Since this report, Firebird have increased their stake in Range to over 17 million shares!
He goes boldly where others have yet to tread By David Stevenson
Published: December 14 2007 17:22 | Last updated: December 14 2007 17:22
Not many hedge fund managers can boast of travelling to Papua New Guinea and trying out the local delicacy – the betel nut. Just in case you haven’t tried this down at Tesco’s deli counter, this is an hallucinogenic fruit that stains your teeth and gives you a “cheap buzz”, all of which no doubt comes in handy if you’re planning a gruelling four-hour road journey up into the highlands. So, clearly, James Passin deserves to be known as the “Indiana Jones of frontier stock markets”.
He’s the New York fund manager who visits rough, difficult places such as Papua New Guinea, Mongolia and Somalia, rather than swanning around the more comfortable nightclubs of Rio. And his adventurous approach is paying off.
His first fund – Firebird Global – is up 367 per cent since 2003, and 38 per cent for the year to October 2007. Better still, his more recent and more daring fund – Firebird II – is up 50 per cent in just over a year, and now boasts blue-chip investors such as the UK-listed Advance Frontier Markets investment trust.
One feature of Passin’s investing style is that he acts like a traditional small-cap fund manager: he’s keen to get his hands dirty (quite literally, in the case of exotic fruits in Papua New Guinea). I think this is important in emerging markets. You need a fund manager out there in the mud, not sitting in coffee shops in Mayfair or five-star hotels in Dubai.
Passin is also an absolute-return investor. He’s as happy to invest in what he perceives to be “cheap” US biotech stocks as he is in Mongolian banks – what matters to him are the fundamentals and his bigger “macro” take on geopolitics.
A good example of this is his huge gamble on Saudi Arabia. I can’t help but think it’s a seething cauldron of looming trouble, strapped like Semtex to a large part of the world’s oil reserves. However, Passin cuts past this prejudice and analyses the fundamentals. Here is a market that’s been one of the worst performers in the last year, yet its economy is booming as oil prices shoot up.
In his view, the market is pricing in huge uncertainty when there’s no real geopolitical risk. That mismatch between perception and reality also makes the local currency, the Rial, the most undervalued currency in the world, he argues.
But it’s the frontier markets that make the most valuable contribution to Firebird. In his time, Passin has invested in Brazil, Russia, India and China, and has even made money out of Africa, but you sense that as soon as the “hot” money starts to flood into a new market, his Firebird fund takes flight. The name of the game for Passin is finding the next big thing – 10 or 20 years ahead of the pack. That currently means Papua New Guinea, Mongolia and North Korea – and, no, I didn’t make that last one up.
Admittedly, there are still a few problems with investing in the Marxist paradise otherwise known as the DPRK. These include the absence of an evil capitalist stock market, the various trade bans in force, and the concept of “buying” anything where no real private property exists.
That hasn’t put Passin off, though – he’s been quietly accumulating a big position in defaulted North Korean sovereign debt. His investment case is oddly compelling: sooner or later, the regime running the country (Passin actually thinks they’re not so crazy) will have to re-engage with the West – and South Korea in particular.
Already, he points to sketchy details of deals that could exploit North Korea’s potentially huge reserves of iron ore and zinc. He also believes a big peace deal will emerge and that the huge disciplined labour force, plus its strategic position between China and Russia, will pay off handsomely.
Passin’s other big bet is Mongolia. This vast land-locked republic has colossal resource potential – gold and copper just for starters – and there are already a number of potentially multi-billion dollar projects that cumulatively have the potential to transform the tiny £2bn domestic economy.
By Passin’s own calculations, if just one or two of these projects comes on line in the next five to 10 years, Mongolia’s GDP could treble. In his view, that could create a huge multiplier effect throughout the Mongolian economy that could set the domestic stock exchange – value $700m – alight. The very fact that Mongolia has a stock market hints at the other big plus: relative legal and political stability based on a thriving civil society.
Passin’s credo is: if you’re patient and are willing to wait a decade or two, returns in the hundreds of per cent could be yours.
Papua New Guinea, meanwhile, is a more pure resources play. It boasts huge reserves of gold, copper and oil plus 20 trillion cubic feet of stranded natural gas that could potentially transform its economy if it could be tapped and liquified and sold into Asian and Australian markets.
But the country is still in the early stages of development. That’s why, at the moment, Passin is happy to play the market using foreign proxies such as the Canadian-based Transeuro Energy and Buffalo Gold.
It’s all fascinating stuff and of course highly risky. Any fund that’s thinking of taking bets on places such as Somalia is clearly going to run into trouble at times. A 60 per cent exposure to commodities also leaves the fund open to the risk of a bear market in resources.
Even so, Passin’s style of hands-on, value-based investing laced with a heavy dose of political realism brings a sense of innovation to frontier markets.
So if you’re looking for tomorrow’s 10 or even 100 baggers, I suggest you consider the places that Passin’s funds search out – even if that means investing in places where once you would have been accused of capitalist heresy. Copyright The Financial Times Limited 2008
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