Masters in Business: Christine Philpotts on Investing in Emerging Markets

Release Date: February 13, 2025

Host: Barry Ritholtz
Guest: Christine Philpotts, Ariel Investments

Introduction

In this episode of Masters in Business, Bloomberg Radio host Barry Ritholtz engages in an insightful conversation with Christine Philpotts of Ariel Investments. Christine, a seasoned expert in emerging and frontier markets, shares her extensive experience, investment strategies, and perspectives on the evolving landscape of global markets.

1. Christine Philpotts' Background and Career Journey

Christine Philpotts brings a wealth of experience to Ariel Investments, specializing in emerging and frontier markets. With a career spanning various continents, including South America, Asia, Africa, Sub-Saharan Africa, the Middle East, and Southeast Asia, she has developed a deep understanding of market inefficiencies and value investing in less efficient markets.

Notable Quote:
"What makes that style of investing so interesting and different is simply market inefficiencies. You know, the US Markets are so efficient, large cap tech stocks, it's really hard to have an edge in that space."
[01:19]

Christine's academic background includes a Bachelor's in Economics from Columbia and an MBA from Harvard. Her passion for finance was ignited unexpectedly during her high school years through the Thomas G. Lebrecht Smart Start Scholarship program by Chase Bank, which propelled her into the world of investment management.

2. Transitioning from Aspiring Pianist to Finance Professional

Christine's initial aspiration was to become a concert pianist, dedicating most of her time to mastering the piano. However, recognizing the highly competitive nature of a career in music, she pivoted to finance. The Smart Start Scholarship program played a pivotal role in this transition, offering her a full tuition scholarship and an internship at Chase Bank.

Notable Quote:
"Using BetterHelp can be as easy as opening your laptop or your phone and clicking a button and the session begins."
[00:37] (Note: This appears to be an ad segment and can be omitted from the summary.)

Christine emphasized the importance of exploring new opportunities and being open to unexpected career paths, which ultimately led her to a successful career in investment management.

3. Deep Dive into Emerging and Frontier Markets

Christine highlights the stark contrast between investing in U.S. large-cap growth stocks versus emerging markets. While U.S. markets are highly efficient, making it challenging to find an investment edge, emerging and frontier markets present greater opportunities for alpha due to their inefficiencies.

Notable Quote:
"But when you look at emerging markets and when you look at value, the opportunity for alpha is much, much greater than it is in traditional large cap growth stocks in the US."
[01:19]

She explains that many managers in emerging markets outperform their benchmarks, unlike in U.S. large-cap stocks where outperforming benchmarks is increasingly difficult.

4. Experiences During the Financial Crisis

Christine shares her experience working at Morgan Stanley during the tumultuous summer of 2008. As part of the convertible debt group, she witnessed firsthand the market's volatility and resilience of certain sectors like convertible bonds during the financial crisis.

Notable Quote:
"We were the busiest desk as other parts of the market were closed, literally shutting down."
[07:21]

This period underscored the importance of adaptability and understanding market dynamics during crises, reinforcing her expertise in navigating complex financial landscapes.

5. Establishing the Grassroots Business Fund

Post-MBA, Christine joined the Grassroots Business Fund, a spin-off from the International Finance Corporation. The fund focused on impact-oriented private equity and credit in emerging markets, targeting small and medium-sized enterprises that provide economic opportunities to the base of the pyramid.

Notable Quote:
"So my original focus was Sub Saharan Africa. I did spend a summer between J.P. Morgan and HBS in Kenya working with a microfinance organization."
[12:13]

Her role involved establishing investment processes, recruiting professionals, and actively engaging with portfolio companies on the ground, offering her a comprehensive view of emerging markets' nuances.

6. Insights into Market Definitions and Geographies

Christine delves into the definitions of emerging versus frontier markets, referencing the MSCI benchmark. She clarifies that classifications are based on criteria like market liquidity, depth, and mechanisms.

Notable Quote:
"We use the MSCI benchmark definition. So they have specific criteria on differentiating between what's in the emerging markets benchmark and what's in the dedicated frontier benchmark."
[22:09]

She discusses specific geographies, including China's classification, Middle Eastern markets like Saudi Arabia and Egypt, and the dynamic nature of these classifications based on evolving market characteristics.

7. Investment Strategies and Stock Selection

Christine emphasizes a bottom-up investment approach, focusing on individual stocks rather than macroeconomic factors alone. She highlights the importance of aligning investments with government incentives and avoiding misaligned sectors to mitigate risks.

Notable Quote:
"We're picking stocks that meet that criteria. And ultimately, as I mentioned, we can lean into or maybe put higher focus on countries where we think the top-down environment is fruitful and lean out of countries that we think are heading in the wrong direction."
[25:22]

This strategy ensures that the portfolio is composed of companies with strong growth potential and alignment with broader economic and political goals.

8. Navigating Risks in Emerging Markets

Christine addresses the unique risks associated with investing in countries like China, where regulatory interventions can impact market stability. She underscores the necessity of understanding government motivations and aligning investments accordingly to reduce unforeseen risks.

Notable Quote:
"So we think that the opportunities are very attractive... we're not debating that, we're less interested in the absolute level and more in the second derivative."
[30:04]

By maintaining a deep understanding of local dynamics and being proactive in engagement, Christine's approach minimizes exposure to abrupt regulatory changes.

9. Ariel Investments and Emerging Market Strategies

Since joining Ariel Investments, Christine has played a pivotal role in establishing and expanding their emerging market strategies. Ariel's philosophy of "slow and steady wins the race" aligns with her long-term investment approach, focusing on value-oriented strategies that seek sustainable growth.

Notable Quote:
"We're not looking to call quarters, we're really thinking about the longer-term trajectory of a business and owning businesses that are trading at meaningful discounts to their intrinsic value."
[43:49]

Her transition to Ariel allowed her to leverage a collaborative team environment, emphasizing alignment of interests and impactful investment decisions.

10. Impact Investing and Board Involvement

Christine serves on the board of the Small Enterprise Assistance Fund, an impact investing fund focused on private equity investments in small and mid-sized companies across challenging regions. Her involvement reflects her commitment to generating both financial returns and positive economic impacts.

Notable Quote:
"The fund has experience from China to Tanzania to Peru to Ukraine... they've worked not only in emerging and frontier markets, but I would call Horizon markets."
[55:56]

This dual focus on profitability and socio-economic development underscores her holistic approach to investment.

11. Personal Insights and Recommendations

Christine shares her favorite books, including "The Obstacle Is the Way" by Ryan Holiday, which emphasizes embracing challenges as opportunities for growth. She also discusses the importance of creativity in investment, especially in less efficient markets, and the value of mentorship and sponsorship in her career.

Notable Quote:
"You need to let go of that and just kind of understand you will be wrong. Ideally, you want to be right slightly more times than you're wrong."
[70:36]

Her advice to recent graduates centers on embracing imperfection, being decisive, and continuously seeking growth opportunities.

12. The Future of Investing in Emerging Markets

Looking forward, Christine remains optimistic about the potential in emerging markets. She highlights the current attractive valuations compared to U.S. markets and anticipates continued economic growth in regions like Southeast Asia. Her strategy involves capitalizing on growth at compelling valuations, distinguishing between markets like India, which may be overvalued, and others like Vietnam and the Philippines, which present balanced opportunities.

Notable Quote:
"We think it's a market that will continue to have a strong economic growth outlook... but we think it's priced to perfection."
[48:19]

Christine's forward-looking perspective emphasizes strategic selection and disciplined investment to harness emerging market potentials effectively.

Conclusion

Christine Philpotts offers a comprehensive exploration of investing in emerging and frontier markets, blending her extensive experience with strategic insights. Her emphasis on market inefficiencies, value-based investment strategies, and alignment with socio-economic goals provides a robust framework for navigating the complexities of global markets. Listeners gain valuable perspectives on risk management, market selection, and the importance of a long-term investment horizon in achieving sustainable returns.

Notable Quotes Overview:

• "What makes that style of investing so interesting and different is simply market inefficiencies." — Christine Philpotts [01:19]

• "We're picking stocks that meet that criteria. And ultimately, as I mentioned, we can lean into or maybe put higher focus on countries where we think the top-down environment is fruitful and lean out of countries that we think are heading in the wrong direction." — Christine Philpotts [25:22]

• "You need to let go of that and just kind of understand you will be wrong. Ideally, you want to be right slightly more times than you're wrong." — Christine Philpotts [70:36]

For more insights and in-depth discussions, explore previous episodes of Masters in Business available on iTunes, Spotify, Bloomberg, YouTube, and other podcast platforms.