Oppenheimer Wins Buying Stocks in Crisis: Riskless ReturnCharles Stein
Justin Leverenz used the February invasion of Crimea to add to such Russian stock holdings as OAO Magnit. He wasn’t counting on a quick end to the conflict, just buying on the cheap to bet on the retailer’s long-term outlook.
Identifying strong businesses and investing during price declines enabled the $43.5 billion Oppenheimer Developing Markets Fund to rank No. 1 among emerging-market equity funds that buy stocks of all sizes in the past five years, according to the BLOOMBERG RISKLESS RETURN RANKING. The fund combined the highest absolute return and below-average volatility in a group of 21 peers with at least $100 million in assets.
Leverenz finds and holds what he calls “extraordinary” companies, those with the potential to transform industries or take market share from rivals. Because such enterprises typically sell for premium prices, he sometimes waits for bad news to drag the stocks down to more attractive levels.
“If you want to achieve strong absolute returns you have to be willing to embrace controversy,” Leverenz said in a telephone interview from his lower Manhattan office.
Magnit slumped 24 percent in the two months following Russia’s Feb. 28 incursion into neighboring Ukraine. The stock has since bounced back above its pre-invasion level.
Leverenz, 46, has been running the fund since 2007. He beat the MSCI Emerging Market Index in the global financial crisis of 2008 when developing-market stocks lost 53 percent with reinvested dividends, again in 2009 when they soared 79 percent as economies rebounded, and every year since.
The performance quickly attracted the attention of investors, who have poured a net $24.6 billion into the fund since the end of 2008, according to data from Chicago-based Morningstar Inc. Oppenheimer Developing Markets, the world’s largest emerging-market stock fund, closed to new investors in April 2013 to stem the cash tide. Leverenz said he didn’t want to be pressured into purchasing things in a hurry.
The manager gets help from analysts in running the fund, while making all the key investment decisions himself. He spends half his time on the road, mostly in his hotel preparing for meetings with executives of portfolio companies. He rarely checks his e-mail or voice mail because they distract him from his work.
“This is a one-man band,” Leverenz said. “This fund is my life.”
With co-manager Heidi Heikenfeld, he also runs Oppenheimer Emerging Markets Innovators Fund, which opened June 30 and invests in small and mid-size stocks.
Bloomberg’s risk-adjusted return is calculated by dividing total return by volatility, or the degree of daily price-swing variation, giving a measure of performance per unit of risk.
Oppenheimer Developing Markets gained a risk-adjusted 5 percent in the five years ended yesterday, according to data compiled by Bloomberg. It had a volatility of 17.6, compared with an average of 19.5 for the group of comparable funds.
The $10.7 billion Aberdeen Emerging Markets Fund ranked second, with the second-highest absolute return and the third-lowest price swings. The $1.46 billion Harding Loevner Institutional Emerging Markets Portfolio was next, with the fourth-highest total return and lower-than-par volatility.
Leverenz, a chartered financial analyst with a master’s degree in international economics from the University of California at San Diego, decided early in his career that the way to invest in emerging markets was to concentrate on companies, not countries. He usually shies away from businesses that sell commodities.
“We have a natural bias against cyclical, commodity-dependent companies and expect commodity producers to face weaker prices and earnings,” Leverenz wrote in the fund’s annual report for the year ended Aug. 31.
Tencent Holdings Ltd., Asia’s largest Internet company, fits Leverenz’s definition of an extraordinary business. When he first acquired shares in 2007, it had large collection of online users but no obvious path to turn that audience into a profitable enterprise.
That didn’t bother Leverenz, who saw a community of several hundred million people who were passionate and engaged. He was confident Tencent would find a way to make money, even if he wasn’t sure how.
“You have to have an extreme imagination,” he said. “I am a believer that it is all about the essence. I am not a person who gets into the details.”
Tencent, based in Shenzhen, China, has since become a major competitor in gaming and has the potential to become a force in mobile messaging and online payments, Leverenz said. The company agreed in late June to buy a $736 million stake in a Craigslist-like site to bolster its Web content.
Tencent has jumped 18-fold since it first appeared in the fund in May 2007, and Leverenz said it can keep climbing.
“The fund finds interesting stories and hangs on a long time,” Karin Anderson, a Morningstar analyst, said in a telephone interview. The fund has a 29 percent turnover rate, according to Morningstar data, compared with an average of 67 percent for its peers.
Because it tends to be light on commodities and financial stocks, the fund may lag behind rivals when those industries lead the way, Anderson wrote in a January note.
Magnit, which Leverenz calls “the Wal-Mart of Russia,” has been in the fund since 2008 because Leverenz saw that its discount supermarket chain had the potential to increase market share in a country where mom-and-pop and open-air stores still represent about half of the retail food business.
“This is an industry that is highly concentrated all over the world,” he said. “It is winner take all.”
Magnit, which is based in Krasnodar, has prospered because it is an efficient operator that has exploited its growing size to gain a cost advantage over rivals, Leverenz said. Its stock is up eightfold in the past six years.
Other Russian holdings Leverenz increased in the first quarter include Yandex NV, which is the country’s largest search-engine operator, and NovaTek OAO, a producer of natural gas.
In an April note to investors, Leverenz said it was unclear whether Russia’s conflict with Ukraine would subside or escalate. Even so, the fund was buying to take advantage of “extraordinarily low prices,” he wrote. Five Russian stocks represented 7 percent of the fund as of March 31, according to the same note. Russian equities account for 5 percent of the MSCI Emerging Markets Index.
Russia’s Micex Index has rallied 19 percent since touching a 2014 low in March, according to data compiled by Bloomberg.
As Brazilian equities declined 16 percent last year, Leverenz boosted his stake in Rio de Janeiro-based retailer Lojas Americanas SA. He described the chain, which owns a controlling stake in online marketplace B2W Cia. Digital, as “one of the most beautiful businesses on Earth.”
Not all of the fund’s stock picks have panned out.
Longtime holding Tullow Oil Plc has fallen 39 percent in the past three years, hurt by a series of dry holes on some of its African projects. Leverenz, who calls London-based Tullow “one of the most successful exploration and production companies the world has ever seen,” has accumulated more shares in 2014.
“I don’t believe I’m wrong,” he said.