CRAIG MERCER | Dalton Investments

What do Star Wars, Noah, Teenage Mutant Ninja Turtles, and tattoos have to do with investing? Everything. Master storyteller Jonny Tomahawk uses the experiences of everyday life to point to valuable lessons about how we all mismanage our wealth.

Jonny Tomahawk is the nom-de-plume of Craig Mercer, Chief Research Officer and Head of ESG at Dalton Investments (Australia). Dalton Investments LLC is a value-focused investment management firm with expertise in Asia, Emerging Markets and global equities. Jonny Tomahawk is also his handle should you come across him on Apex Legends.

Craig also mentioned a book called Trillions which you can find at this link: Trillions, How a Band of Wall Street Renegades Invented the Index Fund and Changed Finance Forever by Robin Wigglesworth | 9780241422069 | Booktopia

Bring Me the Horizon embodies the hope that, through the application and discipline of some simple tenets, you can live a happier and wealthier life. By demystifying the off-putting and often confusing jargon used in the world of investments, Tomahawk's sense of humour takes the fear out of entering a once-forbidding world. Ultimately, when it comes to your future, there's no time like the present. Isn't it time you took control?

Craig believes that there is a need to constantly learn from people that you probably wouldn't ordinarily think are going to teach you something. One of the big problems in investing is people not challenging their criteria. This is all behavioural economics 101 - looking for confirmation. The confirmation bias is pervasive in investing. Not looking for the competing argument that might balance out a viewpoint. Only seeking out the information that reinforces a viewpoint. Reading books about parts of the market or areas of investing that might not be your wheelhouse or areas that you don't understand should be something that you do as a matter of discipline.

TRANSCRIPT FOLLOWS AFTER THIS BRIEF MESSAGE

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EPISODE TRANSCRIPT

G'day and welcome back to Shares for Beginners. I'm Phil Muscatello what's volatility and how to fund managers navigate the dangerous shoals of market downturns. I'm joined today by Craig Mercer from Dalton investments Hello Craig.

Craig Mercer (51s):
Hi Phil. Thanks for inviting me along.

Phil (52s):
Thank you. And I've usually fund managers wearing much more like a suit then you're outift today.

Craig Mercer (58s):
COVID as long since ditch the suit, you know, I spend most of my time working on my own comfortable. Exactly.

Phil (1m 7s):
So Craig Mercer is the chief research officer and head of ESG at Dalton investments, Australia Dalton investments, LLC is a value-based investment management firm with expertise in Asia, emerging markets and global equities. But I just wanted to start off by talking about Jonny Tomahawk. I've got it here,

Craig Mercer (1m 27s):
But obviously those who can't see he's holding up a book. So that's my pen name. And also my gaming handle. If you are into that sort of thing, it's a book I wrote about 10 years ago now. And it was, you know, in some respects, as we were just saying before we came on air quite similar to what Shares for Beginners is about. I tried to distill in a very short, easy to read format, some basic rules for investing, but a lot of, I guess, financial texts can be quite boring. And so I tried to use pop culture and humor to try and sort of elucidate, you know, illuminate some of the problems that many sort of novices face when they invest. It's a very short book. It's about 80, so pages long, and it's called Bring me the Horizon.

Craig Mercer (2m 8s):
It's still available on Amazon and effectively it's meant to be a short read, but to give you some really sort of, you know, maybe humorous stories from my own experience and try and bring that into the world of sort of the, the jargon and all of the problems that come with investing.

Phil (2m 23s):
Yep. And so as a metal guy, I noticed you had a rebirth into hip hop in the late nineties, early two thousands, some advice from The Notorious BIG, or do you say B.I.G.

Craig Mercer (2m 36s):
That's right? Yeah, no. So, you know, one of his songs is called the 10 Crack Commandments, but basically he talks about his own experience dealing drugs before he became a hip hop star and some of the lessons that he learned and actually the 10 commandments are really quite informative about how to run a business and how to invest and how to trust your client, you know, maybe not using leverage or borrowing money. So there's lots of things like that throughout the book that are things that, you know, you might not expect to sort of associate with investing, like, you know, the ninja turtles, for example, and Astro Boy, which is a very personal story about how much money I lost following a thematic or an idea as opposed to a real business.

Phil (3m 17s):
Well, so w was that idea, was that in your personal account?

Craig Mercer (3m 21s):
Yeah. Yeah. I mean, there were a number of fund managers that I worked with around that time that were invested in it, in their own investment portfolios and have subsequently shut down. So yeah, you know, the lesson learned there was like, you know, why not to follow something purely based on, you know, like a dream or an idea, but also the management team at this particular company that made Astro Boy, their original business was making Christmas trees. So what did they know about making movies? And so there's some lessons to be learned there as well about how management teams I guess, can make really severe mistakes.

Phil (3m 56s):
Yeah. So I'll date stamp this because we're recording on the 10th of May, 2022, and we're going to, into a period and I'm going to make the little quotes, volatility. What's your interpretation of volatility.

Craig Mercer (4m 8s):
Yeah, actually, interestingly enough, you know, thinking back, I hadn't read my book for quite a while because it's been such a long time since I wrote it, but I wrote about volatility quite a lot in the book. And I'm very much of the Benjamin Graham school of thinking that, you know, in the short run, the market is a voting machine by that, what he means is, is that at any point in time, the volatility in the market is what people think about the short term sort of thoughts about where the market direction is going. He went on to say, of course, that in the long run, it's a weighing machine, which ultimately business performance and the quality of company will shine through over the long run. So we're going through this sort of period of time where markets are volatile purely because people don't really know what's going on in the world.

Craig Mercer (4m 51s):
You know, there's all sorts of sort of, you know, exogenous and, you know, endogenous threats, you know, around and people don't really know what to make of it and not heads or tails of it. So ultimately volatility is not really risk. Warren Buffet has often said things like if the market was to shut for 10 years, you know, would you be happy owning what you own? And then in 10 years, you know, would you get your money back? So from my perspective, you know, volatility is not risk. Risk is losing your money or the permanent impairment of capital as some like to say. So in many respects, we're going through this period of heightened volatility because people's emotions are quite high. You know, that the fear and greed sort of premise of the markets is quite extreme at this point in time.

Craig Mercer (5m 35s):
But that creates opportunity if you're thinking about the long run. So good businesses with strong business performance over long periods of time should win through this. So there's actually opportunities if you like. So from our perspective, as a longterm value oriented firm, Dalton, we're really thinking about where are the great opportunities and where they lie and does this volatility create opportunity as opposed to sell everything, you know, like everyone else seems to be doing.

Phil (6m 1s):
So how does this selling operate? I've read a lot of Twitter.

Craig Mercer (6m 5s):
Everyone's got, it's not a good place to start.

Phil (6m 7s):
No, no, listen, it's some good people to follow, but everyone has a different idea about where this volatility come from. So there's people who need to redeem money. And so they take their money out of funds and ETFs, and then that affects the buying and selling of those particular companies. And it becomes a feedback loop. Yep. Would that be how you would characterize the process of what's going on at the moment?

Craig Mercer (6m 31s):
Well, look, there's a number of things, you know, obviously we're in an environment where cost of living is clearly rising. You know, inflationary pressures are genuinely real when you've got 8% inflation in the US and the wage inflation or not to the same extent, you know, people's general costs of living are going up. So they need money to fund their lives and interest rates on the other hand, also going up. So they also need money to maybe fund servicing a mortgage or things like that. So there's this, there is some selling in the market because of those kinds of reasons, but a lot of the participants in the market are not investing with a very long-term investment horizon. They're investing in very short term. I want to make money quick. What's the next hot thing.

Craig Mercer (7m 11s):
You know, the Reddit sort of threads that we saw, you know, the hysteria around certain companies, and they're just thinking, oh, the markets are going down. Let me just sell because they're not really thinking about what they're investing in. They're thinking about the momentum side of investing. And this has been pervasive for probably the past decade. The growth of ETFs has been quite staggering, to be honest, you know, to trillions of dollars from not very much. And I would recommend people actually read that book, Trillions, which is a wonderful examination of how ETFs have grown. It's really insightful. But with that, and the ease of accessibility has come a very quick and easy way for people to deploy money that that ordinarily wouldn't have done without doing much research.

Craig Mercer (7m 57s):
I might add,

Phil (7m 59s):
Could you just make a note about trillions plays

Craig Mercer (8m 2s):
Robin Wigglesworth I think is the name of the author, but it's a recently published book. It looks at the whole history of ETFs and how they started from Jack Bogle. Wellington. I didn't realize that Jack Bogle was actually the founder of Wellington, which is an active fund management firm and was cast out because he wanted to grow the indexation business. And then he's his actual logo. The Vanguard that the boat is Wellington's boat that's right. It was like a big, you know, sort of up yours to the Wellington people. He sounds like a really fascinating character. Unfortunately, never got a chance to meet him.

Phil (8m 36s):
Yeah. I've actually spoken to a couple of people. Who've met him and apparently he was very generous and these are people who were employed by Vanguard and he would eat every day in the staff cafeteria and people were welcome to come up and talk to him. And yeah, one of the guests I had Jack Bogle found out that he had a specialty in a particular part of finance Jack wasn't aware of. And after meeting him in the cafeteria, he actually contacted him by email and wanted to learn from this new employee. So that's something that's really important. I think it investing as well as just to always keep learning. Yeah,

Craig Mercer (9m 9s):
Yeah, absolutely. Like you have to be very open-minded and this is again, one of the things that I actually wrote about in Bring me the Horizon was that there is a need to constantly learn from people that you probably wouldn't ordinarily think are going to teach you something. One of the big problems that we have in investing is people get sort of really focused into sort of a myopic way of thinking and they don't challenge their criteria. And this is all behavioral sort of economics looking for confirmation. You know, that confirmation bias is really pervasive in investing. You know, people don't look for the competing argument that might, you know, balance out their own viewpoint. They only seek out the information that reinforces their viewpoint. And so reading books about parts of the market or areas of investing that might not be your wheelhouse or areas that you don't understand should be something that you do as a matter of discipline, as opposed to something that you just occasionally do.

Craig Mercer (10m 3s):
It should be really entrenched into, into suit your modus operandi, if that makes sense.

Phil (10m 8s):
And presumably you've got an investment team that are challenging each other every day.

Craig Mercer (10m 14s):
Yeah, absolutely. Very, very different viewpoints. You know, we're an Asian focused investment firms. So, you know, as you can imagine, we have a lot of different cultures in our business, you know, myself and the CIO are the only two sort of white guys. If you like on the team, you know, we have South Americans, we have Indians, we have Japanese, Koreans, Taiwanese, Chinese, Bangladeshis. So we have people from such a wide sort of mishmash of global sort of culture and economies. And as you can imagine, someone say from Taiwan and someone from mainland China have a very opposing viewpoint about the role China plays in the global economy. And so that can lead to quite heated discussion and debate because from the perspective of someone that comes from, you know, Taipei is very different to the perspective of someone that comes from Beijing because of the news that they consume and the way they fed information.

Craig Mercer (11m 7s):
So that creates, you know, what I call a constructive tensions. It informs the debate and it gives us a more open mind, which is what you want. You want to create a tension if you like.

Phil (11m 18s):
So what are the conversations like at the moment?

Craig Mercer (11m 20s):
Look, I'd say animated is probably a good way to describe it. There's so many different viewpoints, the biggest areas of discussion that we've been having internally have been around China in particular with the Russia Ukraine invasion. There's a lot of thought processing and there has been a lot of discussion internally about what will, you know, Xi Jinping do with Taiwan, you know, given what we've seen happen in Hong Kong. And now with Hong Kong appointing a new leader that is effectively an extension of Beijing, you know, what does that mean for Taiwan? And what does that mean then in turn for the global semiconductor industry, for example, you know, Taiwan is really integral to the global semiconductor industry. If there was a more sort of strategic move by the Chinese government into Taiwan, that would be catastrophic for the global economy.

Craig Mercer (12m 6s):
There's some of us that probably think that's a higher probability than others, but you can see the way in which the geopolitics around the world is sort of shifting you know a lot of Taiwanese companies by way of example, have started to invest heavily in US based manufacturing facilities. A lot of companies that were historically doing business in China, you know, with outsource manufacturing, for example, have started to decouple their supply chains and move back to Japan or back to Taiwan or to other parts of the Asian region, or indeed offshore, you know, India, for example, has been a beneficiary of that. Now Apple has started to build facilities to manufacture phones in India.

Craig Mercer (12m 47s):
Now that's all, as a consequence of, you know, the geopolitical framework now there's probably the very pro China bulls that would think, oh, that's just a short term phenomenon. We don't think it's really gonna change that much. And then there's the other side of the coin, which is, this is something that's going to persist and will continue to sort of decouple. And we're sort of probably more in the latter part of that conversation. And it's also, you know, as head of ESG, one of the things that I think about a lot is, is with the whole Russia situation, you know, basically immediately cast out as a non investible market, given what they're doing in Ukraine. And that sort of begs the question, well, how does China fit into that equation if they're sort of supporting the Russian regime, which they sort of, you know, not necessarily saying they are, but they are through the actions they're taking and what's going on with the Uighur community, you know, should an ESG minded investor be casting the same sort of die on China.

Craig Mercer (13m 44s):
And that's a really deep philosophical question in my mind, you know, Russia is not integral to the global economy in, yes, it produces oil, yes, it produces gas, but those are almost replaceable because, you know, they're eight or 10% of the global

Phil (13m 57s):
Commodities,

Craig Mercer (13m 58s):
The commodities that can be produced somewhere else, China is, you know, fundamentally integrated into the global economy through manufacturing. I mean, they make everything. So if that's cut off tomorrow, that would have material ramifications for so many different kinds of industries and sectors that you wouldn't even imagine you wouldn't even think about, I guess,

Phil (14m 21s):
And ESG comes into it as well. In terms of thinking about China, there's a manufacturing base.

Craig Mercer (14m 26s):
Yeah, of course it does. I mean, one of the things that was really fascinating is in the last few years, the Chinese government has sort of mandated that companies have what they call a CCP committee. So, you know, like in corporate governance terms, you know, say in somewhere like Australia, you have an audit committee and you have a remuneration committee. Well, you know, companies have those things in China, but they also now have a CCP committee,

Phil (14m 48s):
The Chinese Communist party.

Craig Mercer (14m 49s):
Exactly. Right. So, you know, the conduit between company operation and a conduit to the government, right? So that in itself to, Western minded investment firm or investor

Phil (15m 1s):
In terms of the governance side of

Craig Mercer (15m 3s):
Should be a concern, right? Because the Chinese Communist party is not aligned to your motives or your, what you want from a successful sort of investment from a capitalistic standpoint. And they have very different objectives. You know, that's one of the reasons why for many, many years, almost since we started investing in Asia, we've never wanted to invest in state control companies because fundamentally misaligned to you as a minority shareholder, you know, the state of China's goals are completely different to what you want as a shareholder.

Phil (15m 34s):
Yeah, yeah. Yeah. Another thing that's come up recently in terms of the ESG is that this is from an article. I just read it from First Links. And it's about whether armaments manufacturers are now ESG compliant because they're actually doing good in Ukraine.

Craig Mercer (15m 51s):
So you asked, you know, you asked about, you know, what are we talking about? You know, what's the disc..., This is actually been a very, you know, sort of dynamic conversation internally is that the two things that have come up in conversation is one is, you know, it's all well and good, but should you be allowed as an ESG investor to invest in a weapons manufacturer? That's manufacturing weapons for the right people, right? Like now of course the right people is a highly interpretive statement, but that's almost a summary of, it's a very viable question. The second part of the conversation has been around nuclear energy. Clearly when Fukushima the earthquake and the tsunami destroyed the Fukushima power plant, the global sentiment towards nuclear power completely cratered and, you know, economies and governments all over the world start shutting down nuclear power, you know, Germany case in point.

Craig Mercer (16m 40s):
Now the debate here is, is, well, the consequence of doing that is that they become ultra reliant on Russian gas and oil for their own power needs.

Phil (16m 51s):
Yeah. There's a geopolitical implication as well as a carbon production implications.

Craig Mercer (16m 57s):
And so the question then becomes, you know, will we start to see nuclear power becoming back on the agenda and actually fascinating enough Kishida, the President of Japan was just in, I think in Europe and he was talking to a group of investors and he basically said with quite clear language that they're going to start turning on nuclear power again, because that will circumvent the demand that they need for foreign oil and foreign gas to power their own country. At the same time, there's been some enormous innovations on that side of the fence in terms of how, you know, the big issue with nuclear power clearly is what do you do with waste? And I think in Finland, there's been some really crazy innovations that allow companies to dispose of nuclear waste in a more sustainable sort of fashion, if you like without causing harm to the environment, still in early phases of its, its sort of evolution.

Craig Mercer (17m 47s):
But nonetheless you, these kinds of things that we're seeing in Russia and the Ukraine really start to present these conversations as being well actually, are we getting this all wrong? You know, you can't cut off oil and gas from the global economy overnight. There has to be a longterm sustainable transition, but what are the longterm solutions? And I don't think people have quite figured that out yet.

Phil (18m 16s):
So you're mentioning about Chinese companies having a CCP representative...

Craig Mercer (18m 22s):
From the corporate committee that liaises with the government

Phil (18m 25s):
Does that occur with Chinese companies that are listed on the NASDAQ.

Craig Mercer (18m 30s):
So that's a very fascinating conversation. So

Phil (18m 33s):
I mean we know Ali Baba, for example,

Craig Mercer (18m 35s):
Yeah, Tencent has done this, but the reality is, is those companies. And this again has been a hot topic of conversation is most of those US listed Chinese companies will have to delist at some point, you know, that the US authorities are quite, they're pushing through the legislation. And a lot of it has been pushed through already. They've been either relisting back in say Hong Kong or, you know, bring business back on shore or they've just gone private. And that whole banning of the ADRs, you know, American depository receipts really stems from a corporate governance concern, which is all of those listed entities in the S are what they call variable interest entities, which effectively means that they are a Cayman or a British Virgin islands domiciled company that has entered into a contractual arrangement with the onshore company in China.

Craig Mercer (19m 25s):
And there's almost no transparency between what those contracts actually intimate. So the auditor's can't get clean access to the onshore accounts in China. They're not able to inspect the companies as they would say in the U S and that's really what's led to this was we have no transparency. There was a wonderful example of Alibaba, which did this deal, where they spun out Ant Financial, Ant Financial being the IPO that was, you know, canned by the Chinese authorities because of control issues. But Ant Financial was spun out of Alibaba at a, at a price that was absolutely ludicrous. And I can't remember the number exactly, but it woefully undervalued the business, but who was the controlling shareholder of Ant Financial?

Craig Mercer (20m 13s):
It was Jack Ma. So he was essentially selling the company to himself at a price that was unreasonable. And I'm talking, it was probably sub $10 billion at the time. And then they were going to do an IPO that would evaluate the business at $120 billion or whatever it was, which you know, that screams of bad corporate governance,

Phil (20m 34s):
That's it that's a related party transaction.

Craig Mercer (20m 37s):
That's correct. Right. So, Ant Financial was controlled by Alibaba. They were the major shareholder and it was effectively spun out at a price. And because they control the voting rights of Alibaba, they could do it without other shareholders, you know, approving it now. And again, this is one of the major drawbacks of a lot of technology companies, not just Chinese ones, you know, like We Work was a great example of this, you know, Facebook where you have found a controlling shareholders that might own say 9% of the equity or 10% of the equity, which is not an immaterial amount of equity, but they structure the equity in such a way that that 10% carries a much more substantive voting power.

Craig Mercer (21m 19s):
So, so they have class A shares, which is what the general public owns. And that's one share one vote, which is pretty normal practice. But then class B shares might be one share 10 votes. And the class B shares is where obviously all the controlling shareholders sit and they own less than the, you know, the controlling amount of the total equity of the company, but they control the company. So Alibaba was that kind of example. And almost every single technology company that I can think of in the US has that same kind of structure. So you have a controlling shareholder. That's not the controlling owner. If that makes sense.

Phil (21m 57s):
That's really interesting because ESG most people think about ESG and wanting to have a carbon free future, but the G part of it is governance. This is so important as well. And you're just highlighting so many of these governance issues in many companies.

Craig Mercer (22m 13s):
Absolutely. And it's very hard to think. And from my own experience, from the evidence of researching thousands of companies from an ESG perspective, I have come to the conclusion that you cannot really have a company that has strong environmental and social policies without strong governance, because it points towards the ethical mindset of the leaders of the business. If they structure the governance in such a way that is fundamentally misaligning you as a minority shareholder, you know, how can you really trust what they say they're doing on the E and the S is really correct, right. But you also have no power to enforce the change. So, you know, one share one vote should be what everyone does, but the private equity firms around the world have, you know, come to deals to take these companies public from being private, where they've given an favorable terms, I guess, or favorable to them, to the owners of those businesses when they go public so that they can retain control, behave like a private enterprise, but spend the public's money, which is a great transition of wealth.

Craig Mercer (23m 18s):
I should say,

Phil (23m 19s):
In your opinion, is there a company that's getting it right? Let's be optimistic. You know,

Craig Mercer (23m 24s):
There are many companies that are doing this, right. I mean, you know, speaking of, you know, our area of expertise, I mean, a company like Sony, for example, you know, Sony is a world-class company. It makes products that, you know, almost everyone more have a Sony product probably in their household, but they've really got the E the S and to some extent, the G correct. Now the G comes with the caveat that it's Japan. So the mindset of governance in Japan is quite different to maybe what the mindset of good governance might be say in the United Kingdom. But in the context of a Japanese corporate, it's got really strong governance sort of credentials. Now, could they probably return more money to shareholders? They could probably be a bit wiser with a capital discipline, but from an ESG standpoint, they've got a lot of it, right.

Phil (24m 11s):
And looking at Asia, Dalton is coming to the view that Asia is becoming one region and should be treated as one region. Can you explain that? Are we talking about south Asia and Southeast Asia? And

Craig Mercer (24m 22s):
It's probably slightly incorrect to say it's becoming one singular market. What we think is, is you cannot analyze Asia or invest in Asia without looking at the whole region. So that's a subtle difference. And by that, what I mean is, is you cannot form an opinion on a Japanese technology company or hardware manufacturer. So in the semiconductor industry, if you're not really focusing on what's going on in Taiwan and in Korea, because they are the major competing forces. So if you are a Japanese investor, you really have to be thinking about Asia as a whole. Actually, what we probably think is this decoupling sort of story that I sort of was mentioning is actually Asia is becoming more decentralized.

Craig Mercer (25m 3s):
So you're moving away from China as the dominant sort of trading block. If you like, and you're getting more companies spreading out their sort of manufacturing or diversifying it across the region so that they have less disruption, if you like to supply chains and that's come as a consequence of probably two major things, you know, the Trump administration in the first instance, what they did was they introduced obviously tariffs against China, which forced a lot of companies to think, well, if we're making a product that is got a tariff on it in China, if we move our manufacturing from China to say Cambodia or to Myanmar or to Vietnam, and we don't get that tariff, then let's do that because we can maintain margins.

Craig Mercer (25m 51s):
And a lot of companies did that fairly quickly, or have been doing that for a long period of time. You know, when COVID started that accelerated that process, because it became even more abundantly clear that the reliance on China for manufacturing was crippling a lot of companies. And we're even seeing it now with China, lockdowns and China sort of zero COVID approach, you know, being still very prevalent right now, companies are experiencing supply chain disruptions,

Phil (26m 19s):
And it's terrible thing to be reliant. So reliant on one country. Yes.

Craig Mercer (26m 23s):
So policy, so a market like Japan, for example, Japan actually introduced tax incentives to a lot of its companies to bring back manufacturing on shore. Now, clearly the issue that is very pervasive in Japan is labor shortages. It's a very old country. They don't have the young dynamic workforce that really, you know, you need to goods, you know, in a factory

Phil (26m 45s):
And now immigration either.

Craig Mercer (26m 46s):
Well, that's exactly right. So you have this weird sort of situation where Japan has the ability to bring some of these things on shore. And there are companies bizarrely that specialize in bringing labor into the country, but also automation and robotics and all those kinds of things where Japan leads the world, allow them to maybe do things with less physical people. And, you know, come back to the point I made earlier, this is one of the reasons why India is going to be a big, you know, in our minds, a winner of all of this, they have a very young and dynamic population and a lot of companies are like, well, India has, you know, a slightly more transparent rule of law, English based law, legal system. It's a democracy, you know, the world's largest democracy, highly

Phil (27m 28s):
Educated,

Craig Mercer (27m 28s):
Highly educated English speaking to a large extent. So, you know, there's a lot of things that make it almost a no brainer, but also if you're thinking about long-term thematic trends, where is the biggest population in the world in the next two decades, it's in India, you know, it's got a huge amount of its population under the age of 30 and quickly becoming wealthier, which is a large consumption market in itself. And we saw that in China. And so we're going to see sort of somewhat of a repeat of that whole big economic transformation. As more Indians joined the workforce as more Indians earn more money. They not only consume themselves, but at the moment it's still a economic trade-off for a US manufacturer.

Craig Mercer (28m 13s):
You're getting much cheaper labor in India than you are sending to us. But as that changes, you know, obviously then they'll be somewhere else where people will ultimately go. And that might well be somewhere in Africa, for example, which is probably the next 50 years.

Phil (28m 29s):
Wow, fantastic. Dalton engages with portfolio companies and you encourage them to drive value for shareholders by suggesting opportunistic buybacks of company stock. Tell us about that process. I mean, do you have that much kind of sway with the management of some of these portfolio companies?

Craig Mercer (28m 50s):
The simple answer to that question is, is both. Yes and no. So obviously in a small company, you can ask, yeah, well, you can ask any management company to do it, right? Whether or not there'll be inclined to listen to you as something entirely different, but in a company say without, you know, a market capitalization of say 200 million us dollars, you know, we can own 10, 15% of those companies. And in that circumstance, you have much more sway because you're oftentimes the second largest shareholder maybe to the founder that created the company. So yes, you can have some sway, but as I said, like different kinds of management teams that have very different responses to, you know, any form of sort of active engagement for the most part in a market like Japan, where we're probably the most pronounced at this, the knee-jerk reaction is, is, you know, no, we don't want to talk to you.

Craig Mercer (29m 39s):
You're a foreigner. You know, like what do you know now, the most powerful thing that's happened in Japan in the last sort of say 10 years is under the Abe government. I think when he came into power in 2012, he introduced a whole range of reforms. You know, Japan has been notorious for poor management of balance sheets, basically in a hoarding cash on balance sheet, which comes from, you know, the Asian crisis or the Tokyo bubble popping in 87. You know, this fear that, you know, they always need to be prepared for the worst case environment, which is, you know, as we go through this in market correction now makes these companies arguably a lot more competitive, but because they've done this so aggressively for so long now you have quite literally hundreds of companies, the trader, the market value of their share price is less than the cash that they hold in the bank.

Craig Mercer (30m 27s):
Now that is not a great use of your capital on your,

Phil (30m 31s):
And this, this comes to the question of capital and how a company should use its capital. And buyback is one of the ways that they can deploy that.

Craig Mercer (30m 39s):
And so they could increase dividends, which is another thing that we're very proactive in, in encouraging, you know, returning capital to shareholders in some form, you know, buying back shares ultimately means that they return cash to you as an investor. They contract the amount of shares that they have an issuance, which means you get more earnings per share because bear in mind, a lot of these companies actually really good businesses that are generating, you know, sound cashflow. They have growing, operating margins, they have growing businesses. And so the cash just continues to grow because they don't really do anything with it. So they should either buy themselves out and take themselves private because they shouldn't really be necessarily public companies or they should return that cash to shareholders in some way that is accretive to all shareholders.

Craig Mercer (31m 21s):
Now, the bizarre thing that we've come up against in Japan is even though the owner might be the biggest shareholder, they are ultimately the biggest net beneficiary themselves of doing this kind of transaction, but they're reluctant to do it, which to us doesn't make any sense. So being more gentle, a bit sort of engaging with companies over very long periods of time, understanding that we're a long-term shareholder in a business we're not here just to, you know, strip money out of the business and then walk off. All those kinds of things are really important in a market like Japan. So we've had some successes in doing this. I mean, if we look at our own portfolios, we've had more buybacks and more dividend increases in the last 18 months than we've ever had historically.

Craig Mercer (32m 8s):
And a lot of that comes down to the fact that the government is pushing reform, you know, more capital efficiency in forcing companies to enhance their return on equity, which is forcing management teams to think, oh, we have to do something otherwise we're going to fall foul to the government. They're not necessarily worried about you as the shareholder, but falling foul to the government. And then the Tokyo stock exchange itself as introduced a whole sweeping range of regulations that have said, basically, if you don't meet certain standards, you're going to be delisted from the primary stock market in Tokyo, which if you know anything about Japanese culture, you know, loss of face is an enormously big thing. And so here, you've got a situation where the companies don't want to be demoted from these indices.

Craig Mercer (32m 50s):
So I have to come up with a plan to, you know, increase the value of their own company to keep themselves in those indices. So whether it's buying back stock selling other assets that they might have that are underperforming increasing their dividends, buying themselves out, or, you know, doing mergers with others to create a more cohesive end product. If you're end company, those are all things that are on the table and they're happening at a reasonably fast pace, which is a really exciting time to be involved in the Japanese market. You know, when prices already cheap, you know, global stock prices are falling. Japan was cheap before they started falling.

Craig Mercer (33m 32s):
They've obviously gone down where the rest of the world, the yen is also at like, I think a 50 year low relative to the us dollar. So if you're a foreigner buying into Japanese securities, not only are you buying cheap stocks, but you're buying them at a very cheap yen. And then this backdrop of all this governance reform and change makes it a really exciting time to be doing this kind of stuff.

Phil (33m 53s):
So Craig tell us about Dalton and how listeners can find out more about you

Craig Mercer (33m 57s):
Dalton. We're based in the US primarily, you know, but we have offices all over Asia and like Tokyo in particular, we have a large team with people in India here, and obviously in Australia, myself, people in Asia, in Hong Kong as well, and Santa Monica, which is where our head office is, Dalton investments.com is our website. If you want to learn more about what we do manage about $3 billion in Asian equities, I guess, primarily in Asian equities and Japanese equities. And that's really what we, you know, that's our bread and butter. We've been doing it for the best part of 25 years, but at this stage,

Phil (34m 29s):
And where can listeners find the book or you sit on, it's still available.

Craig Mercer (34m 32s):
That's all on amazon.com or, or Lulu publishing, which is the publisher of the book. I think you can buy it directly from the publisher's website, but amazon.com it's called Bring me the Horizon. And the author's name is Jonny Tomahawk. And as I said, if you ever happen to be playing Apex Legends or something, and you see that that's me

Phil (34m 50s):
And metal music play in the middle band as

Craig Mercer (34m 52s):
Well. Well, yeah, the book was named after a metal band, Bring me the Horizon, which is, you know, if you're a fan of that kind of music, quite a big band, one of their songs was, was the inspiration because it was about breaking away from, from the crowd, if you like.

Phil (35m 3s):
Yeah. Well, I could always imagine you in a black t-shirt down at Utopia records,

Craig Mercer (35m 8s):
Actually, I don't go there often enough,

Phil (35m 12s):
Craig. Thanks very much.

Craig Mercer (35m 13s):
Thank you very much, Phil

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