You can make theoretical arguments about it, but I would rather take the world as it is. Our starting point is looking at individual stocks in similar sections of the same market. If that information is not available, we look at how the stock has behaved over time relative to its own market. For example, if GE typically trades at a 20% premium to the S&P and then GE suddenly starts trading at 60% premium, this could be a sell signal for GE, but we would not typically think how GE compares to Samsung.

Q: On average, in how many markets do you invest and is there an index that you use for benchmark?

A: We are looking through the whole global emerging market universe, which is quite large. The vast majority of our money is invested in nine major emerging markets: two Latin American markets, Mexico and Brazil: in Asia - India, Taiwan, mainland China, Korea, and then Russia, Israel, and South Africa. Our benchmark is the MSCI Emerging Markets Free Total Return Index, which includes dividends.

Q: What are the peculiarities of investing in markets like Russia?

A: The Yukos affair was political. In the headlines over the last couple of years, it is an interesting case study for us, because we actually had a position in the stock. We exited it purely on valuation grounds and in retrospect we were lucky. But even if we had not exited it earlier, as soon as the fate of Yukos shares ceased to be an economic issue and became a political issue, we lost our edge in terms of the ability to analyze the stock.

If we do not understand what is going on in a company and how the stock can be valued, we get out of it. Once the whole thing started unraveling, we would have sold if we still had stock. Some investors looked at it in 2004, because it was trading at significant discount, but we would never invest in a company on these terms. We are not political analysts, we are fund managers. That is an example of investing not only on the basis of valuation, but also on conviction on what our edge is.

Q: Can you give us an example of what makes unique the Asian markets?

A: Each country is different. At any one time, valuations are different, but you can find a bank in Korea that trades one times book and a bank that trades at two times book, and maybe there is no reason. Some oil companies in Korea trade at 4 times earnings, others trade at 6, and those are the types of valuation anomalies that we look for.

One of reasons that the Korean market is cheap is because the companies have historically been asset destroyers, for the lack of a better word. Their dividend-payout ratio has been poor. But in the past 4-5 years, there have been some changes because companies starting to pay dividends to shareholders, increasing their efficiency, and are becoming more focused on return on equity. Before the Asian crisis in 1997 – 1998, Korea’s focus was on sales growth and market share, somewhat like the Japanese 1960 model. But now things are changing and foreign ownership has risen from zero 20 years ago to 41% today.

India has a relatively closed economy. However, a lot of companies are making very competitive products there now. It is a very rich and deep market in terms of the number of stocks. The macro side is slowly improving, which is good news for the longer-term.

Q: Many people think that China is also repeating the Japanese model and could end up in the same situation. Do you find the same story in China as in Korea?

A: Yes, we are looking for the same thing – our interests to be aligned with that of the management. If the company is there as a strategic trophy for the government, or is listed as a cash cow for its parent company or for some other subsidiary, that is not what we are looking for. Understanding the corporate structure and the alignment of our interests with the aims of the company is very important for us.

Q: How do you deal with risks that are inherent for the emerging markets, such as currency volatility and liquidity?

A: We have a strict liquidity rule as part of our risk management process. We have to be able to exit at least 75% of our portfolio within a week, without representing more than a third of the volume over that week. We do not have a policy to hedge currencies so investors take local currency risk. From the point of an U.S. investor, emerging currencies as a whole are undervalued so should see currency appreciation against the dollar. But we are not currency experts, so we do not hedge currency.

Q: How do you try to protect yourself from fraud, which we have seen in Russia, Mexico, or Korea?

A: The stock selection process includes a rigorous analysis of the management. We cannot say in advance and with full certainty that fraud is not going to happen, but we meet management quarterly and we follow these companies more closely than a lot of our peers. Even the top investment banks do not have the most experienced analysts covering the emerging markets area. We have known many companies for over a decade. Knowing the company for a long time gives us an edge and more confidence. It is easier to spin your story once than to do it repeatedly. But we are not always right. It can happen that someone you thought you could trust ends up to be some kind of a fraud, but luckily for us it rarely happens.