advisor at the bank how my savings might earn a higher return, and he recommended a very safe REIT (real estate investment trust), whose shares traded like a stock and represented ownership in an income-producing real estate portfolio. This idea of owning a share of a companys future earnings stoked my curiosity, so I began reading about stocks and stock markets, and soon made a second investmentin Astra, an Argentine oil company (my first frontier market investment).

Astras stock price was volatile and doubled soon after I bought it. I felt like a geniusuntil the stock plummeted a few weeks later. In the end, I did not make money on my Astra shares, but I did become intrigued by why stocks fluctuate, and this experience helped inform my decision to major in economics and business administration. I avidly consumed all the books and magazines on investing that I could find at my colleges library, and I even suggested to the librarians several titles they ought to add to their collection. I was in the library devouring the latest issue of Institutional Investor magazine in the spring of my senior year in 1981 when I fell upon an article titled, The Worlds Greatest Money Manager. This manager was a little-known (at the time) genius named George Soros. I was intrigued because he was Hungarian, and if an Eastern European was now the worlds best money manager maybe I, too, had a shot at being a successful money manager. A decade later, I would meet him and have the honor of managing money for his fund.

Still fascinated by investing, after graduation I went to work for a small Swiss private bank. Switzerland is very small, and the Swiss tend to invest most of their money abroad; so my bank, like most in the country, practiced global investment management. This made the bank a fascinating training ground. And, being new, I got to ask a lot of questions. For example, every single portfolio in the bank held 5 to 10 percentor morein gold. When I asked why, I was told, Well, because thats what you doyou always have to have some gold in the portfolio. That didnt make sense to me, as gold yielded nothing at a time of high single-digit yields in safe government bonds. I didnt understand why every client would need to hold the same asset, and why it must be held at all times.

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