Argentina & Greece: Time to Put Your Eggs in Two Basket Cases? (part 2)
Nick is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Bruno del Ama, CEO of Global X Funds, discusses the logic behind his firm’s recent decision to offer ETFs for Argentina and Greece.
[continued from part 1]
Bruno del Ama: By launching the [Global X FTSE Greece 20 ETF (NYSEMKT: GREK)], we knew we would be taking an enormous reputational risk, and be clobbered by the press, who would be asking, “What in the world are these guys doing?” But again, it was the right thing to do at the right time for investors that were seeking access to this market. If you look at the return, it has been volatile and thus far up about 10% since inception less than a year ago in an incredibly difficult environment in Greece. Based on a fundamental analysis of these companies, these stocks are trading at very low valuations, even with all the country’s problems.
A good example is Coca-Cola Hellenic (NYSE: OCCH), which is one of the world’s largest bottling companies for Coca-Cola with operations in 28 countries across Europe, Asia, and Africa. Less than 10% of its revenues are from Greece. It just happens to be based in Athens, listed on the Athens exchange, and managed by Greeks. Yet it is a highly profitable company that you can buy very inexpensively. Management recently announced they are going to move their headquarters to Switzerland and list their shares on the London Stock Exchange because their valuation has been decimated even though their operations are strong. Just by moving their listing to London, their value is likely to go up. That’s the kind of arbitrage that is too good to pass up.
Nick Slepko: Well, you definitely won’t be accused of chasing the market.
del Ama: By the way, that is one of the greatest perverse incentives in our industry. Because investors often chase returns, generally the best time for an asset management firm to bring a product to market and raise assets tends to be highly correlated with the worst time for an investor to invest in that market. So, what do you do? Do you bring Colombia to market in February 2009 when there is higher uncertainty about its economic future? Do you bring Greece to market in December 2011? Or do you bring Colombia to market now? [After a 200% increase in share price since 2009.] We have been successful as a firm by focusing on what we believe makes most sense for our clients long-term, which can include products that may not currently be in favor but where valuations are attractive or growth potential is significant.
Slepko: When Coca-Cola Hellenic becomes a Swiss company, will you remove it from the Greece ETF? As the largest holding (~17% of the net assets) of the ETF, how important is Coke to the ETF?
del Ama: As a passive fund that tracks an underlying index, ultimately it’s up to the index company, FTSE, to determine if the company should be removed based on the guidelines of the index. Coca-Cola Hellenic has announced that they plan to retain a cross-listing in the Athens exchange, and if so we believe it would still qualify for the Greece index, but ultimately it depends on the eventual cross-listing on the Athens exchange and the index provider. Hellenic has done well, but 83% of the performance of the index is driven by other companies that have also done well recently.
Slepko: So it sounds like Greek companies are sound, and they are just dealing with the big macro.
del Ama: I would not go as far as to say that. The problems in Greece are big and the profitability of many of these companies is being challenged dramatically and some have had massive declines in revenues and profits – most notably in the banking sector. Greece also needs to implement significant labor reforms to increase competitiveness, which it has begun to do as part of recent austerity measures. But there are other companies that, like Coca-Cola Hellenic, have meaningful operations outside of Greece. Hellenic Telecom (NASDAQOTH: HLTOY.PK), the third largest component of the fund, is the largest telecom operator in Greece but also has material operations in Eastern Europe, particularly Romania and Bulgaria. These companies aren’t just impacted by the local market, they have meaningful, valuable activities in other markets as well.
OPAP (NASDAQOTH: GOFPY.PK) [the Greek Organisation of Football Prognostics] is the fourth largest holding of the Greece ETF and one of the largest betting firms in Europe. OPAP has been impacted by the ongoing recession in Greece but not as much as one would expect, as sports betting seems to be quite resilient.
When you look at the banks, like the National Bank of Greece (NYSE: NBG), the [ETF’s] second largest holding, they have suffered the most, but their valuations have been compressed the most as well so you can also see opportunities with the banks because they are trading at such pitiful valuations.
Ultimately, if you look at these companies, their market capitalization is down over 90% from the end of 2007. So the question is, “Has what happened in the local Greek market really reduced the value of these companies by over 90%?” What is happening in the local market has definitely had a dramatic impact, but how dramatic? If these companies are worth say a third of their 2007 value for example, then they are still worth several times what they are trading at now.
hukgon has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.
