James Harmon's Caravel finds investment opportunities in the world's unlikeliest places
It would be an understatement to label James A. Harmon a contrarian investor. The chairman of New York-based Caravel Management, a so-called frontier-investing firm, is venturing into places where few others dare to tread. Caravel has put money to work in the world's most tumultuous markets: Lebanon and Pakistan, where deadly violence is endemic; Bangladesh, where dire poverty is exacerbated by a steady procession of cyclones and floods; and even Zimbabwe, where inflation has topped 500,000% as the economy teeters under the rule of President Robert G. Mugabe.
If it all sounds too bad to be true—well, that's the point. "The risks," says Harmon, "are overrated." Exploiting the gap between popular perception and market reality has been an immensely profitable undertaking. Harmon launched Caravel, named after 15th century explorer ships, in October, 2004, with $1 million. Now it has $150 million under management and is on track for $500 million by decade's end. Through Nov. 30, the most recent figures available, the firm had returned 224% net of fees since its inception, compared with 179% for the MSCI Emerging Markets index and 41% for the Standard & Poor's 500-stock index.
At a time when seemingly every stone in emerging marketdom has been turned over, it takes an intrepid and well-connected investor to find fresh opportunities. Harmon's career experience has put him in a rare position to pounce. During the Clinton Administration, Harmon served as head of the U.S. Export-Import Bank, the governmental entity that helps finance the sale of American exports abroad. Before that he spent 38 years on Wall Street, rising to the top post at New York investment bank Schroder Wertheim. Nowadays, Harmon pivots between both worlds, traveling to Washington at least once a week to chat up politicos and confabulating often with foreign heads of state. "He's a seasoned diplomat and finance guy," says David W. Blood, managing partner of Generation Investment Management, a firm he runs with former Vice-President Al Gore, a mutual friend. "In the realm of frontier investing, you cannot get a better combination."
Harmon's banking contacts have proven just as valuable as his political ones. His shop pulls in $15 million a quarter from investors—many of them celebrities, according to people familiar with the firm. "It's word of mouth," he says. "And I like it that way." In the 1980s, Harmon was on the board of Orion Pictures, which released Woody Allen's films and the Oscar-winning Dances with Wolves, and was nonexecutive chairman of Warner Music (WMG). What's more, Harmon's wife of 50 years, Jane, was lead producer of such Broadway plays as Driving Miss Daisy and the 1997 Tony award-winning The Last Night of Ballyhoo. Harmon also counts California Governor Arnold Schwarzenegger among his friends.
Harmon, 72 and lean from running four miles a day, ended up in high finance by accident. Born in New York City and raised in nearby Mamaroneck, N.Y., the son of a lawyer and shop owner went to study English literature at Brown University in 1953. Summer jobs at broker-dealer New York Hanseatic Corp. whetted his appetite for Wall Street. After getting an MBA from Wharton in 1959, Harmon spent the next 15 years at Hanseatic, where he moved into investment banking. In 1974 he joined Wertheim, ascending to chairman and CEO in 1986. All the while Harmon took a strong interest in politics. He ran the finances for the 1993 reelection campaign of Democratic New York Mayor David N. Dinkins and in 1996 helped raise some $100,000 for the Clinton reelection campaign.
The banker's life changed in 1997, when the President tapped him to run the U.S. Export-Import Bank. "I didn't know what it was," he confesses in his office overlooking New York's Central Park. "I had to look it up." He accepted the post unaware that he would soon find himself in the middle of a storm unlike any he had navigated before: the emerging markets crises of the late 1990s. Barely a month after Harmon's Senate confirmation, Thailand's currency collapsed, spreading contagion throughout Indonesia, Malaysia, South Korea, and the rest of the region. In Seoul, he says, he witnessed depression-like unemployment juxtaposed with scenes of citizens jamming the streets to donate jewelry to shore up their foundering currency. "I knew then and there that a recovery would not be far off," says Harmon. Indeed it wasn't. South Korea has come so far, it's now on the brink of graduating into the league of developed economies.
A decade later, Harmon is calling on such experiences—and the high-level contacts he made along the way—as he dives headlong into some of the diciest frontier markets. Caravel holds 34 positions in 16 countries, including Kazakhstan and Zambia. The firm has 10% of its assets in Pakistan, where it is investing in Adamjee, a rapidly growing insurance company. The insurance industry is embryonic in Pakistan, even compared with neighboring markets. "As the consumer economy takes off in Pakistan, so, too, will insurance such as property, motor vehicle, and a range of products related to consumer credit and travel," says Caravel chief investment officer Donald L. DeVivo. But the risks are high: Pakistan has shifted into and out of a state of emergency as the calls intensify for its leader, Pervez Musharraf, to step down.
In the Philippines, which makes up 14% of Caravel's portfolio, the firm is backing DMCI, the nation's largest construction outfit. Harmon likes how the company has expanded into lower-income homebuilding as well as water and power infrastructure—just as the Philippines is experiencing a broad-based housing boom. He notes that the Southeast Asian country's economy, fresh off fiscal and tax reform, is growing at its fastest clip in 30 years.
Perhaps Caravel's most brazen foray is into Zimbabwe. About 2% of the firm's portfolio is in Dawn Properties, the owner and manager of 10 hotels and undeveloped residential land in the capital city of Harare. Tourist traffic is increasing with the rapid weakening of the local currency. "Dawn's land and property assets are substantial and not likely to be depreciated by a deteriorating economy," says DeVivo. "On just about any measure, the stock is very cheap."
Not all of Caravel's investments have panned out. In May, 2006, the firm bought a stake in BMB Munai, a small Kazakh oil-exploration company, at the equivalent of $10 a share. Within months the company's stock had plunged to $5.25. Harmon dumped his holdings in December, 2006, at nearly a 50% loss. He's now planning a new venture in war-hobbled Lebanon and the Palestinian territories. But first, he's laying diplomatic groundwork. Harmon is urging Washington and the rest of the G8 to flood the region with loans and aid to set a foundation for peace and, eventually, investment—a virtuous cycle, he says.
Of course, the nascent markets in which Harmon invests could tumble badly, sending investors scurrying to safer destinations. But if his hunches prove correct, that's when the really big gains will come.
In an Oct. 26 research note, Merrill Lynch (MER) strategists Michael Hartnett and Lucila Broide described the frontier economies—which include Jamaica, Sri Lanka, and Slovenia—as "the emerging emerging markets." They figure that group of 37 countries represents nearly one billion consumers and sports a gross domestic product of $2.4 trillion. That's still small compared with the traditional emerging markets. But the stock gains have been far stronger: The report notes that since January, 2000, the frontier markets have returned an annualized average of 24%, com-pared with 12% for emerging markets and 3% for developed ones.