Lessons from two international investments

By Jessica Bruno | April 21, 2017 | Last updated on April 21, 2017
8 min read

A lot can change in two decades. When James Donald joined Lazard’s emerging markets fund back in 1996, Mexico was a major focus and China was a minor part of the portfolio.

“The universe in emerging markets has changed dramatically,” says Donald, who’s now a managing director with Lazard in New York City. His investment style, however, has not. He and his team still search for undervalued companies with relatively stable profitability. Often, that means companies in countries or sectors that have fallen out of favour.

Over time, he’s become stricter at discounting for risk when calculating a company’s value. Risk can mean macroeconomic issues, like a country’s political climate, or micro concerns, like corporate governance.

Emerging market investing has also become more competitive over the last six years, as companies in many regions have seen earnings downgrades. Donald says that’s pushed a lot of managers to look at companies they would have otherwise passed over. “We’ve found [fewer] opportunities than 10 years ago,” he says, “but there are still quite a few.”



Founded in 1988, CP All operates Thailand’s 7-Eleven stores. As of 2015, there were nearly 9,000, with plans to reach 10,000 stores in 2018. The stores stock ready-to-eat fresh food. CP All also has stakes in marketing, IT, sales, logistics and support companies.

Putting it through the process

Every week, Donald gets a list of 200 to 250 companies that fit his investment criteria, which include strong historical returns and relatively low current valuations. The companies can be in any sector, and in any emerging or frontier market. He also looks at names in developed markets with significant exposure to emerging economies.

From there, he combs through financial statements. He reviews the company’s accounting practices, among other checks, to see whether they’re a potential risk to investors. And, when looking at potential investments, he and his team focus on the stability of a company’s current and future profitability. He studies different ratios and indicators, depending on the sector. For financial companies, it’s price-to-book ratio, while for consumer staples it’s price-to-cash flow.

When he reviewed CP All, its books didn’t worry him. And since CP All is a consumer staples stock, he used anticipated return on equity for the next three years.

Donald’s analysis showed CP All was a high-return business, with the potential to be more lucrative. “We saw the possibility of returns on equity being above 40%, and few impediments to the growth of the company,” he says.

Company stats

HIT: Sberbank

Ticker: MCX:SBER

HQ: Moscow

What: Russia’s largest bank, with more than 16,000 branches

Est. purchase price: 86.8 rubles (August 2011)

Current price: 163.5 rubles (April 4, 2017)


Ticker: (BKK: CPALL)

HQ: Bangkok

What: Operator of Thailand’s 7-Eleven stores.

Est. purchase price: 23 Thai baht (July 2011)

Est. Sell Range: 39.25 to 64 Thai baht (2016)

He bought a stake in July 2011. That month, it was trading at an average of 23 Thai baht on the Bangkok stock exchange. CP All eventually made up 1.2% of his emerging markets fund.

Turning point

“It went well for a long period,” Donald says. Then, in 2013, CP All made a surprising investment. It bought Siam Makro, a chain of wholesalers in Thailand, for US$6.1 billion. Donald was initially concerned about the size of the acquisition and the fact that it was financed with debt. He reviewed CP All’s balance sheet and asked management for its rationale.

CP All said it could continue to grow while keeping profitability high. Donald concluded the company could still generate capital quickly enough to cover expenses, so he stayed the course.

Donald had also noticed CP All executives were compensated through salary, without performance bonuses. He would have preferred management be aligned with shareholders through stock incentives, which he says are more effective than stock options because an option’s price can fluctuate, independent of a company’s performance.

He raised this concern with management, who replied that a straight salary showed they weren’t greedy. Donald wasn’t convinced.

In December 2015, Thailand’s securities commission found CP All’s vice-chairman and two board members guilty of insider trading. Other top executives were also implicated. They were accused of using insider knowledge of CP All’s negotiations with Siam Makro back in 2013. The securities regulator said the executives had bought Siam Makro shares during the negotiations, profiting when CP All announced a higher target price for the shares as part of the takeover.

Insider trading cases are rare in Thailand, and this was one of the biggest. The executives, and others outside the company, were fined less than US$1 million in total. The low fine caused a public outcry, and Thailand’s regulators pledged to toughen up its enforcement.

CP All’s internal handling of the scandal made matters worse, says Donald. For months after the fines, high-profile investors, including Thai mutual funds, government pensions and major foreign funds, called for CP All’s executives to step down. Top funds withheld future investment until the company took action. Yet no one was fired or punished. The company said this was because of their “previous track records of ethical practice and immediate compliance and settlement with the SEC.”

Faced with this inaction, Donald re-evaluated. “We substantially reduced the governance score,” he says. “That caused our target price for the company to come down to a level that wasn’t much above the share price [at the time].”

He decided to sell.


Donald sold his stake throughout 2016. The stock opened the year, for instance, at about 40 Thai baht and it peaked at 64 baht in early October. Though his fund still profited from the position, Donald doesn’t consider the experience a win.

“I wouldn’t have guessed they were doing these things,” he says. In hindsight, he says he would have seen management’s compensation structure as a bigger risk.

A month after he sold, and more than four months after the scandal broke, the company’s chairman, who was one of the people allegedly involved in the insider trading, apologized. He didn’t step down or fire anyone, but promised to appoint an independent governance advisor. Investors continued to call for action. Donald says if the company had replaced its executives and revamped its culture, he would have considered staying.

Despite the scandal, CP All’s stock continued to do well. The stock rose in 2016, and hit five-year highs earlier this year. As of April 4, a share was worth 61.25 baht, up 166% from when Donald bought the stock.

“This is a case where the market does not agree with our position,” says Donald. Nonetheless, “it’s too big a risk for us.”


Sberbank (MCX:SBER)

Sberbank is Russia’s oldest and largest bank, and one of the world’s biggest. About 70% of Russians use the state-owned institution’s services. Established in 1841, it now has more than 16,000 branches across the Russian Federation. With a presence in 22 countries, it has more than 137 million retail and 1.1 million corporate clients.

Putting it through the process

Sberbank came to Donald’s attention through his weekly list of top companies. For much of 2011, the Russian market was in decline, taking Sberbank’s shares with it. But the bank’s fundamentals were strong. It holds nearly 40% of all individual deposits in Russia, Donald notes.

When evaluating the likely stability of a company’s returns, Donald and his team may turn to his firm’s fixed income or discounted asset teams for information. He also looks at sell-side research to see if analysts have drawn similar conclusions about a company’s risks or activities.

“The recommendation is about the last thing we look at from the sell side,” Donald says. “It’s really a check for us to see if our views are being also seen by the sell-side analysts. Often, they’re advising the company or meeting the company as often or more than we are.”

He bought in August 2011 on the Moscow exchange, where the stock’s average price that month was 86.8 rubles.

Turning point

In 2014, Russia’s economic prospects worsened. International oil prices collapsed and Western countries imposed sanctions on Russia for its aggression toward Ukraine. The sanctions restricted all Russian financial institutions’ access to international capital. In 2015, Sberbank’s stock price was about 50% of its book value, says Donald, so he added to his position.

“The greater the upside and the greater the liquidity, the larger the position size relative to other opportunities,” he explains. His smallest positions are 0.75% of the portfolio, and the largest are 5%. At the time, Sberbank was less than 3%.

“Although, at first, profitability fell to mid-single-digit returns on equity, we really thought it was in a strong competitive position because, in times of stress, depositors often move funds to the strongest institution. So [Sberbank] had a lot of low-cost deposits moving to it,” he says.Smaller banks faced difficulties as the ruble’s value plunged against the U.S. dollar; the majority of their debts were in U.S. currency and the payments became untenable.

In 2015, as many as 20% of Russia’s banks were at risk of collapse. Further, Russia’s bank regulator continued to penalize banks suspected of abetting money laundering, or of being mismanaged and under-capitalized. Between 2013 and 2016, the bank regulator shut down more than 250 institutions—Sberbank’s competitors.

An internal advantage at Sberbank was the bank’s leadership. Donald liked that Lev Khasis, first deputy chairman of Sberbank’s executive board (effectively its chief operating officer) had been senior vice-president of Wal-Mart.

“He is really a logistics expert,” says Donald. Under Khasis, the bank contained costs and increased efficiencies.


As of April 4, the stock traded at 163.5 rubles, and Donald plans to hold—though he started trimming at the end of January and the beginning of February 2017. Sberbank “was performing so strongly that the upside has diminished somewhat,” he says.

Further, the macroeconomic issues that had challenged the bank could soon improve, he notes. In 2016, Sberbank’s return on equity was 15%, and Donald thinks it’s poised to do better as the Russian economy recovers. The World Bank forecasts the country’s economy will grow 1.5% in 2017.

Russia’s interest rate, which spiked above 16% after the oil price shock, is now around 10% and could fall further. This would keep more of the bank’s debtors from defaulting. Further, U.S. president Donald Trump seems open to removing sanctions against Russia, improving the country’s political and economic prospects.

The changes would also help Sberbank’s competitors, but the bank retains a large market share. “Did I think when we added to Sberbank that there was a chance things might not get back to normal? Absolutely. But I thought that, at those types of prices, that was a risk worth taking.”

Despite economic troubles, Russia was actually the second-best market on the MSCI Emerging Markets index last year, notes Donald. “In any normal period of Russian economic activity, I think it can have returns on equity above 20% […] for a couple of decades,” he says.

Jessica Bruno