Idea Brunch with Tim Staermose of Global Value Hunter
A masterclass in African equity investing
Welcome to Sunday’s Idea Brunch, your interview series with underfollowed investors and emerging managers. Today we are very excited to interview Tim Staermose!
Tim Staermose is the author of Global Value Hunter, a blog where he scours the globe for the best investment deals. Tim has lived across the world in places like Tanzania, the Philippines, Hong Kong, and Indonesia, and currently focuses much of his time on investing in African equities.
(Last week we interviewed Raj Shah of Stoic Point Capital and our next interview comes out Sunday, August 21.)
Tim, thanks for doing Sunday’s Idea Brunch! Can you please tell readers a little more about your background, your passion for value stocks, and how you became a global value hunter?
Sure. I have a pretty unique background. I was born in Tanzania, but my parents are European – Danish, and British. By age 9 I had lived in Tanzania, Denmark, Egypt, and Singapore, before my family moved to Australia. I stayed there, finishing school and university before getting a job in the stockbroking industry in South Korea in 1996. I studied Korean and was an exchange student in Seoul for a year during university. After Korea, I moved to the Philippines, Hong Kong, and later Indonesia, where my wife is from. I spent many years writing investment newsletters. In that role, I always put myself in my reader's shoes and looked for stocks I would buy with my own money. I have always gravitated toward a Warren Buffett or Ben Graham style of “value” investing. In 2009, at the age of 35, I first retired to manage money for myself and a few others. I have basically lived and breathed stock market investing for the better part of 25 years. In 2020, I started the African Lions Fund, which has since grown from $4 million to $18 million under management. From my value stock research around the globe, I found sub-Saharan Africa was the ONLY place you could then buy a large number of wonderful businesses at fair, or even cheap prices. The valuations nearly everywhere else in the world were distorted by ultra-low interest rates since the late 2000s. The air is coming out of those valuations a little bit now, but the relative values on the stocks we own at African Lions Fund are still far more attractive. Even though the Fund is up over 40% since inception, earnings and dividend growth have largely kept pace with that for many stocks we own, and valuation multiples have not yet expanded across the board. It remains a fertile hunting ground.
You know the African equity markets well. What advice would you give an investor about investing in African equities? What are the necessary ingredients for success when investing in developing markets?
Well, I’ve been investing in Tanzania specifically since 2018, and other African markets since 2020. The key is to realize capital is much scarcer in these Emerging and Frontier economies than it is in the West. You can still get high single-digit interest rates on a bank deposit, or mid-teens on a government bond. So, to take the added risk of investing in businesses listed on the stock exchanges here, you want to be sure you are appropriately rewarded. I bring a “return on invested capital” focus to my investment methodology no matter where in the world I’m investing, so this was second nature to me anyway, when I first came here to conduct research. But if a company in Africa is not generating a return on invested capital in the 20%+ and ideally 30%+ range, for me it’s rarely going to get my attention. So that’s one basic filter. Thankfully, there are dozens of great companies here with returns on capital well north of that. But you also have to be prepared for extra risks such as foreign exchange rate risks. In Nigeria for example they have been rationing foreign exchange and when you sell your shares for Naira, you have to join a long queue at the Central Bank to get your money out in dollars. It can take months, or even years. We are also seeing the emergence of a parallel exchange rate market in some other economies amid the extraordinary US dollar strength at present, and a general scarcity of dollars. Kenya is one notable example. Ghana, too. The liquidity, or ease with which you can buy or sell large amounts of shares without affecting the price too much is also a big challenge in these markets. But there are positives, too. I’m a native English speaker. I’m familiar with common law jurisdictions. With the exception of one or two francophone countries where we have invested, in West Africa, all of the African markets where I am active have English as the language of business, English financial reporting, and a common law legal framework. It’s much easier to operate here for me than it was in Asia, for example. To be successful, you need more patience and perseverance than in the developed markets, both to do your initial research, and to get your trades executed. Information on listed companies is harder to find. Liquidity is low. Trading costs are high. There is also more risk in many respects, but you get well compensated for taking that extra risk with much higher returns on capital available in general for all business ventures, including listed companies.
On Global Value Hunter, you mentioned you regularly meet with management teams in Africa’s Frontier Markets. What are you looking for in these meetings? And who are some of the CEOs you admire most?
My main objective when meeting management is to ascertain if they are both competent and honest. As I say in the memorandum for my fund, “Are they the sorts of people you’d want to be in business with personally? Are they ethical, both in business and in life?” I try and get a feel for the management as people, and how the company culture is. Are they open to questions? Do they treat minority shareholders well? Obviously, I’m not going to learn everything there is to know in a one-hour meeting. But, there’s no substitute for sitting down with management, ideally face to face, for trying to judge what sort of people they are. The financial statements won’t tell you that. I’m also looking for how they think strategically. I am much more interested in the big-picture things, than delving into financial minutiae.
One of the CEOs I admire is Alfonso Velez of Twiga Cement in Tanzania. He’s feisty, competitive, cares deeply about all his stakeholders, and loves to deliver for shareholders. His door is always open. The main shareholder in Twiga is Heidelberg Cement, and a no-nonsense engineering and process-driven culture pervade the organization. But a strong customer service ethos, as well as a tight control on costs are other things it appears to me that Alfonso has been able to get his team to deliver in the 5 or 6 years he has been in charge. My main fear is what happens when he leaves!
MTN Ghana’s CEO Selorm Adadevoh is another class act. I’ve not yet met him in person. But, on every call and investor briefing, it’s clear he’s sharp as a razor and knows his business inside out.