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By John Coumarianos | 06-24-2010 01:29 PM

Gensler: Whole World Depending on the Emerging World

The T. Rowe Price Global Stock Fund manager likes emerging markets' self-financed growth, very high savings rates, and improved corporate and government balance sheets. Plus, Gensler on getting comfortable with emerging markets capitalism.

John Coumarianos: Another thing I wanted to ask about, something that's really distinctive about your fund versus the other funds that we compare it to in the global or the world stock category at Morningstar, is that you have a healthy amount of emerging markets exposure. I think you have nearly 20% emerging markets exposure and that puts you in the top 20% of the category. Explain your attraction to emerging markets.

Rob Gensler: Right, well, that's where all the growth is. It's just not that complicated. It's also a lot of volatility and all. But when you step back, the emerging worlds are a third of global GDP. It's only 13% of the free market cap in the benchmark. Remember, emerging markets are about 26% or 27% of true market cap in the world. So am I overweight in emerging markets or underweight? I'm being frank about that. You have a backward looking benchmark that is free-float adjusted. As an investor, I'm not a free-float adjusted investor. I just invest in opportunity. But when we're talking about the opportunity, it's a third of world GDP, a 32% savings rate, a 30% investment rate. So here you have a very high investment rate. In the U.S., it's only 11% or 12% investment rate, Europe's 18%, Japan's 20%. You have a very high investment that's driving growth, you have the industrial revolution happening 200 years later type of thing, and it's self financed.

By the way, at the same time that in the West we have real problems. Consumers are delevering, corporates are delevering, financials are delevering, and governments are now having to be more fiscally sound.

Don't be surprised if you see my direct emerging markets go from 19% or 20% to maybe 23% or 24%, but remember all investors have a lot of indirect exposure to emerging world. All your commodity stocks you own are really success or failure. But even many, many businesses, and I'll take Pernod Ricard that we own. They have three regions; Europe, America, and rest of world. And rest of world used to be their smallest region. It's now 40% of their business, or a Toyota where they sell more cars in the emerging world than in America, lower value and all. So the whole world is depending on the emerging world. So no matter where you invest, it's really interconnected.

Coumarianos: So, you can own a European or an American company, or at least one that's domiciled in the U.S. or in Europe, and still have tremendous amount of emerging markets exposure?

Gensler: Everyone does. But my real reason I like it is the self-financed nature, the very high savings rates investment, and also versus 20 years ago, the balance sheets are far, far better. They used to have massive asset-liability mismatches where people had foreign currency debt, and they had obviously local businesses, and you get currency crisis, big crisis. That's a lot better today. So there's much more sound balance sheets at the corporate level and the government level and much more opportunity to grow. Now they are higher valuation and much more volatile. So, you need to position-size and risk manage appropriately.

In fact, when I'm really honest about my portfolio, we have about a third of the strategy, somewhere about 35% really exposed to the emerging world, but I think all managers have more than it is just by domicile, because there's a lot of interconnected. So it's a very complex thing to look at.

Coumarianos: Sure and you have to look at this, where a company is generating its sales, of course, things like that. I wanted to ask also on the emerging markets theme, I know you spend some time in Asia helping build T. Rowe Price's research effort there. How did that influence the way you look at the emerging markets, and what was that experience like in general?

Gensler: Well, just to correct you, I think our Asian team taught me more than I taught them. Maybe I'm selfish, I like that. With T. Rowe I lived in London two years and then lived in Asia for a year. I'd lived actually in Africa many years ago. For two and half years I worked at Botswana Development Corporation, and I had actually been a student in London many, many years ago. Callaghan was Prime Minister – okay, dating me.

But what did it teach me? Look, Asia, it's the future of the world in terms of all that growth and all that savings, but these economies are run very different. There is a concept of feudal capitalism that exists. There is a concept of strongman rule. This is the idea where you can have a dictatorship or you can have the Communist Party, but as long as they give economic growth to the people and manage the economy well, that's the game. There's a lot of corruption all over. It doesn't mean you don't invest, though. So I think it helped me understand that nuance, that flavor of a different form of capitalism because it really is very different than in the West. And sometimes for some people that's scare them. 

To understand the subtleties also, when investing in these companies, you don't own the economy. So the problem is, is you own either a state sector company that really gets micromanaged by the governments and messed with or you own some entrepreneurial thing, and it is a treacherous field in the emerging world often because of corporate governance issues and all. So to really have more on-the-ground understanding and feeling of that nuance and also working with our team, which is really talented and understanding them. Actually on Saturday I'm headed out to Asia for two weeks; Hong Kong, Tokyo, Mumbai, Delhi. So it's constant.

Coumarianos: Constant contact with the team there.

Gensler: Constant. I was in Moscow two weeks ago, I was in Australia six weeks ago, I was in London in between. It's the nature of a global manager.

Coumarianos: Sure.

 

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