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Researching foreign companies.


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There are a few threads on here discussing investing in foreign markets (Japan, Russia etc) and the lack of information available in English, particularly with small caps. This is a problem I often bump up against. Google translate only goes so far...

 

I'm curious to know how the large/institutional investors and hedge funds deal with this issue.

 

Do they pay to have everything translated, which, if you consider that an annual report may have over 100 pages, can become pretty expensive if they want to research all filings and reports going back several years for every company they want to check out.

 

Does Bloomberg/ Capital IQ provide a translated version of all filings?

 

They employ local/ native speaker analysts for each market they cover?

 

 

Thanks for any feedback

 

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You probably want to be able to read the original filing.

 

In addition, you want to know the culture.

 

One step further is living in the same culture.

 

This will allow you to decrease your margin of safety and increase position size.

 

Another way to think about it is what do you need to compete with the 'locals' and not be the patsy at the table...

 

;)

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Or invest in a market that the locals have left such as Japan.  Only 4% of Japan's population directly owns equities.

 

At some point buying cheap enough is a hedge against mistakes alone.  If you're buying a company at 40% of NCAV or net cash does it matter if you can't read all 30 pages of footnotes?  If you were to buy 20 companies like this I don't think reading the footnotes would add much to your incremental return.

 

If you're looking to go Buffett on some foreign market then yes, you need to be able to read the reports.  Many companies publish their annual reports in English, or you can find a local who can help you translate.  Alternatively you can learn to read some of the target language. 

 

Note the hesitation of readers to invest overseas.  For some reason most US investors are extremely hesitant to invest outside the US.  Many non-US investors are focused on US equities as well.  What you have is this strange situation where everyone is looking at the US and foreign small caps are very ignored.  My experience has been that the cheap companies outside of the US are of much higher quality compared to the cheap companies in the US.  The competition is smaller, and information is easier to find.

 

Here's a site worth browsing:  http://www.worldreginfo.com

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Thanks. Maybe i didn't put my question across very clearly but i was just wondering if anyone has insight as to how the pro (western) firms deal with the language barrier.

 

Thanks.

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A few points

I'm a Dev World guy - so my responses are biased towards that:

 

-There just aren't many professional international small cap managers - especially long-only.  A lot of this has to do with liquidity.  If you offer people daily liquidity then the most you can run in a reasonably concentrated-ish portfolio (say 40 names) is about 500 mil.  Its hard to make that work with the required infrastructure - even tucked into a bigger firms where you've got the operational stuff covered its hard to make it work.  You basically need to charge hedge fund fees for it, and even then you are size limited.  Its a major inefficiency BTW  - why its worth your time to focus there.

-A lot of guys have some language skills. I'm extremely comfortable reading annual reports in French and Spanish, less so Italian. In undergrad I actually took Business French, and the terminology is pretty similar in all of the romance languages with respect to Financial Statements.

-Japan - other than some guys who just look for decent ROE businesses trading at crazy cheap P/B (which I think is great, and is probably how I would approach Japan if I had to - so I don't mean that as a pejorative) - pretty much everyone I've met who is a fundamental investor in Japan has significant Japanese speaking staff - usually the analysts, occasionally the PM.  Its also the norm to bring a translator to meetings.  I've done meetings in translation and it sucks.  I suspect Korea is the same way.

- The adoption of IAS makes life so so much easier so that you can be much more confident using the databases to find names, and then try to figure out the language problem when you do your research.  Again - I've not run across too many N. European companies (I actually can't think of any off the top of my head) that didn't publish an English language annual.  But god it used to suck back in the day with crazy German depreciation rules and what not.

- One area where I think language is a real issue is regulated industries.  I usually find that regulators don't consistently translate their documents into English.  Anecdotally it seems to me like the Banking Regulators are the worst.  This is a problem.  I'm not really a banks guy so I don't have a solution But this is a problem even in Large Cap land.  I spent hours trying to learn about Italian banking rules on credit before I just gave up.  If I was running a product that just did non-US small cap I'm pretty sure I'd need a guy who just did banks and nothing else.

- When all is said and done, yeah - you hire a translator.  I remember having to hire a guy to translate Romanian for me once - not because I was investing in Romania, but because of something involving a sub that was hairy.

- The guys I know who do Frontier stuff rely on the databases and then spend a bunch of time vetting management as being trustworthy and then buy on crazy cheap multiples of what ever they favor.  I don't actually know any true deep-value frontier guys.

- Most the big EM shops have speakers of the languages in their analyst pools.  There are actually a decent number of small cap EM managers - I think because its much easier to charge 2% fees.

 

By my way of thinking the language issue is much much bigger for you if your investment strategy is short-term/sell-side driven/earnings focused or scuttlebutt focused. But for classic value guys, the cheapness of things eliminates a decent part of the risk.

 

Just some thoughts. I'd be interested to hear what others think.

 

 

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A few points

I'm a Dev World guy - so my responses are biased towards that:

 

-There just aren't many professional international small cap managers - especially long-only.  A lot of this has to do with liquidity.  If you offer people daily liquidity then the most you can run in a reasonably concentrated-ish portfolio (say 40 names) is about 500 mil.  Its hard to make that work with the required infrastructure - even tucked into a bigger firms where you've got the operational stuff covered its hard to make it work.  You basically need to charge hedge fund fees for it, and even then you are size limited.  Its a major inefficiency BTW  - why its worth your time to focus there.

-A lot of guys have some language skills. I'm extremely comfortable reading annual reports in French and Spanish, less so Italian. In undergrad I actually took Business French, and the terminology is pretty similar in all of the romance languages with respect to Financial Statements.

-Japan - other than some guys who just look for decent ROE businesses trading at crazy cheap P/B (which I think is great, and is probably how I would approach Japan if I had to - so I don't mean that as a pejorative) - pretty much everyone I've met who is a fundamental investor in Japan has significant Japanese speaking staff - usually the analysts, occasionally the PM.  Its also the norm to bring a translator to meetings.  I've done meetings in translation and it sucks.  I suspect Korea is the same way.

- The adoption of IAS makes life so so much easier so that you can be much more confident using the databases to find names, and then try to figure out the language problem when you do your research.  Again - I've not run across too many N. European companies (I actually can't think of any off the top of my head) that didn't publish an English language annual.  But god it used to suck back in the day with crazy German depreciation rules and what not.

- One area where I think language is a real issue is regulated industries.  I usually find that regulators don't consistently translate their documents into English.  Anecdotally it seems to me like the Banking Regulators are the worst.  This is a problem.  I'm not really a banks guy so I don't have a solution But this is a problem even in Large Cap land.  I spent hours trying to learn about Italian banking rules on credit before I just gave up.  If I was running a product that just did non-US small cap I'm pretty sure I'd need a guy who just did banks and nothing else.

- When all is said and done, yeah - you hire a translator.  I remember having to hire a guy to translate Romanian for me once - not because I was investing in Romania, but because of something involving a sub that was hairy.

- The guys I know who do Frontier stuff rely on the databases and then spend a bunch of time vetting management as being trustworthy and then buy on crazy cheap multiples of what ever they favor.  I don't actually know any true deep-value frontier guys.

- Most the big EM shops have speakers of the languages in their analyst pools.  There are actually a decent number of small cap EM managers - I think because its much easier to charge 2% fees.

 

By my way of thinking the language issue is much much bigger for you if your investment strategy is short-term/sell-side driven/earnings focused or scuttlebutt focused. But for classic value guys, the cheapness of things eliminates a decent part of the risk.

 

Just some thoughts. I'd be interested to hear what others think.

 

Great advice.  I can read business French fairly well and it's been useful.  I also noticed you get a lot of bang for your buck with romance languages, I can follow Spanish or Portuguese financials even without knowing the language.  I can't read the footnotes, but I can understand the financials.

 

You're dead on regarding foreign banks.  While I have no issue reading about a French industrial the French banks are a different story.  I have spent more time than I'd like to admit trying to parse French bank filings.  In the end I just decided I'd rather invest in US banks, there are a lot of them and many are just as cheap.  Some of this will change come October when all European banks will be required to make English XBRL filings.  At that point the issue will be parsing the filings rather than reading.  Their implementation of XBRL is very European meaning where a US company's filing is maybe 2megs a single German bank filing is 1.5gigs of XML text!

 

Personally if I can read a foreign company's filings I will invest in a situation that has at least a 50% upside.  If I can't read it then I need at least a 100% upside or more to account for anything I might miss. 

 

Lastly, you can find cheap translators online if you want to hire a person to translate something.

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I actually live in Singapore, and its pretty for me to invest in Hong Kong, Malaysia, Thailand etc.

 

I would say that other than Japan, its not that hard seeing that the following countries have English financial statements:

 

Singapore, Thailand, Malaysia, Hong Kong

 

That's a couple of thousand companies for you to look at.

 

Each exchange has its own quirks that are unique to it. I would also say that you can often find local data providers which are much more timely and accurate in providing information about developments in companies that a standard financial database cannot.

 

That being said, you are miles ahead just by applying the teachings of Graham and Dodd to the emerging markets. I recommend flying to each of these countries before you invest. I am currently in Japan right now checking it out.

 

Regards,

theasiareport

 

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One other thing about banks is the the quality and granularity of data collected by the databases in the US is much much better than it is in Europe.  I've not used SNL, but CapitalIQ and Factset capture the regulatory data in the US, but they don't ex-US. Bloomberg doesn't either.

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One other thing about banks is the the quality and granularity of data collected by the databases in the US is much much better than it is in Europe.  I've not used SNL, but CapitalIQ and Factset capture the regulatory data in the US, but they don't ex-US. Bloomberg doesn't either.

 

Yes, the US regulatory banking data is great.  I run a company that builds tools based on US banking regulatory for investors and bankers (http://www.completebankdata.com).  We've looked into the European banks, the issue is there is no one regulatory standard.  This is what I referenced above, it will be standardized in October.

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It will be standardized or implemented?

 

Great question.  In theory it's supposed to be implemented, but I'm still seeing news releases about standardizing things like asset quality.  If this is going to be implemented by Oct then that doesn't give much time for the submitters to adjust their systems to whatever has yet to be determined.

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-Japan - other than some guys who just look for decent ROE businesses trading at crazy cheap P/B (which I think is great, and is probably how I would approach Japan if I had to - so I don't mean that as a pejorative) - pretty much everyone I've met who is a fundamental investor in Japan has significant Japanese speaking staff - usually the analysts, occasionally the PM.  Its also the norm to bring a translator to meetings.  I've done meetings in translation and it sucks.  I suspect Korea is the same way.

 

Worked for 5 years as headhunter in Tokyo and dealt only with front-office type roles with a lot of exposure to foreign hedge funds (from 2006-11 when we had a big cycle of Japan team build up and then eventually firing/closing). This is exactly how it worked in Japan. All our hedge fund clients wanted native Japanese bilingual types who thought differently than the 'average' Japanese, often educated in US/Europe or spent time with a father who was transfered overseas, etc. It was the holy grail that we constantly searched for... there are also a lot of non-Japanese who gained some tremendous Japanese language ability (near native) and they had some opportunity but generally still couldn't get as far with clients.. Clients would be regional PM/fund founders/global PMs in Hong Kong, Singapore, NY/Conn or London generally. They wanted analysts on the ground to support their positions and research.

 

Not to say there isn't opportunity when you aren't fluent. I personally think when it's really cheap enough (liked oddball stocks approach) you don't really need to know more than what google translate can tell you, as long as you spread risk around in a basket and search for statistical cheapness.

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It will be standardized or implemented?

 

Great question.  In theory it's supposed to be implemented, but I'm still seeing news releases about standardizing things like asset quality.  If this is going to be implemented by Oct then that doesn't give much time for the submitters to adjust their systems to whatever has yet to be determined.

 

An EU implementation slipping. Why I never...

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