Data from the Institute of International Finance found that foreign net flows to emerging market portfolios accelerated last month to almost three times the amount in May. As flows to emerging markets pick up, ValueWalk decided to profile an emerging market fund manager: Mesut Ellialtioglu, Turkey investment officer of the Talas Turkey Value Fund at Talas Capital.
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Talas was up 29.3% in dollar terms for 2020, compared to the MSCI Turkey Index's return of -8.5%. The fund was down 8% for the first quarter, but the MSCI Turkey Index was down 20%.
Building On Research
Ellialtioglu said in an interview that he has always been a research-oriented person from childhood. As a child, he enjoyed getting printed material from all over the world, especially different companies. He said in the early 1980s, he would cut coupons from printed newspapers and send off for catalogs and annual reports from various companies. That's how he got started with research.
Because of his interest in businesses and industries, he came to the U.S. to study business at the Wharton School at the University of Pennsylvania. He learned about the interaction between the stock market and the economy. He compared his knowledge and observations with those of his home country of Turkey.
"So I was like always in a process of comparing the differences and trying to understand what will come up in my own country in Turkey and what kind of opportunities lie ahead," Ellialtioglu told ValueWalk. "… At Wharton it was so much common to read the annual reports of Berkshire Hathaway, and we had always discussions about all these value investment style and the attractiveness of compounding through investing very long term."
He noted that the Istanbul Stock Exchange was founded in 1986, so he started following the Turkish stock market. After Wharton, Ellialtioglu took a research position at Banker's Trust, and he continued to look to Turkey and elsewhere for returns.
"Finding different opportunities actually all over the world, I look at many, many different places, not specifically Turkey," Ellialtioglu said. "But my focus is Turkey, and even though I look all over the world to see different performances, different developments, I compare them with my Turkey base opportunities and really try to identify what lies ahead here in Turkey as an investment opportunity… So it's like thinking global and acting local… It's always like you have to be looking globally at everything, and when it comes to a specific investment, it's still your own groups, and your own local experience gives you further advantages and edges."
Finding Value In Turkey
At a time when Turkish stocks have been plunging, Talas Capital has been able to protect wealth. Ellialtioglu said the MSCI Turkey Index fell almost 50% over the last three years in dollar terms. However, his fund was flat over the last three years. Ellialtioglu said it wasn't an outstanding return, but his fund posted a strong performance compared to the market's 50% decline.
"What I am thinking is that this is the bottom level of the markets, being in the past three years, so there lies the opportunity in front of us," Ellialtioglu said. "So having preserved the capital of our investors, I expect it to deliver substantial returns going forward, so when it comes to emerging markets, there is always huge upside and downside."
Matthew Peterson, CFA who runs a small value hedge fund out of Austin Texas concurs. In a recent letter to investors, Peterson called Mesut "the world’s greatest Turkish equity analyst", noting:
There are only 400 publicly traded companies in Turkey. So, that is a totally manageable amount to know everything about. About 200 of the companies are truly investable. The other ones are ones you wouldn’t put your money in, they are kind of zombie businesses. Mesut has been studying the same 200 companies for 25 years. He knows every manager and CEO. "
Since he is based in Turkey, his concentration is creating value from the Turkish markets and doing business in Turkey and its surrounding region. Ellialtioglu noted that Turkey is the 17th largest economy in the world with a population of 85 million, and it's connected to the European Union with a free trade agreement.
"So when you look from outside to a country, you have to first see if this country is investable, and what makes a country investable is its domestic economy, and besides domestic economy, its trade links with surrounding countries and group opportunities from there," Ellialtioglu explained.
He added that Turkey has a strong economy and is of strategic importance because it's the center of Eurasia.
His strategy starts with the quality and size of a company. He watches its performance and growth, the quality of management and capital allocation decisions, and the quality of its financials, balance sheets, operations, operating profitability, and cash generation.
One of Ellialtioglu's top positions is glass conglomerate Sisecam Group. He said the firm is one of the top five glass conglomerates in the world. Sisecam makes glass bottles and containers and other types of glass, including glassware, glass that's used in hours and glass chemicals. Ellialtioglu said the company is a global leader in all four segments. It has about an 80% market share in Turkey and a 15% share in the EU. Sisecam is in the top three companies in glass chemicals like soda ash and chromium.
Ellialtioglu said glass consumption has grown by about 2% to 3% annually over the last decade, but in emerging markets like Turkey, glass consumption has grown 7% or 8% per year in terms of volume.
"When we look ahead in front of us when it comes to Europe, what we expect is that the glass consumption will grow by about 5-7% in the next five years," he said. "So we have to see the changing patterns of growth in different sectors, so when it comes to the glass sector, going forward, it is important to see the growth potential in emergent markets and also the changing growth potential in the markets."
He noted that the European market is increasing in importance because of its increased focus on environmental sustainability over the next five to 10 years. Ellialtioglu said the EU requires houses to get a license for energy savings, and in order to get a license, they have to renovate their glass windows.
Being A Contrarian Investor
Ellialtioglu added that the market selloff in Turkey had created significant value gaps between intrinsic and market values, and he has always benefited from these gaps, although it sometimes takes years for him to see gains.
"In my career I always benefited so much from this opportunity, this differentiation… and being a contrarian at the bottom of the market because at the bottom of the market, everything seems so bad, and everything seems bankrupt," he said. "That's always the time to start investing and being contrarian, and this is a calculated risk based on this fundamental value of the company, and I advise investors to take the opportunity to invest and see the differentiation between value and the price… I always benefited from buying at the bottom of the market."
Looking Into The Future
When asked about investors who inspire him, Ellialtioglu mentioned Warren Buffett and Charlie Munger. He said what has made a huge difference in his career has been looking far into the future. He has seen many Turkish investors lose so much money, their fortunes and their careers because they couldn't invest very long-term.
Whenever he has problems, he always returns to the principles of Buffett and Munger and tries to look into the distant future, not just the next three or four months or even the next year.
This post first appeared on ValueWalk Premium