Harding Loevner global portfolio manager Rick Schmidt isn’t afraid of the heat.
When Mexico had “big problems post-election,” Harding Loevner bought its first stock in Mexico, Schmidt told ThinkAdvisor.
“It’s just having the discipline to implement your beliefs when things are a little scary, and we took a little heat owning Mexico at that time,” he added. “A similar story in emerging markets, we bought Russia when the sanctions were coming on. Both of those have worked out — some a little quicker, but that’s the approach we’re taking.”
Schmidt is a co-manager on Harding Loevner Global Equity (HLMVX), which has a 4-star Morningstar rating and nearly $924 million in assets; Harding Loevner Emerging Markets (HLEMX), which has a 4-star Morningstar rating and $3.6 billion in assets; and Harding Loevner Frontier Emerging Markets (HLMOX), which has a 3-star Morningstar rating and more than $420 million in assets. The emerging markets fund soft-closed at the end of June 2016.
So, what was Harding Loevner’s first stock in Mexico? Grupo Televisa.
Grupo Televisa operates cable and direct-to-home satellite pay television system in Mexico. It distributes content it produces through broadcast channels and through pay-TV brands and television networks, and cable operators.
“Television in Mexico is still very important, and the system is a bit like the U.S. in the ’50s, maybe the ’30s, when … the studios controlled the artists,” Schmidt said. “They’ve learned from what’s going on in the U.S. and they’re building out a cable network.”
Prior to buying, Harding Loevner’s analysts had covered Grupo Televisa for around 10 years, according to Schmidt. The firm had “never bought it because we didn’t think it was attractively priced,” he added.
Any business Harding Loevner invests in has to be covered by analysts. So there are a lot of businesses that Harding Loevner covers but doesn’t invest in.
“We have analysts and part of the discipline is that you don’t want to become emotional. But you’re human … so you see things going on,” Schmidt said. “So what we try to do, for example, any business we invest in has to be under analyst coverage, which is quite a long process in terms of producing a report that looks at the industry, looks at the company and only then does a valuation.”
Across its strategies, Harding Loevner likes high-quality, growing companies, purchased at reasonable prices.
The firm has defined four quality growth criteria that a company must exhibit before it will be considered for investment. Harding Loevner looks at a company’s competitive advantage and if it has a strong position within an industry with favorable global competitive structure, as manifested by high and/or improving margins.
It also looks at a company’s financial strength, or its business-appropriate balance sheet and borrowing capacity availability and internal free cash flow generation capability. Quality management is also important to Harding Loevner, in which the firm looks for a track record of successful management with a clearly articulated business strategy and a consistent regard for shareholders.
Lastly, the firm wants a company with sustainable growth, which means it has prospective growth of revenues, earnings and cash flows.
The challenge is being able to block out the noise in a volatile environment.
For example, during Mexico’s post-election volatility, Schmidt said it would have been easy to say, “I’m putting a higher discount rate on because I don’t know what’s going to happen with NAFTA. Or, the industry could get much worse because the economy’s going to slow.”
“If you want, you can get all whipped around by what’s happening in the world. Instead, you have to sort of welcome volatility,” Schmidt told ThinkAdvisor. “We have a saying, ‘if an investment feels comfortable, it’s probably one you should be worried about.’”
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