Transcript: Lazard’s James Donald



The transcript from this week’s MIB with Lazard’s James Donald is below.

You can stream/download the full conversation, including the podcast extras on iTunesBloombergOvercast, and Soundcloud. Our earlier podcasts can all be found on iTunesSoundcloudOvercast and Bloomberg.

ANNOUNCER: This is Masters in business with Barry Ritholtz on Bloomberg Radio.

BARRY RITHOLTZ, HOST: This week on the podcast I have an extra special guest than his name is James Donald and he is managing director and head of emerging markets at Lazard Asset Management where he runs a team of 75 people and analysts focused on the emerging markets across equities and fixed income. He has been investing in the emerging market space for over three decades. If you find the world of emerging markets remotely interesting, well then, strap yourself in for a master class in emerging markets investing.

We discussed everything from valuation issues to constructing a portfolio to risk factors that exist in EM that may not exist in developed countries, how countries go from frontier to EM and from EM to developed and some of those developed countries have gone back into E.M.

This is an area I am personally fascinated in because I’m aware of the fact that U.S. stocks are, let’s just say, richly valued, European and Japanese stocks a little less richly valued, but EM is where the valuation exist and when we look at the track record of EM and U.S. stocks over long periods of time, it seems like the leadership goes back and forth, it cycles all over longer periods of time 5, 7, 9 years at a time. We just finished a nearly decade-long period of time where EM not just underperformed the U.S. but significantly underperformed the U.S..

The gap was about as wide as it ever gets. Last year seem to be the beginning of a change of leadership and we could see EM stocks outperform the United States and other developed nations for quite a number of years, perhaps even a full cycle. So if you are at all interested in places like China, India, Russia, Brazil, Mexico, Turkey, Greece, I keep saying Vietnam even though it’s a frontier country but I’m intrigued by the part of the world, South Korea, and Taiwan as EM countries when really they are almost developed countries. You will find this conversation absolutely fascinating.

So with no further ado, my conversation with Lazard Asset Management’s James Donald.

VOICEOVER: This is Masters in Business with Barry Ritholtz on Bloomberg radio.

RITHOLTZ: I’m Barry Ritholtz, you’re listening to Masters in Business on Bloomberg Radio. My special guest today is James Donald, he is the managing director and head of emerging markets at Lazard Asset Management. He’s also a member of the international equity select team. In 2017, that group was named SMA managers of the year by Think Advisor and a number of other entities for the year 2016 in the international category where they racked up returns in excess of 22 percent. Think Advisor reported that the group has had annual returns of over 11 percent since its inception in 2004. James Donald, welcome to Bloomberg.


RITHOLTZ: So you begin your career back in 1983 which was a pretty good time to get into finance the start of a long bull market. What was your first job on Wall Street? Well am was born in Toronto and I actually began my first career in Toronto at a brokerage firm called Wood Gundy where I did a training course around the firm.

RITHOLTZ: So you participated or helped build a training course?

DONALD: I participated in the training course and I was involved in a whole lot of different functions in the firm anything from operations all the way to government finance.

RITHOLTZ: So what drew you to the emerging-market side?

DONALD: Well I then in 1985 got a position at SG Warburg in London and I went into the investment management area there and was involved in global investments. This is really pre-emerging markets, emerging markets only really developed I would say in 1987 1988, and so I was involved in managing global portfolios, a lot of U.S. holdings at that time and really learnt about portfolio management at SG Warburg and that the firm ultimately became Mercury Asset Management.

And in the early 1990s when Mercury was establishing its emerging-market team, I was very interested in joining that team and so I was one of the first members that joined that team and was involved in managing portfolios at Mercury. What was the motivation that led you to say so and so you’re in London, the center especially in the 90s of a fairly booming developed nation, a developed metropolis. Europe was really starting to come into its own, what made you say hey, all these develop market things are kind of interesting but let’s venture into something a little more adventuresome.

DONALD: Yes, I had done a lot of work analyzing smaller stocks in the U.S. and looking at stock markets in Asia and back then, essentially the equivalent of emerging markets places like Hong Kong and Singapore and Malaysia in areas like that.

And so I thought these markets were ones that I have had experience or not too different experiences with, and I also was very attracted by the cultures, the variety of cultures in emerging markets and the end of the day, I felt that people around the world want to see their economies develop and the capital markets are a very, very critical part of that.

RITHOLTZ: So this was long before the era of index funds or country funds we could just push a button in one transaction gives you exposure to fill in the blank, Asia, Vietnam, emerging markets, very different era, how was it like in those days compared to today?

DONALD: It was before index funds but it wasn’t necessarily before country funds. A lot of country funds actually developed during this time because a lot of these markets were very, very small and they don’t — didn’t want to be overwhelmed by foreign capital flowing in and flowing out.

So actually country funds were a very, very big part of the development of those markets. In general, the markets were very small a lot of the big, big countries today, for instance, China, which is close to being 30 percent of the emerging-market index today was around 1 percent.


DONALD: And back then places like I mean Malaysia was a huge market, Mexico was a very big market whereas say Brazil was relatively small or you know, for instance India was relatively small as well.

RITHOLTZ: Were there any restrictions on our we know everybody wants capital coming into their countries, were there any restrictions on how that money could be removed with a gated or any of these country funds and I was thinking of country ETFs and indexes but the specific country funds if you needed to get your money out in a hurry, was that feasible?

DONALD: Well if you go back more than 20 years, a great deal of these markets were not markets you could directly invest in.

You had to go through those country funds so they were fixed pools of capital and as a result of that know the country funds values could be very different from their net asset values and so essentially that could distort the picture very heavily.

RITHOLTZ: And no computerized arbitrage opportunities?

DONALD: No, none of that, slowly these markets have opened up and investors like ourselves have been able to directly invest in them.

RITHOLTZ: Let’s get into some of the details and specifics. How do you define what is or is not an emerging-market? Is it an economic definition, is it a political definition? Where are the lines drawn?

DONALD: It’s something that’s changed over time. I think originally the index was based — or the indices were based on economic development and political development. They’ve moved over time more towards what’s easily accessible and MSCI is the biggest index provider in this area and they’re very focused on accessibility.

RITHOLTZ: Meaning define accessibility, the ability to get capital in and —

DONALD: The ability to get capital in, capital out, the ability to get information on these markets without any major restrictions.

RITHOLTZ: So now is a good a time as any to ask what is the distinction between the so-called frontier markets and emerging-markets?

DONALD: Those have even less accessibility on the whole they are much more rudimentary economies and rudimentary markets. And they have less liquidity in them. So there are is an ongoing process by which countries have moved between a frontier markets and emerging markets and even back into frontier market.

RITHOLTZ: It’s a fuzzy line, it’s not a very bright line.

DONALD: There — there’s certainly some gray in that whole discussion.

RITHOLTZ: And you mentioned earlier China is about 30 percent of emerging markets. It’s arguable that they’re not that far off from being a developed nation. When might that occur where China is no longer considered an EM country?

DONALD: Yes, I understand that, I get asked that question a great deal. I would say there are there other countries that would be probably contenders at least based on economic development before China.

RITHOLTZ: Give us some examples.

DONALD: Well the most obvious are South Korea and Taiwan which are actually quite developed economies, relatively wealthy economies, there are some restrictions with changing money and with investor identification that has cause them to stay in emerging markets. But in terms of overall capital market development and economic development they’re probably the leading contender.

RITHOLTZ: You would think South Korea is much closer to the Japan like economy than a China like economy.

DONALD: Well, China has come a long way. China has industrialized very successfully and China is no longer a low-wage country. It’s actually in a medium wage country so it’s not nearly as wealthy as South Korea or Taiwan on a per capita basis but it’s moved up quickly.

RITHOLTZ: One of the appeals of emerging markets are that within this equity half of your portfolio, they’re not completely correlated with either developed markets or the U.S. as a particular example but that raises the question how correlated or uncorrelated are emerging markets with the U.S. stock market?

DONALD: Well, the correlations have increased. There is no question that when the U.S. market has big movements, they have a lot of interlinked risks around the world that cause these markets to be much more correlated than they used to be. Over time, there are big differences between the performance of the emerging markets and the U.S. market, but on a short-term basis the correlations are pretty high.

RITHOLTZ: So let’s talk about those performance metrics that you look at the trailing 10 years and our 2018, so it takes us back still through the financial crisis. U.S. markets have done very well, emerging markets not so much. There seem to be signs that that’s changing now. Tell us your thoughts on the performance issue and how long these cycles last. They seem to alternate a little bit, don’t they?

DONALD: It’s hard to tell how long they last. I mean they seem to be often 7 to 10 year period that we see this. You’re absolutely right, emerging markets has underperformed the U.S. over the last 10 years. I think the biggest reason for that is that we’ve been through a strong period where deflationary pressure has dominated markets and the emerging markets are just more economically sensitive than the U.S.

You know, if you think about the technology sector for instance —


DONALD: Big, big area in the U.S. there is actually quite a big technology sector in emerging markets as well but you have a lot of industries that are very economy sensitive. So in that — in that last decade period, that economic sensitivity has worked against the returns in emerging markets.

RITHOLTZ: What about the dollar? I used to think and I’m changing my view somewhat on this, I used to think of emerging markets as heavily commodity dependent and therefore heavily dollar dependent. Is that still the case and how significant is the dollar to emerging markets performance?

DONALD: Well the commodity areas like energy materials are today relatively small parts of emerging markets around 15 percent of our universe.

RITHOLTZ: How does that compare to say 25 to 30 years ago?

DONALD: Well, even 10 years ago, it was over 30 percent.

RITHOLTZ: Really? That’s a big change.

DONALD: So it’s a big change. It tends to fluctuate over periods of time but I — what I would say is that emerging markets as a whole are just more dependent on economic growth than the developed world. And so when the world has difficulties with economic growth, emerging markets tend to be negatively affected by it.

RITHOLTZ: So that’s an interesting contrast, because I usually think of everybody dependent on economic growth when we have a recession, people tend to spend less, less employments, profits are affected with x markets but what you are really saying is more nuanced, emerging markets are much more sensitive to the state of the economy than Europe or the U.S. or even Japan for that matter. Is that a fair assessment?

DONALD: I think that’s fair, I think the clear enemies of emerging market equities are negative real economic growth and/or crises.

RITHOLTZ: So we’ve seen over the past year or two, the U.S. dollar weakened fairly dramatically after a huge seven or nine year run and when we look at performance of emerging markets versus Europe versus U.S. they seem to have just edged out those areas on a nominal basis but for a U.S. investor in dollars, they had a booming year last year because of the weakness of the dollar. How significant is the currency not to exports of commodities but to the net performance of EM to investors in the U.S.?

DONALD: Well emerging market equities tend to have a natural negative correlation to the dollar.

RITHOLTZ: Weak dollar, strong E.M.

DONALD: Weak dollar, strong E.M., strong dollar, weak E.M., that is that is a strong correlation and indeed, emerging markets tend to have quite a strong correlation with commodity prices.

RITHOLTZ: Let’s talk a little about some of these varied differences between emerging market countries in different parts of the world. When I think about EM I tend to think about Asia and South America, and to a lesser degree, Southern Europe, places like Turkey. How different are all these regions? One would imagine those three places are very, very different economically and in terms of their markets.

DONALD: There is tremendous variety across emerging markets in Asia you have large technology sectors for instance where as you have a lot more of a focus on commodities in parts of Latin America and in parts of Eastern Europe like Russia or South Africa. So very different countries, very different political systems, tremendous variety.

RITHOLTZ: So when I think about different parts of the world I think of the U.S. as fully or even richly valued, Europe a little less richly valued, emerging markets relatively cheap compared to the other two, how do you come up with valuation metrics for different parts of the world when they are such different economies.

If you’re if you’re looking at China Russia or you’re looking at Brazil or Argentina, can you apply the same sort of metrics or do you have to develop different tools for different economies?

DONALD: Well, I would agree with you. I actually come at this from the perspective of thinking there were no cheap asset classes today relative to their own history but emerging markets are relatively cheap to develop markets and the U.S. market from where I stand.

And we approach our analysis by focusing on stocks, stocks that look inexpensively valued and relatively profitable. We do a lot of accounting analysis because we have around 70 analysts at Lazard who are involved in looking at old types of different strategies, and we make adjustments for accounting distortions where relevant, and then we look forward towards the fundamentals for their businesses.

And we then see according to the valuations if we think of the stocks are inexpensively priced or not. And then at the end of our process, we will discount for certain risks that include things like political risk and macroeconomic risk and even governance risk.

RITHOLTZ: So last year in the United States I think we could fairly safely say we had one of the most politically unstable or certainly politically volatile year as we’ve seen and yet the stock market was utterly placid. It was very confounding to a lot of people although history tells us politics and investing don’t matter that much in the United States. Can you apply that same rule abroad or do you have genuine risk that a government gets destabilized, there are capital controls that come in and suddenly the investment thesis for that country is much more challenging than it was earlier?

DONALD: It’s a very good question because I also was surprised last year in the U.S. that the market did not seem to be affected by the noise — the political noise and the economic noise out there in the world as a whole and in the U.S.

I think it varies on situations, but certainly, there are political effects that we see in emerging markets, a very good example right now is in South Africa where a new leader of the African National Congress, Cyril Ramaphosa has come into power and where they seem to be sizable changes afoot politically that are causing some quite big changes with the currency and with the market in that country.

RITHOLTZ: What about some of the other countries where we’ve seen some either diplomatic or geopolitical issues. You mentioned Russia. Is Russia an investable country?

DONALD: We believe it is. It certainly is a place where you have to take into account political risk because it can have big, big effects on certain corporations and to some degree of judgment in how we look at that. It’s also a place where we tend to see risks associated with governance and some companies so those are big big factors in Russia. But we do think that there is reasonable protection in most companies in Russia.

RITHOLTZ: What about India? We talked about China earlier and you mentioned India in passing, a giant country by population, a big technology center, what are we to make of India’s perennial sense of being on the verge of great things happening and then nothing seems to really gain any traction?

DONALD: Well I think India’s very exciting right now. You’ve got a Prime Minister, Mr. Modhi who doesn’t really have to answer to anyone even the leaders of his own party were not in favor of him being Prime Minister. He appears to be very, very courageous he’s willing to do things like removing the largest denominations of currencies and making big, big changes in the civil service. So what is exciting is he’s tackling the bureaucracy of that country knowing that there’s a huge young population with think about 1 million people going into the workforce every month.

RITHOLTZ: Amazing.

DONALD: And he needs to prepare that country for a much more developed type of economic system.

RITHOLTZ: What are the countries sort of underappreciated or overlooked in the world of E.M.?

DONALD: Well of course I mean every country has its own issues. I mean India for instance is actually I wouldn’t say a terribly inexpensive market we do find opportunities there, but it, in general, is not an inexpensive market. The areas that that we think are relatively under-appreciated include Russia include some stocks in Brazil, Turkey, Indonesia for instance, and to some degree South Africa right now. But again, we find opportunities in many, many markets across emerging markets.

RITHOLTZ: Let’s talk a little bit about putting those 70 analysts to work in the emerging market space. How important is it to have the — I know it’s a cliché but boots on the ground, how important is it to physically be located in some of these countries and see firsthand what’s going on?

DONALD: I think it’s vital to go and see activities in all of these countries, I don’t think it’s necessary to actually be there all the time but I think it’s very, very critical to travel, to get updates, to see what’s changing in these markets on a very, very regular basis.

Because if you’re not seeing it fairly regularly, you’re perhaps not understanding opportunities or risks that are coming up in these markets.

RITHOLTZ: So you racking up 1 million frequent flyer miles a year or you more New York-based?

DONALD: Not a million but a good portion of that and pretty much all of our analysts are traveling heavily around the emerging market world to see opportunities on an ongoing basis.

RITHOLTZ: So let’s talk a little bit about market efficiency you know there’s only so much any of us can do to beat large cap U.S. stocks, it seems a ton of information is known there are no real advantages to picking this company over that or so it seems in the U.S.

Do you have that same level of market efficiency in emerging markets specifically is information is freely available, are there advantages that can be had from your own analysis in your own data gathering? How does EM differ from you know the S&P 500 in terms of potentially producing market beating results?

DONALD: Well I think indexing is a perfectly viable tactical and often short-term solution, but one of the interesting things is that in emerging markets, over longer periods of time the median manager tends to beat the index. And so I think informational efficiency is less good in the emerging markets and there aren’t necessarily a huge amount of analysts in emerging markets overall, it is nothing like the U.S. and so actually going and understanding these companies and utilizing certain strategies for investing, I think, can produce good results in comparison with the index over longer term periods of time.

So it’s a bit more work, I think one has to be creative but I think one can construct portfolios using perhaps different investing methodologies in emerging markets that can provide a very strong performance in the long term.

RITHOLTZ: So let’s talk about constructing those portfolios in and discuss little bit of process you manage a team that’s a lot of analysts, I assume a bunch of traders, a number of other support process and I’m guessing this investment committee on the top of that whole pyramid. What is the process like thinking about creating a new portfolio, making changes to existing portfolios, tell us how you think about these things?

DONALD: Well the way we’re organized at Lazard is that we actually have 12 different emerging-market teams anywhere from fixed income to currencies to fund of funds to equities, we’re almost like a collection of boutiques and all the strategies are different. So in equities for example, we have you know, four different equity strategies, we have a quantitative one, we have a relative value one which is where I spend most of my time, we have a growth at a reasonable price one, and we have a core one.

So a whole lot of different things, it is almost like a menu with four different food plates and people can decide based upon their objectives what they what type of journey they would like to go on.

RITHOLTZ: So that’s garp, quants, relative value, and core?

DONALD: And core.

RITHOLTZ: Is there much overlap between them or by design, they are all very —

DONALD: By design, they are quite different portfolios, the overlap is relatively limited and they will produce different types of results for investors over time.

RITHOLTZ: And you mention fixed income, I’m under the impression that fixed income overseas is a little bit of a challenge and fixed income in emerging markets is a very, very different animal than what we’re used to here in the United States.

DONALD: It is very different from the U.S. you really have a number of different fixed income areas in emerging markets, you have hard currency, debt, which has been a very, very strong area, you have local currency that until recently has been relatively weak and then you tend to get strategies that mix the two, and you also have quite a significant corporate debt universe as well.

RITHOLTZ: And you reference currencies as a group, how significant does currency hedging become when you’re investing in various countries or do you not bother with currency hedging and saying eventually it all evens out in the wash?

DONALD: In fixed income, currency hedging happens in a significant amount I would say, in equities we can hedge currencies, in practice, we don’t tend to do it that much, it’s quite expensive and it’s quite easy to get the time periods wrong.

We tend to embed it in our target prices by analyzing what risks we think the currency or macroeconomic factors in general might mean for the actual profitability of the company.

RITHOLTZ: So you could reduce your expect the returns in a given space thinking currency is a risk factor for this area?

DONALD: Correct.

RITHOLTZ: That’s quite intriguing. You also mentioned you have a relative valuation funds, let let’s talk a little bit about relative valuation in the emerging market space. How do you think of EM valuations, is it always relative between countries, are you looking at the group relative to developed nations or you mentioned earlier, you can look at different asset classes relative to their own history, or do you do a little bit of everything?

DONALD: In the way we invest, we tend to look at the actual stocks and their valuations and in a relative value world, we tend to look at it relative to the profitability of the companies. In a growth at a reasonable price type of strategy we tend to look at valuations relative to earnings per share growth rates. As a whole, we will look at the universe and we will compare the universe in emerging markets to developed markets today, the price-earnings ratio of emerging markets as a whole is at about a 30 percent discount to that of developed markets.

RITHOLTZ: That’s pretty substantial, do you think those will eventually converge?

DONALD: I think there’s a good chance with the economic scenario we’re seeing now accelerating growth around the world from a very low base. That’s usually a positive thing for emerging markets and we’re anticipating the likelihood of increasing profitability for emerging-market stocks relative to developed market stocks. Those things happen, I think we could see significantly lower discounts in valuation.

RITHOLTZ: So take me through your process a little bit because there are so many moving parts here I’m trying to get a handle on what is the decision-making process like when you’re — is it top-down, is it bottoms up, is it both because I sort of hearing you guys are really more specifically stock pickers in each country as opposed to hey from a top-down view we think Asia’s attractive but maybe South America not so much so our tilt goes that way or am I just getting that wrong?

DONALD: No, you’re exactly right. Most of our strategies are more bottom-up than top-down, so we tend to start by identifying what looked like compellingly attractive stocks. Valuation almost always play some sort of role as do fundamentals. In the relative value strategy that I’m most involved with, we are attracted to stocks that are inexpensively priced and have had pretty good profitability. We then look closely at their financial statements and footnotes to see if there are distortions that are caused by that and adjust for any distortions that we think are material. If the stock is still compellingly attractive, we will then look into the future into the next three or four years and try and forecast the fundamentals, particular the profitability and derive a price target for that.

And if there’s enough upside then to go on to the last step, that’s where we look at some of these other type of factors like macroeconomic and political risk and governance risk as well, very important for us, and discount for those.

And at the end of the day, see if we have upsides that are competitive with what we already have in our portfolio.

RITHOLTZ: So since valuation drive stockpicking to such a large degree, do you ever find yourself stepping back and looking at the overall portfolio and saying I’m going to make up a couple of countries but gee we have a lot of Turkey and Vietnam stocks and we have almost no stocks from Mexico or Thailand, I’m just making these things up, but if valuation is a key driver can you end up with sort of a lumpy distribution of stocks by country?

DONALD: You could end up with quite different exposures in different countries and we don’t have to invest in any given country.

RITHOLTZ: So you have no mandate that hey I want two percent across the board and no more than 20 percent of this country.

DONALD: Well, we have limits on what we can have in a given country so we can’t have you know, I think is very unlikely we’re going to have positions in five or six countries and nowhere else. That’s really, we’ve never had a situation like that, we’ve always pretty much been invested in something like 13, 14, 15 countries in emerging market sometimes 20. But so we haven’t really had that issue but there are times when some countries are just not attractive for instance, we will have nothing there.

RITHOLTZ: We have been speaking with James Donald of Lazard Asset Management. If you enjoyed this conversation, be sure and stick around for the podcast extras where we keep the tapes rolling and continue discussing all things emerging-market.

Be sure and check out my daily column on you can follow me on Twitter @ritholtz, we love your comments, feedback and suggestions, write to us at, I’m Barry Ritholtz, you’re listening to Masters in Business on Bloomberg Radio.

Welcome to the podcast, James, thank you so much for doing this. This is an area I find absolutely fascinating and in y shop in the beginning of 2017 we changed our tilts a little more aggressively towards EM from the U.S. and then we did it again in the beginning of 2018, nothing huge, just a couple of percentage points here and there but like you we look at valuation and think that’s a key determiner of future returns. There’s a bunch of questions on value I didn’t — I didn’t get to that I want to I want to come back to but before I do that I have to just talk about some numbers a little bit.

So when we look at the population of the emerging market countries, it’s something like half of the global people, half the global population, but in terms of market cap, it’s tiny, it’s 10 percent.

Are those two eventually going to converge? Are we going to see a greater weighting of emerging markets or as these countries — or as these countries mature some of them are going to start to move into the developed nations side of the ledger?

DONALD: We’ll probably see a combination of those things, I would guess, I think at some stage probably not in the immediate term but you’re going to see some of these countries like South Korea and Taiwan move into the developed world and the in all likelihood I think there will be more and more companies in emerging markets and you’ll see the growth of those markets as a percentage of total market capitalization.

RITHOLTZ: So South Korea, Taiwan, when I think of some of the more developed emerging-market countries Turkey, Vietnam, I want to say Australia but I know I know they’re not technically an emerging-market country.

Who is the next tier below South Korea and Taiwan?

Israel is another name that comes to mind.

DONALD: Well, Israel is actually it actually made the move a number of years ago into the developed world, Mexico is a possibility and it’s a reasonably well-developed country and market so that that is a possible mover.

RITHOLTZ: How about anyone from South America?

DONALD: I think it probably will take a little longer but Chile would be definitely the contender I think there, it’s been pretty successful economy and a pretty successful market.

RITHOLTZ: That’s intriguing.

And we talked about valuation in EM relative to history, what emerging-market countries do you think are uninvestable these days?

DONALD: Well that’s something we look at very, very regularly we look at what sort of protection we think there is for investors. The best example of an on investable emerging-market has really been Venezuela which has had terrible, terrible problems, as you know.

RITHOLTZ: Inflation, political instability —

DONALD: To a large degree caused by politics, and in 2005 2006 basically the government said it was going to buy a lot of the publicly listed stocks and just give us the value they thought made sense, there was no real protection for investors there.

RITHOLTZ: So that they de-privatized companies.

DONALD: Effectively.

RITHOLTZ: And we will tell you what we think it’s worth.

DONALD: Effectively I gave us an arbitrary value for that so really we felt that is — that is the best example of an uninvestable country.

RITHOLTZ: What’s it going to take for them to rehabilitate that image other than a full regime change?

DONALD: I think a full regime change is the only is the only thing that is going to change it, I mean I spent a lot of time in Venezuela in the early 1990s and —

RITHOLTZ: They made a lot of progress at one point.

DONALD: Well there were some there were some very, very well run companies and PDVSA, the big oil company was always known as a company that was that had experts and was well-managed. But unfortunately quite a lot of that seems to have changed now.

RITHOLTZ: So now let’s — let me change this up a little bit during the European crisis, we saw accusations that a number of countries that were considered part of the E.U. and considered developed nations really could’ve been on the emerging-market side of the line and the example that comes up time and again is Greece. Was Greece really a full developed nation and was it comparable to its other European Union colleagues?

DONALD: Unfortunately, the situation that has befallen greases been a tragedy, it was an emerging-market country and then it joined the E.U. and essentially got a lot of E.U. fiscal aid —

RITHOLTZ: And low rates and infinite borrowing from Germany.

DONALD: And that has really compromised the economy and the indebtedness of the country has gone up dramatically, it is now back in emerging markets and I would say we’re waiting to see if the plans — the economic plans for Greece can rehabilitate the country particularly the banks which have very, very high nonperforming loans but if the economic plans can work, then perhaps Greece can come back.

It’s a very sad story, a lot of companies that I’ve seen over years have had terrible problems through this and in many ways it might have been a better thing if Greece had never put the euro as its currency.

RITHOLTZ: I was in Greece two summers ago and I’m just struck by what a beautiful country and people are lovely but you getting a tourists eye view not necessarily an economists eye view and it feels like a European country, it feels like a developed country, you just the apparently the financial infrastructure simply isn’t there compared to the rest of Europe.

DONALD: Well it had excellent banks in the period in the 1990s, some very, very well run banks, but when indebtedness increased enormously and wasn’t really kept properly in the economic pitch — in the economic figures of the country, it was a big negative surprise and of course no one known wanted to be involved with the country at all.

RITHOLTZ: Now with the hindsight looking back it seems absurd that banks in Greece and the government of Greece could borrow at the same rate as banks in France or Germany, but I guess that’s the problem with too much easy money.

DONALD: That I think is the problem.

RITHOLTZ: So we always used to talk about the PIGS, Portugal, Italy, Greece and Spain, are any of those other Southern European countries really are at risk for where should the these countries be placed? Should they be developed nations are or emerging-markets?

DONALD: From what I understand with those four countries, they have worked pretty hard on mending their fiscal situations and their economic condition and so I don’t think they will be emerging markets, those four — Portugal is probably the closest but I think I think they’ve all been a lot of very important work in the last six or seven years.

RITHOLTZ: I mean it’s hard to imagine Italy as an emerging-market given their history and everything else and I was just in Spain in October and I can’t say enough about how delightful everything from the food to the people, but again it’s a tourists eye view, you not seeing the dark underside.

DONALD: Right, right.

RITHOLTZ: And then let’s talk a little about China because that is such a fascinating growth story and such a fascinating country over the past three decades, what’s the line in the sand where China crosses over from EM to developed?

DONALD: Well I think there’s some way yet to get to that line. One of the big changes is happening this year is that the main indices will have China A shares, so mainland traded shares in China and the capital markets in China are increasingly converging with global capital markets. We still have quite a lot of work to do on the on the debt side in China, but this A share inclusion in the MSCI index I think is a major, major event.

RITHOLTZ: So to put — to explain that a little bit, if you are on non-China resident, if you are overseas, you go to Hong Kong you buying B shares, not A shares, there isn’t the same arbitrage situation that keeps them lined up sometimes you’re paying a premium you are not getting the same exact thing, the same exact rights, is that going to go away and we’re all be able to buy a shares? Is that the expectation?

DONALD: As long as you have an ability to do it through the connect system in Hong Kong you are going to be able to buy Shanghai or Shenzhen listed A shares in that market to a large degree within those indices. And it’s worth remembering the A share market is you know — if you take the full market is the second biggest stock market in terms of market capitalization in the world.

RITHOLTZ: So are B shares going to go away?

DONALD: I’m not sure if they’re going to go away but possibly over time they will.

RITHOLTZ: So China has been growing well for a while was 10 percent, 12 percent, now we’re in the 7 percent not that that’s too shabby, we’re hoping to grow at 3 percent in the U.S., we’d kill for 7 percent, what happens to China’s economy as they mature and what does that mean for their share market?

DONALD: Well it’s easier for rudimentary economies to grow rapidly because it’s a catch up process with the developed world and so over the last 30 years or so, the growth is been very impressive but it’s been naturally coming down because the catch up is less and less.

RITHOLTZ: You are starting from such a tiny base, it’s easy to grow 20 percent , but now they’re almost as large an economy is as the U.S. and some measures larger.

DONALD: Yeah I think it’s less big in the U.S. but it’s been going much faster and it has the potential one day to be as big as the U.S.

I think, you know, the interesting thing is that last year at the Chinese Party Congress they didn’t actually come out with the target growth rate it had been around 6-1/2 percent, this whole has a lot to do with Xi Jinping, the President and consolidation of his power but the fact that they haven’t got a target growth rate I think is important because perhaps it takes pressure off Xi Jinping and the leadership to some degree.

I think there is also a wish in China to have better quality of growth and not just simply higher growth.

RITHOLTZ: Let’s get into some of the details there, that’s really interesting, how do you define better quality, how did they define better quality, what are they looking to see from their economy going forward, what areas do they want to see more growth in and what are they leaving behind?

DONALD: I think they probably mean better diversified growth I think they probably mean more technology and more modern industries and not just the big industrial old-style industries. They’ve also indicated that they would like to see less financial leverage in the economy and the industrial sectors of the economy as well.

RITHOLTZ: Now, aren’t most of the major financial centers and big banks there either somewhat or partly or fully state owned if they want less leverage can’t they just dial back their leverage? It seems sort of odd to hear that said, we want less leverage, well you guys are in charge of it.

DONALD: That is correct, but on the other hand, China has changed a great deal the last 30 years but there were still old-style effects from the communist period. So for instance state owned enterprises the companies that are wholly owned or still majority controlled by the state or different government bodies, in some cases they have a constitutional right to bank capital.

And so one of the issues in China that has been concerning investors has been particularly in the last six or seven years when the economy has been slowing down, quite a lot of state owned enterprises have been demanding capital from the bank.

RITHOLTZ: So they have a right to access bank capital but what about leverage ratios, what about interest rates, there are lots of dials and levers that the state can pull to say if you want capital, okay, but it’s going to cost you 14 percent or whatever?

DONALD: Well the state owned enterprises have actual rights to have the capital often at lower rates and so the amount of control the banks have or even the politicians who are in charge of the banks is limited.

RITHOLTZ: That is fascinating.

DONALD: And so this is a process which presumably will get deregulated over time but it is not there at this stage.

RITHOLTZ: So a couple years ago, a giant story out of China was the ghost cities that that China seem to be anticipating the need for big urban centers be it from manufacturing or service jobs, and they would put up the cities of 10 million, 20 million, 30 million people seemingly overnight and it was a bit of a frenzy to buy into those units, and then that story kind of faded from the headlines? What’s happening with those cities? What economic purpose do they serve and is that a good or a bad thing for China’s future?

DONALD: Urbanization is still at the core of Chinese political thinking.

RITHOLTZ: This is a 10 year plan, this isn’t just a short-term —

DONALD: May even be longer than 10 years.


DONALD: Yes there’s still a massive movement of people from rural areas to the cities there are over 100 cities apparently in China that have 1 million people or more, you know, a midsize city in China is probably 8 million people like New York City, and a big city like Shanghai or Beijing at 20 million people and I — but I think urbanization is a long-term process.

RITHOLTZ: Half the country is in farms or is it is it more or less than that?

DONALD: It’s probably a little bit more than half country that still is in a rural setting but opportunities and economic opportunities are generally far greater in urban settings — your opportunity to go to university be educated much greater if you’re in an urban location and I think the government is definitely continuing to think of urbanization as an ongoing primary policy.

RITHOLTZ: So that seems like it accomplishes a few things, it gets people out of the rural areas off the farms, it leads to greater education of the population and creates a fairly sophisticated workforce that can do some of these are more modern industries that that the Chinese government is pushing people for. Is that is a fair assessment?

DONALD: I think that’s fair I think it’s all part of the economic development program that the Chinese government would like to see.

RITHOLTZ: So we barely think beyond a quarter or two in the United States they are making plans 10 and 20 years out, that’s a real challenge to compete with that, isn’t it?

DONALD: I think emerging countries have to think in terms of decades for their economic development but that’s — that is really the best way of looking at things because again they have the visibility because they can look at a country like the U.S. and say maybe we don’t want to be exactly like what the U.S. is but we can catch up in these various areas over the course of the next 10 or 15 years.

RITHOLTZ: So the infrastructure spend we’ve seen in China right now, we are recording this in the midst of an infrastructure debate in the United States, they have been spending tens of billions maybe even hundreds of billions of dollars on infrastructure buildout. How important is that to the country? How much longer is that going to go on, are they going to basically create the equivalent of what the U.S. did postwar for their own country and why are we doing it which is the rhetorical question afterwards?

DONALD: I would probably say they’ve already done that because that if you go to even midsize cities in China you’ll find a beautiful new airport, you’ll find expressways and highways ,you’ll find in many places, very, very good infrastructure and they believe that is necessary to attract companies to set up factories or to set up a potential for employment and they’ve done that and I think they are continuing to do that as we look ahead.

Maybe we’re not to see big increases but I think were to see ongoing spending.

RITHOLTZ: And they think that gives them a competitive advantage for both building attracting capital building factories building companies that become world-class global competitors.

DONALD: And I think the evidence is there I mean China is today in many areas, the factory of the world, and so that that build the building of infrastructure has attracted a lot of big companies.

RITHOLTZ: Someone here should take a look at what they’re doing and perhaps we can have paved roads also. I remember when I could drive my car on the road and not worry about losing a tire.

Anything we skipped? Anything we I didn’t mention that you want to refer what any parts of the world or any country?

DONALD: Well I think India is worth mentioning at this point because according to I think the leading plans and India something like two thirds of all infrastructure spending is planned to be built in the next 14 years.


DONALD: In India. Now if you been to India.

RITHOLTZ: I have not.

DONALD: Okay India is quite a different situation to China, the infrastructure is generally relatively old although this been quite a lot of structure building in the last 15 years.

RITHOLTZ: I’ve seen photos of telephone poles with thousands of wires coming off of them, some are phone, some are Internet, it looks like it’s utterly jerryrigged and cobbled together.

DONALD: Well the plan is to change that, the plan is to build something like two thirds of the total infrastructure of the country in the next 14 or 15 years and that is that is with the Modi government so it’s a very exciting time in India and I think it’s important to highlight it because it may have a significant effect on worldwide growth.

RITHOLTZ: Quite interesting, let me jump to some of my favorite questions I ask all of my guests.

Let’s start with what is the most important thing that people who know you don’t know about your background?

DONALD: Well I — when I was a student I had quite a lot of pretty basic jobs and I was a street cleaner in London for a summer —

RITHOLTZ: Like literally pushing a broom?

DONALD: Yes, yes, which gave me a different perspective on the world I think and it was certainly quite an interesting — and I worked at a pulp and paper mill in Northern British Columbia one summer which was quite a tough job to say the least and I worked also in a warehouse for a supermarket company unpacking box cars.

I would say these things motivated me to want to have an office job and ultimately motivated me to move into the investment world where I could be mentally stimulated.

RITHOLTZ: Tell us about some of your mentors who helped push your career along and affected your philosophy.

DONALD: Well, I’ve been fortunate my father was an asset manager, he was a portfolio manager and I never had pressure to go into this area, but he was certainly someone who understood the industry and was very helpful from that point of view and I was fortunate later to get an opportunity to work a little bit in the industry and then I took various exams to see if I enjoyed it more.

So that was one mentor, I would say when I was at Singapore Warburg and Mercury Asset Management, several of my senior colleagues were truly investment people and were tremendously good mentors to me and this is an industry that always has its challenges and you have to know how to deal with those challenges and they were very, very important to me.

RITHOLTZ: How about your philosophy? What investors affected the way you look at the world of investing in general or emerging markets in particular?

DONALD: Well this probably sounds a little bit textbook but I would say I very clearly understand the way Warren Buffett invests.

RITHOLTZ: But people don’t realize it’s an actual legal obligation of the show for that to be the answer.

You could do much worse than Warren Buffet.

DONALD: I think he’s probably one of the absolute best investors of all time, I also think John Templeton was one of — again one of the greatest investors of all that very much a global investor and very fundamental in nature and I think — I really think they were probably the two names that I would put the top of the list.

RITHOLTZ: Buffett for valuation, Templeton for global.

DONALD: And Templeton for valuation as well.

RITHOLTZ: Really? Interesting. Let’s talk a little bit about some of your favorite books, this is everybody’s favorite question, tell us what you like to read, give us some of your favorite books be they finance related or not, fiction or nonfiction.

DONALD: Well I very much enjoyed recently reading a book on the Wright Brothers by David McCullough, I thought it was a very interesting book, I enjoyed reading The Last Spike which is a Canadian book about the building of the Canadian Pacific Railroad and the making —

RITHOLTZ: The Last Spike.

DONALD: The Last Spike so it was the last spike in the railroad when they finished that off in the Rockies, and that’s been my Canadian background. I still think The Prince by Machiavelli is a brilliant book and tells you a lot about interacting in difficult situations and in a very, very useful book from that point of view.

RITHOLTZ: Those are three winners. What has changed since you’ve entered the world of emerging markets? How is it different today than it was in the early 90s?

DONALD: Our universe is changed dramatically. So again back in the 1990s places like Malaysia and Mexico were huge parts of our universe, Portugal and Greece were part of our universe back then, very big parts, Greece has come back in but it left for a while. Today China has become the really big weighted country but Brazil and India are also very substantial. So the universe is changed and there’s been quite a lot of sectoral change in it, there have been a lot more constituents of our universe which I think is very different from the U.S. where I think the number of stock is actually fallen over the last say 15 years.

RITHOLTZ: The joke is the Wilshire 5000 is about 3600.

DONALD: Right, I mean the other thing that’s really changed is that information has ballooned so at 20, 25 years ago, going — being based in these markets was I think much more important whereas today I don’t think you have to be based in the markets, I think you can go and travel regularly to the markets because the information is instant.

RITHOLTZ: Is that a competitive disadvantage at one point in time where there wasn’t a lot of information and now anyone can Google it and come up with some data?

DONALD: I think 20 or 25 years ago, it could’ve been seen as a disadvantage.

RITHOLTZ: So you told us about the recent shifts over the past three decades, what do you expect the shifts to be in the emerging market space over the next three decades?

DONALD: It was very hard to tell, I would imagine emerging markets will develop further and will see some of the frontier countries joining the emerging markets. Vietnam for instance is a frontier country, perhaps it’ll develop its capital markets to become an emerging market, we will see so that that’s one thing you know, some perhaps shorter-term changes, we’ve seen a market but in the last seven years where growth has been the most successful style by a long way and at some stage I would anticipate a change of leadership more towards value.

RITHOLTZ: True in the U.S. as well.

DONALD: That it would probably be a global effect if it happened, I think there’s a high probability of that. I also think in the emerging markets in the last five or six years markets have been quite affected and in somewhat — in some cases dominated by macroeconomic factors. And I would guess that will become more idiosyncratic, more stock focused at some point in time.

RITHOLTZ: tell us about a time you failed and what you learned from it.

DONALD: Well when I was a university many, many years ago, I was very involved in student politics and I was the speaker of the University Student Council which was actually quite a serious operation, and there was an election for president of the Student Council and I think I could have been a contender and I could’ve even won it and I decided not to go into that race and I have lived to regret it.

RITHOLTZ: We always seem to regret the things we don’t do as opposed to those that we do. Tell us what you do outside of the office to either relax or stay mentally or physically fit? What you do for fun when you’re not in a suit and tie.

DONALD: Well when I can I try and do a bit of exercise, not as much as I’d like to but I do try and do some. I read quite a lot I quite enjoy some movies, I have a cottage up in Canada so I go up there and travel in boats and see friends in those places and I even though I travel a lot for work, I do travel for pleasure as well and go and see historical sites and places like Rome for instance, is a wonderful place to go with incredible, incredible history.

RITHOLTZ: No doubt about that. Where in Canada you have a cat a cottage and hat lakes are you boating on.

DONALD: It is in Lake Huron, it’s a part of Lake Huron Georgian Bay in the eastern part of Lake Huron and of course a very, very big Lake and it’s remote, very difficult to get to, and but it’s very calming place.

RITHOLTZ: I go fishing every summer in Maine and we’re so far north that we start to get Bell Canada showing up on there, but it’s a flight in and then of a floatplane and really it’s just– it it’s not just 100 miles away from anywhere, it’s 100 years away from anywhere.

DONALD: Yes, it’s very remote where I go and actually quite hard to get to.

RITHOLTZ: What sort of advice would you give to a millennial or someone just beginning their career who were — who was interested in getting into emerging markets or asset management or finance?

DONALD: This is something we have to be concerned about is are lots of millennial’s now working with us and sometimes they have different priorities for from the way we are, but I would say first of all you can combine your business interests and other interest, your personal interest in what we do obviously the type of work we do can become challenging, but you can do other things, for instance I’m involved heavily in a charity which is makes grants to about 70 grantees around the emerging market world.

I’m involved in an educational foundation and those are things that are very, very important to me, I would also encourage millennials to think long-term, the asset management business is a long-term business, particularly the long only part of it and you can’t really be evaluated properly if you’re not going to be long-term in your focus.

Finally I would say learn how to evaluate yourself, learn how to criticize yourself in a positive framework, constructive criticism, and understand what you do well and what you do badly.

RITHOLTZ: And our final question, what is it that you know about investing in emerging markets today that you wish you knew 30 years ago?

DONALD: Well I would say the great thing about investing in general but certainly in emerging markets is it’s very stimulating, it’s always challenging, it’s not easy, you are always learning, very important you have a plan, you have a process and I think to be in this business, you have to know how to take pain.

RITHOLTZ: How to take pain.

DONALD: Because anyone doing what we do active investment management is going to go through challenging periods of time and you have to be mentally strong to go through that.

RITHOLTZ: Quite fascinating we have been speaking with James Donald of Lazard Asset Management. If you enjoyed this conversation be sure look up an inch or down an inch on Apple iTunes Overcast or where ever finer podcasts are sold.

We love your comments feedback and suggestions, write to us at, I would be remiss if I did not thank the crack staff that helps us put together this conversation each week, Medina Parwana is my producer and audio engineer, Taylor Riggs is our booker producer, Mike Batnick is our head of research, Atika Valbrun is our business manager.

I’m Barry Ritholtz, you’re listening to Masters in Business on Bloomberg Radio.


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