Jonathan Binder lives and breathes emerging and frontier markets.
Despite the “typical English country life” Mr. Binder (sounds like cinder) experienced growing up in the village of Speldhurst, Kent, he was born in Bogota, Colombia, and spent childhood vacations in Cambodia, his father having been employed by a major oil company. Now managing director and chief investment officer at boutique Consilium Investment Management in Fort Lauderdale, Fla., he first moved to New York in 1988 to work on James Capel & Co.'s international bond desk. He moved to Miami in 1997 when he joined The Americas Trust Bank. That's where he met Charles Cassel, his business partner for 15 years and managing director and chief risk officer at Consilium, the firm they set up in 2004.
Mr. Binder's investment style might be best described as global-macro, and most of his strategies have employed some short selling in both equity and bonds. Consilium still runs a multistrategy hedge fund, but Mr. Binder is refocusing the firm on frontier markets and emerging markets small-cap long-only strategies. Assets under management, once topping $2 billion, have fallen to $244 million, but Mr. Binder is confident assets will grow again quickly. (The decline stemmed from losing the firm's largest client, a subadvisory role, and outflows after the financial crisis from clients who were hurt by liquidity and so redeemed from liquid strategies.)
What's the appeal of frontier markets? Frontier countries make up more than 20% of the world's (gross domestic product) and over 30% of the world's population and are likely to grow at a superior rate to the developed world for the foreseeable future. The populations are young, urbanizing, with the propensity to consume. So we believe that's a part of the world's GDP that any investor should want to be exposed to.
The difficulty at this time is that, while it's a big percentage of the world's GDP and population, it's a pretty small percentage of the world's capitalization. So, liquidity is a challenge. Volatility is a challenge. While we believe it will grow considerably, for big institutions to get a meaningful exposure is actually quite tricky.
You've set a capacity limit on your frontier markets strategy of $380 million. Why so low? We run very focused portfolios. We take a completely non-indexed approach. We want to be able to shift our allocations between countries, sectors and companies because the environment is shifting quite rapidly, both as a result of what's going on in the developed world but also because the political and economic environment of these countries is shifting quite rapidly. And so share price movements can be rapid and large, and we want to take advantage of that volatility rather than be hindered by it.
How did you get started in frontier markets? Starting back in 2005-"06 we viewed the credit markets as expensive and not providing a huge amount of value. Rather than use a gigantic amount of leverage to create return, we decided to try to find value elsewhere. That's what took us to Nigeria in early 2006. At that time they were completing a debt restructuring that took their external debt down very substantially, from about $25 billion to about $5 billion. Their external debt was yielding 5% to 6% in U.S. dollars, which was not that interesting to us. But they were in the process of developing a local capital market and local yield curve. And when we first invested in two- and three-year bonds in Nigeria locally, they were yielding 22% to 23%. So for us that represented a completely different kind of value opportunity compared to buying the external debt at 5%. Once we looked at that story ... we looked at similar opportunities in the rest of Africa — Zambia, Uganda, Kenya, Ghana, etc. That's when we started investing substantially in the frontier markets, in both debt and equity.
Are you developing other strategies? Capacity in our frontier strategy will be allocated in the next year or so. The other area we're looking to launch is emerging markets small cap. The traditional approach is to have a global emerging markets manager looking at everything around the world. But I think there's an increasing desire to try to enhance the product range and the value-added opportunity by looking at different substrategies, whether it's individual countries, regions or stratifying by (company size), which is a natural progression. I think the capacity there is somewhere closer to $1 billion.
A little further out, one of the great opportunities in frontier today is for PIPE financing — private investment in public equity. We're not private equity people; we're not venture capital people; but there's a very large number of businesses out there ... that have been constrained from growth for a number of years for any number of reason — political, economic, etc. — but are great businesses and they need financing.
Are you getting away from the hedge fund business? We're definitely moving away from it. There's always an opportunity there for somebody, but for us ... and the client base we want to have, we believe the best opportunity is in the long-only area in (emerging markets) small cap and frontier.
How will you get up to capacity in these strategies? On the client side, we're very interested in having clients looking to make long-term allocations. Short of us performing really very poorly, we want clients to be looking at this with an investment cycle of at least three to five years, and hopefully a much longer-term horizon. That inevitably means we're looking at pension funds (and other institutional investors.)
Is that the plan, then, to find a handful of investors and be done with the sales side? Yeah, when we hit capacity, that's it, we're done (and we'll focus on maintaining client relationships). And that's why we are very focused on having six or seven clients that have exactly the same attitude and approach to investing in frontier markets, because we want them to all be simpatico with each other.
Do you have any of those clients in place yet? Russell (Investments, for whom Consilium runs $40 million as part of Russell's frontier markets multimanager strategy) is certainly that way, and we do have several conversations going on now with very much like-minded pension investors. They're (located) mostly in the U.S., with some in Europe.
You have said Greece will leave the eurozone; will the remaining countries stick together? It's very difficult to tell. The volatility associated with the political news cycle is huge. But I think the investment community is beginning to grasp that provision of liquidity can't solve solvency issues nor competitiveness issues. For us, the parallel with Argentina for Greece and indeed some of the other countries (in the eurozone) is very instructive. Argentina had a pegged currency, which worked until everyone woke up to the fact that they were running big fiscal deficits and eventually became unwilling to finance that, which eventually created a run that started with the banks. The government eventually capitulated and broke the peg. Argentina's currency devalued substantially, and while it was very painful for the first six to nine months, they were thereafter able to grow very rapidly. Greece is actually in a superior position to Argentina in some respects, because exports represent a bigger portion of their GDP than they did or do for Argentina. So (Greece) can, through devaluation, regain competitiveness and earnings power and growth in a much more substantial way than Argentina did. But clearly there's a huge institutional desire for this not to happen. n