Kevin Carter - The Thing That’s Emerging Are The People, It’s All About The Consumer | #187

Episode Summary

Executive Summary: Kevin Carter traces his path from value investing and index-fund skepticism to entrepreneurship and the creation of EMQQ, arguing that broad emerging-markets indexes are distorted by state-owned enterprises while the real growth lies in emerging-market consumers and internet companies enabled by smartphones and leapfrogging adoption. He makes the case that investors should favor targeted, thematic exposure over generic EM ETFs.

Main Topics: Career path from active management to entrepreneurship (Priority: 5/5): Carter recounts early lessons at Roberts and Stevens, his work in value and short-selling, and how reading Buffett and Malkiel pushed him toward indexing, ETFs, and eventually founding investment businesses. Why broad emerging-market indexes are flawed (Priority: 5/5): He argues that standard EM benchmarks overweight state-owned banks, oil firms, and other legacy sectors with poor governance and misaligned incentives, making the broad index a value trap. Emerging markets as a consumer-growth story (Priority: 5/5): Carter emphasizes that the true investable trend is the rise of emerging-market consumers, especially younger populations gaining income and purchasing power across Asia, Latin America, and Africa. EMQQ and the internet-commerce opportunity (Priority: 5/5): He explains EMQQ as a rules-based index of public emerging-market internet companies, built around the idea that smartphones and online commerce are reshaping consumption in the developing world. China, governance, and investor skepticism (Priority: 4/5): He addresses common objections to China and emerging markets—communism, manipulated data, and governance risks—while arguing that the largest risks are state ownership and corruption, not the headline narratives. India and frontier leapfrogging (Priority: 4/5): Carter identifies India as the biggest future growth area because hundreds of millions are still gaining first-time internet and smartphone access, enabling rapid consumer and digital adoption. Valuation vs growth and active versus passive (Priority: 4/5): He stresses that low P/E ratios in EM are not attractive if earnings quality is poor, and that high-growth internet and consumer companies deserve valuation focus, not blanket index exposure.

Key Arguments: Reading Buffett and Malkiel led Carter to realize that active managers often underperform after fees, but also that indexing can be flawed when the underlying index is structurally biased. Broad emerging-market indexes are heavily tilted toward state-owned enterprises, which may not be run to maximize shareholder value. Emerging markets are fundamentally a consumer-growth story: most of the world’s population and a large share of the young live there, and incomes are rising faster than in developed markets. Internet and e-commerce companies in EM capture consumption growth better than traditional consumer or industrial sectors because smartphones are changing how people buy goods and services. EMQQ was designed to target the investable part of that trend: publicly traded emerging-market internet companies with liquidity and market-cap rules, capped to avoid excessive concentration. China and other EM countries do have real governance and political risks, but the common media narrative overstates issues like fabricated GDP and understates the scale of consumer growth and digital adoption. India appears to be the most promising major market for future internet and consumer growth because a vast population is still coming online for the first time. A simple P/E screen is misleading in EM; growth, governance, and sector composition matter more than cheap headline multiples.

Data Points: Start date at Roberts and Stevens: January 1992 - Carter’s first job in the investing world. Roberts and Stevens Emerging Growth Fund AUM: about $100 million - The fledgling mutual fund he helped market early in his career. 1991 fund return: up over 60% - The Roberts and Stevens Emerging Growth Fund surged during the 1991 rally. Trip duration after marriage: five to six months - Carter and his wife traveled through South America and Africa in 1997. Short Amazon loss: one-third of net worth in a day and a half - A painful event that shaped his investing memory. e-investing acquisition year: 2000 - The fractional-share brokerage business was acquired by E-Trade. Active Index Advisors sale year: 2004-2005 - The index-based separate-account business was sold to Natixis. After-tax outperformance target at launch: 1.5% per year - Carter says this was the expected value from systematic tax-loss harvesting. Active Index Advisors realized outperformance: about 3% annually - He says the strategy’s average outperformance versus the S&P 500 over 15+ years. Sector revenue growth: about 40% for a decade - Carter claims EM internet companies have averaged roughly this growth rate. EMQQ holdings count: 65 companies - Number of public emerging-market internet companies in the index at the last rebalance. Index cap rule: 8% maximum position - EMQQ caps the largest holdings to avoid excessive concentration in Alibaba/Tencent. EMQQ valuation: about 22x earnings - Approximate multiple cited after a sell-off, with forward multiple around 23x. EMQQ revenue growth: over 30% - Current growth rate cited for the sector. Emerging markets underweight in portfolios: about 5% average allocation - Carter says investors typically allocate far less than market-cap weight. Emerging markets market-cap weight: about 12% - His cited global market-cap share for EM. China population without a computer/internet: 500 million - He uses this to illustrate the remaining growth runway in China. India population without a computer/internet: 1 billion - He cites this as the largest single growth opportunity. People getting first computer in India: 100,000 per hour - Carter’s estimate of the pace of first-time device adoption. Podcasting revenue comparison in China: about 5x the U.S. on a revenue basis - Used as an example of how digital monetization differs by market. Macau casino revenue comparison: 10x U.S. revenue - He cites Macau as another example of China-adjacent consumer scale. CFA challenge prize: $100,000 - He offers this to anyone who finds a public sector with faster growth over the stated horizon. Earlier challenge prize: $10,000 - His original reward for finding a faster-growing sector.

Pivotal Quotes: "Most investors, both institutional and individual, would be better off buying index funds." — Warren Buffett (as quoted by Kevin Carter): Carter describes how this line shocked him and pushed him toward index investing logic. "The indexes were broken." — Kevin Carter: His conclusion after studying emerging markets and seeing the distortions caused by state-owned enterprises. "The future consumption companies, they're not even in the consumer category. They're in the technology category." — Kevin Carter: The insight that led him from traditional EM consumer ideas to EMQQ and internet-commerce exposure.

Implications: Investors should rethink EM exposure: broad indexes may capture low-quality state-linked assets, while the real opportunity is digital consumer growth in China, India, and other emerging markets. Thematic, rules-based exposure may better align with long-term structural trends.