Leverenz Wields $25 Billion in Emerging Stocks With Top Fund (1)
April 11 (Bloomberg) -- Justin Leverenz, who runs the $25 billion Oppenheimer Developing Markets Fund, is beating 97 percent of his peers by ignoring the economy.
The 43-year-old money manager has been buying shares of Yandex NV, Ctrip.com International Ltd. and Colgate-Palmolive India Ltd., companies he says face little competition and serve growing markets that are insulated from fluctuations in gross domestic product.
"Emerging-market investors are chasing credit cycles, chasing inventory cycles and trying to move money from one country to the other," said Leverenz, whose fund returned about 42 percent during the past five years, 32 percentage points more than the average gain at 76 rivals tracked by Bloomberg. "I invest in companies."
Leverenz's focus on business models instead of economic trends puts him at odds with the surging popularity of emerging- market exchange-traded funds, which avoid stock-picking to track the returns on broad equity indexes. Betting on economic booms and busts in developing nations is no longer the best strategy for stock investors because the countries have cut debt and boosted foreign-exchange reserves, Leverenz said in an interview in his office in lower Manhattan.
"Investors in businesses are positioned to do well in the next decade," said Leverenz, who has overseen a 133 percent increase in the Oppenheimer fund's assets since he took the helm in May 2007, making it the world's biggest actively-managed equity mutual fund focused on developing nations, according to data compiled by Bloomberg. "A few companies enjoy such extraordinary benefits that no one can replace them for a long, long period of time."
Leverenz, an art enthusiast who buys paintings from China, Russia and India, compares the companies in his fund to artists such as Andy Warhol who consistently generate higher returns than their peers. A Warhol self-portrait sold for $38.4 million at Christie's International in New York last May.
"If you look at the price distribution of paintings or sculptures, very few people command the economics," said Leverenz, a father of three who lives in New York's Westchester County. "When I look at the companies, it's the same observation."
Yandex, Russia's most popular Internet search engine, has a 60 percent share of the nation's online search market and posted a 50 percent jump in fourth-quarter earnings as ad revenue increased.
Ctrip, China's largest online travel agency, may boost profit by more than 20 percent annually during the next five years as more of the country's 1.3 billion people book their hotels over the Internet, according to Leverenz, a fluent Mandarin speaker who was a director of Asian technology research at New York-based Goldman Sachs Group Inc. before joining OppenheimerFunds Inc. in 2004.
Colgate-Palmolive India, the local unit of the world's largest toothpaste maker, posted a 75 percent surge in profit during the three months ended December, compared with a 16 percent average gain for makers of household products in emerging markets, data compiled by Bloomberg show.
Yandex shares gained 2.3 percent at 9:47 a.m. in New York trading, while Ctrip increased 0.8 percent. Colgate-Palmolive India slipped 0.8 percent in Mumbai.
The Oppenheimer Developing Markets fund usually owns about 100 stocks, Leverenz said, compared with more than 800 in the MSCI emerging-markets index. The top five positions typically account for about 15 percent of assets, versus 10 percent in the MSCI gauge, and the fund holds stocks for an average five years, according to Leverenz.
About 72 percent of the fund's investments as of February were in 10 countries, with 39 percent in the so-called BRIC nations of Brazil, Russia, India and China, according to Oppenheimer's website.
Leverenz's focus on individual companies hasn't insulated the fund from equity-market swings. The fund lost 8.9 percent during the past 12 months as the MSCI Emerging Markets index declined 13 percent amid concern economic growth in developing nations is slowing, data compiled by Bloomberg show. During the global financial crisis in 2008, the Oppenheimer fund fell 48 percent as the MSCI index lost 53 percent.
Growth in the Oppenheimer fund's assets may eventually hurt returns by limiting the number of stocks Leverenz can buy, said Karin Anderson, a senior mutual fund analyst at Morningstar Inc. in Chicago. It's more difficult for larger funds to purchase and sell thinly-traded stocks without affecting the market price, she said.
"It's something to keep an eye on," Anderson said in a phone interview. "You don't want to see so much money coming in that he can't find the opportunities he wants in the smaller-cap spaces that are less liquid."
Companies in the Oppenheimer fund as of February had a weighted median market capitalization of about $15 billion, according to Oppenheimer's website. That compares with an unweighted median of about $5.1 billion for the MSCI emerging- markets index.
For much of the past three decades, developing-market investors have made money by purchasing shares during economic booms and then cashing out before the inevitable collapse, said Leverenz, who also held research and fund management positions at Barclays de Zoete Wedd in Taiwan and Edinburgh-based Martin Currie before joining Oppenheimer.
Turkey's benchmark equity index surged fivefold in 1999, before a financial crisis wiped out half of its value during the following 15 months. The MSCI Russia Index soared 112 percent in 1997, then tumbled 83 percent the following year after the government defaulted on $40 billion of local debt and devalued its currency.
Now, emerging economies are undergoing a "paradigm shift" toward stable growth that will make picking the right stocks a bigger driver of returns than identifying changes in the countries' economic and credit cycles, Leverenz said.
Emerging-market governments have cut debt to 34 percent of gross domestic product from 52 percent a decade ago as their annual economic growth averaged 6.5 percent, compared with 3.6 percent in the 1990s, according to data compiled by the International Monetary Fund. Brazil, Russia, India and China, the four-biggest emerging economies, have a combined $4.3 trillion of foreign-exchange reserves, up from $439 billion a decade ago, data compiled by Bloomberg show.
"The creditor in the system is the developing world," Leverenz said. "Emerging markets no longer have the same economic volatility as they did in the 1980s and 1990s."
Surging inflows into developing-nation ETFs show that many investors still prefer betting on trends in economic and earnings growth rather than buying individual stocks.
The only emerging-market equity funds with more assets than Leverenz's fund are the $54 billion Vanguard MSCI Emerging Markets ETF and the $40 billion iShares MSCI Emerging Markets Index ETF, according to data compiled by Bloomberg. Both ETFs, which trade throughout the day like stocks on U.S. exchanges, are designed to mimic the MSCI benchmark index without trying to outperform the gauge.
Emerging-market ETFs tracked by research firm EPFR Global have lured $14 billion of net investor inflows during the past six months. That compares with $3.7 billion of inflows into developing-nation mutual funds, which are typically priced once a day after the close of regular trading.
The Vanguard ETF has returned 18 percent in the past six months, topping the 16 percent gain in the Oppenheimer fund, according to data compiled by Bloomberg.
"I'm not interested in keeping up with the competitors," Leverenz said. "It's impossible for me to outperform in every environment."
His fund's gain during the past five years has topped the Vanguard ETF by 24 percentage points, according to data compiled by Bloomberg.
The Oppenheimer fund held about 7.5 million shares of Yandex at the end of February, or 4.7 percent of the company's outstanding stock, data compiled by Bloomberg show. Yandex, which raised $1.3 billion in a U.S. initial public offering in May, will boost per-share earnings by 74 percent through 2013, according to the average of 11 analysts' estimates compiled by Bloomberg. That compares with estimated growth of 40 percent at Google Inc., the world's most-popular search engine.
Yandex, based in The Hague, Netherlands, has climbed 30 percent this year, while Mountain View, California-based Google slipped 2.9 percent.
"Search is always a monopolistic business" because the more users the engine attracts, the more effective it becomes, said Leverenz, who also holds shares of Seongnam, South Korea- based NHN Corp., owner of the country's biggest search engine, and Beijing-based Baidu Inc., the largest in China.
Leverenz has been buying shares of Shanghai-based Ctrip during the past six months, building a stake of at least 9.4 percent through February, according to Bloomberg data. While he admired the business for "years and years," the shares only became cheap enough to snap up last year after growth in the world's second-largest economy slowed and Ctrip reported lower profit margins, Leverenz said.
The company still has "huge" growth opportunities because most Chinese hotels lack online booking systems and Ctrip has a stronger brand than its competitors, said Leverenz, who has a degree in Chinese studies and political economy from the University of California San Diego.
Ctrip has dropped 11 percent in U.S. trading this year, following a 42 percent tumble in 2011. The stock is valued at 16 times estimated 2012 profits, down from 24 times projected earnings a year ago, data compiled by Bloomberg show.
"There's a massive gravitation toward Ctrip and it's going to be a major threat to competitors," Leverenz said. "But it's a company you have to have patience with. You have to have a really strong stomach."
The Oppenheimer fund holds a stake in Colgate-Palmolive India amounting to about 5 percent of the company's outstanding shares, which advanced 14 percent in Mumbai trading this year, data compiled by Bloomberg show. The company has a 52.5 percent share of the country's toothpaste market and about 27 percent of the mouthwash market, according to a January report from India Infoline Ltd., a Mumbai-based brokerage.
"Colgate owns the toothpaste market in India," Leverenz said. "It's a very nice market structure and has been very profitable."
The Mumbai-based company's brand recognition in the world's second-most populous country will drive growth as rising incomes enable more people to buy personal-hygiene products, he said. India's per-capita GDP will probably rise to $2,348 by 2016 from $1,527 last year, increasing more than three times faster than in the U.S., according to the IMF.
"India is developing very rapidly," Leverenz said. "The world has totally, fundamentally changed."
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