Episode #308: Best Idea Show – Maciej Wojtal, Amtelon Capital, “I Saw Iran As Potentially The Biggest Transformational Opportunity Since Russia”

Episode #308: Best Idea Show – Maciej Wojtal, Amtelon Capital, “I Saw Iran As Potentially The Biggest Transformational Opportunity Since Russia”


Guest: Maciej Wojtal is the Chief Investment Officer for Amtelon Capital. He has 12 years of experience in the financial industry.

Date Recorded: 3/24/2021     |     Run-Time: 58:34

Summary: In today’s episode, we start by hearing how the 2015 nuclear deal between the US and Iran sparked Maciej’s interest in Iran. He shares what he learned early on – the country has a resilient economy with great demographics – and when paired with companies trading at 3-4x earnings, he was compelled to set up his firm in 2018. Maciej walks us through what it’s been like over the last few years: handling new sanctions under the Trump administration, 70% currency depreciation one year, and, most recently, the impact of COVID.

As we wind down, he shares the possibilities for the country going forward and the potential for foreign inflows to drive valuations up in the near future.

Comments or suggestions? Email us Feedback@TheMebFaberShow.com or call us to leave a voicemail at 323 834 9159

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Links from the Episode:

  • 0:39 – Intro 1:10
  • 1:36 – Welcome to our guest, Maciej Wojtal
  • 2:44 – Maciej’s journey to becoming an investor
  • 4:10 – Starting Amtelon Capital to participate in the Irainian stock market
  • 7:33 – The process of establishing a fully functional frontier fund
  • 11:00 – Understanding the people and demographic of Iran
  • 13:48 – Adventure Capitalist (Simons), The Investment Biker (Rogers)
  • 14:41 – The first few years of business and bringing investors into the fund
  • 21:06 – Portfolio construction and Iran’s market cap
  • 23:23 – American policy changes and their influence on the geopolitical stage
  • 27:58 – Analysis of the Iranian market over the last couple of years
  • 32:06 – Getting access to market databases from the Iranian market
  • 35:46 – Are there other funds there worth looking into?
  • 35:39 – Market fluctuations and social impacts due to COVID-19
  • 38:41 – Valuations and earnings predictions for 2021
  • 40:44 – Companies currently in their portfolio
  • 42:12 – Do other frontier markets present similar opportunities like Iran?
  • 45:54 – Best case bull or bear scenarios in the coming decade
  • 49:30 – Maciej’s most memorable investments
  • 53:24 – Which countries are currently taking interest in Maciej’s fund
  • 55:28 – Iran’s reception to foreign investors and institutions
  • 56:11 – When investors can start traveling to Iran to see it for themselves
  • 56:09 – Learn more about Maciej; Amtelon Capital; Twitter @mwojtal
  • 57:35 – Where someone can cross paths with Maciej the most in a post-COVID world


Transcript of Episode 308:

Welcome Message: Welcome to the “Meb Faber Show” where the focus is on helping you grow and preserve your wealth. Join us as we discuss the craft of investing and uncover new and profitable ideas, all to help you grow wealthier and wiser. Better investing starts here.

Disclaimer: Meb Faber is the co-founder and chief investment officer at Cambria Investment Management. Due to industry regulations, he will not discuss any of Cambria’s funds on this podcast. All opinions expressed by podcast participants are solely their own opinions and do not reflect the opinion of Cambria Investment Management or its affiliates. For more information, visit cambriainvestments.com.

Meb: What’s up y’all, another banger of a show today. This is the newest in our series of Best Ideas. And our guest today is the founder and CIO of Amtelon Capital, an investment fund focused on Iranian equities. Today’s episode, we start by hearing how the 2015 nuclear deal between the U.S. and Iran sparked our guest’s interests in the country. Our guest shares what he learned early on, a country’s resilient economy with great demographics. And when paired with companies trading at three to four times earnings, not revenues, earnings, he was compelled to set up his firm in 2018.

He walks us through what it’s been like over the last few years handling new sanctions under Trump administration, a big currency depreciation in one year, and most recently, the impact of COVID. As we wind down, he shares the possibilities for the country going forward, potential for foreign inflows to drive valuations up in the near future. Please enjoy this best ideas episode with Amtelon Capital’s, Maciej Wojtaj. Maciej, welcome to the show.

Maciej: Hi, Meb, thanks for having.

Meb: We’re winding down Q1 2021, where do we find you today?

Maciej: Well, slowly in terms of our performance is slightly down, but super optimistic about the following quarters so it’s not bad.

Meb: Where in the world are you?

Maciej: I’m in London.

Meb: That’s one part of the name of your firm Amtelon. What’s that stand for?

Maciej: Correct. So that’s the acronym of Amsterdam, Tehran, and London. So cities where we became operational on day one when we launched 2017.

Meb: You’re originally from Poland. You know, pre-pandemic, Poland…it was Poland or somewhere in Northern Europe was going to be like my to-do list, one of my bucket items. I’ve never seen Pearl Jam in concert and they were supposed to be playing, I think last summer in Europe and was planning on going and obviously, that didn’t happen. So fingers crossed maybe this year. We’re big Polish investors, it’s one of the cheaper countries we think, we’ll see at least the model, say in Europe. But tell me a little bit about your origin story. We’ll get to what you’re doing today but you kind of bounced around a few traditional hubs and shops in your early days as a young analyst, is that right?

Meb: Yes. So I was born and raised in Warsaw in Poland. I got my first job, or like, an internship while I was still at university at Citigroup in Warsaw, so I was doing equity research. And then my first real job came from London, from JPMorgan in London. This is when I moved from Warsaw to London and that was in 2006. I initially started in equity derivatives, structuring, selling, trading different types of hybrid derivative products. And then I moved within JPMorgan to something that was called proprietary positioning business. It was basically a prop-trading unit that was separated from the bank in a different building so that we couldn’t see any customer flows. And we basically traded with the bank’s money on its own account.

So I was in the equity long-short part of the business and it was an amazing structure. So we had a very wide investment mandate, but we did mostly developed markets, cash equities, plus derivatives, but we traded also a lot of emerging markets and some frontier markets. So even places like Philippines, or Vietnam, or China, Asia is when it was still difficult to get allocations there. So it was an amazing structure, it lasted until 2009 when banks were shutting down prop trading desks, then the whole team moved out to a hedge fund in Mayfair, where we continued with the strategy.

Meb: So what was the lead-in to what you guys are doing now? I think the timeline would be kind of starting up the firm, what, 2015 is that a ballpark…?

Maciej: ’16.

Meb: What was the inspiration?

Maciej: Well, the inspiration was the lifting of the UN sanctions and signing the nuclear deal with Iran. When they lifted the UN sanctions, it became legal well before…everyone except for U.S. persons to do business with Iran, to invest there. So I knew that there was a market, that there was a stock exchange, but no one could ever do anything so I didn’t really know the details. I started doing more research 2016 and I realized that it’s not only a market but it’s a proper big liquid market with 600 companies listed with, at that time, $100 million daily liquidity, and there are no foreign investors. I mean, all the foreign investors still are less than half a percent of the market cap. At that time, the market cap was around $100 billion.

Meb: I just want to hear you say that again and make sure I heard it correctly. Foreign ex-Iran investors are only less than 1%?

Maciej: So the market cap is $100 billion, all foreign investors, less than half a percent of that. Yes, so there is no one. And it doesn’t happen too often that you have a country of significant size opening up and there is actually something to do for portfolio investors there. Because, you know, you can get bullish on Yanmar, maybe North Korea at some point in the future. But it’s a good country to go and build a factory, I don’t know set up a bank, maybe launch a startup, but nothing to do for portfolio investors, maybe you’ll be able to buy some debt, and that’s it.

And here, you have 600 companies, enough liquidity to allocate some visible amount of money there. No foreign investors, meaning that no competition, which makes the market much less efficient. And also you can expect that these foreign inflows will happen in the future, so you get a chance to start buying local assets before other investors get in. But obviously, the main driver, the main thing that pushed me towards this market was the valuations.

So what I saw was not only a market and companies that have a lot of growth potential because the country just missed a couple of…everything good that happened in emerging markets. So globalization, interest rates going down, lower inflation, but the potential growth for earnings is huge. But also, you get to buy very cheap multiples on trading earnings so the market was at around five, six times earnings. And I was looking at companies like utility company that is providing sweet water and certain industrial gases to local petrochemical companies.

It was trading at four-and-a-half times trading earnings, it has zero debt so utility without any debt. It was paying 20% dividend Q. And on top of that, older contracts were priced in euros, so in hard currency, so it was naturally hedged against the currency depreciation. So those types of opportunities, comparing to anything else in the world, the value opportunity was huge. And it looked at that time as if geopolitics were turning in favors, they were becoming more supportive for Iran. Obviously, that later became obviously incorrect with the change in the U.S. administration.

Meb: All right, you got this idea, your early career was involved in various developed emerging frontier markets, what was sort of the next step? Did you say, look, I need to go to Iran, do some boots on the ground? I need to do some more research, I need to make some contacts? Or how did you sort of make the jump from this is a cool idea to hey, this is actually like, a really good idea and a business?

Maciej: So look, I obviously decided to travel to Iran. I never been there before, I actually didn’t know any Iranian, and I haven’t met any Iranian in my life prior to my first trip there. So I had no connections. So I basically googled the local brokers, set up a couple of meetings, travelled there. I told my wife basically one day that I bought a ticket to Tehran and I’m just going for a couple of days. She was excited.

And I met the brokers, I opened brokerage accounts for myself. I also managed to open bank accounts for non-domiciled clients. I decided to test everything with my own money. So I had to figure out how to transfer money because the banking connections were still not there. So I used some intermediaries, which looked a bit dodgy. I mean, I wasn’t used to this form of finance and transferring money. But this is actually how all the capitals money was flowing up to the lifting of UN sanctions.

So up until 2015, it was through a large network of intermediaries. And $80 billion of trade every year was flowing through those companies. Which were essentially market makers between those who wanted to move money in and those who wanted to move money out. And it has been working like this for a while and pretty well. So I got 10,000 pounds or whatever, just to test it into the market into my brokerage account. Started buying stocks, selling stocks, buying local treasury bills that are also listed, selling bills, buying different types of financial instruments, and it worked. So when I saw that this is actually real, and it’s working, I did some more research if it would be possible to set up a fund. So basically an institutional investment vehicle that could manage money for outside investors as well.

So it seemed yes, so I decided to quit my job as a fund manager and started setting this up. But then it took me more than a year to actually launch it because, you know, having the right structure. Also, I wanted the structure to be in a good jurisdiction so that…all the investors I was speaking to thought this was a scary investment idea. I mean, people don’t know much about Iran, people know about it through headlines. And headlines are always bad because headlines are usually about politics.

And then when I went to Iran, I started meeting local people. That was very interesting. I mean, everyone who is interested I think in new markets, especially some frontier markets that are just opening up, should go there. You know, you need to have boots on the ground, meet local people, you need to have your own perspective on things and not rely solely on the newspaper headlines. So initially, when I went there, for the first time, I didn’t know anyone.

So I had my meetings, and then I was going to restaurants by myself. So local waiters were asking me where I was from, I said I was from Poland. So then they started asking me about Pawlikowski, Chmielewski, so they’re Polish film directors. And one guy started speaking to me in Esperanto because this was his hobby. And he said, “Oh, but it was a Polish Jew who invented the language Esperanto. So you guys in Poland probably know how to speak this, how to use it, or just a bit.”

So you know, this is all funny, but it was showing you the quality of people that you were meeting. And this is I think actually the biggest asset of Iran is its population because you have educated people. I mean, first of all, its great demographics so median age, slightly above 30, with very high level of education. So tertiary enrollment rates are on par with developed markets, not emerging markets. Education has always been very important. They’re aware of 4,000 years of history that Iran and Persia has.

Then the cost of labor because Iran has been under sanctions for so long, the cost of labor is lower than in Vietnam. So for foreign investors, I mean, like corporate investors, global companies, Iran is a big market. It’s a bit like Eastern Europe in the ’90s. So you have this big market with lots of cheap people where you can just basically relocate your factories that at some point will become an important consumer market for you as well. But more than that, because Iran…and when you look at Iranian companies, this is very visible, is closely linked to the region.

So when you look at Iran, it’s 84 million people, but Iran plus all the neighbors is 550 million people. So it’s like second hero, and Iranian companies are well-positioned to export there. So that’s why this, you know, from the investment point of view, is an interesting investment opportunity. But for FDI, this is a no-brainer for European, Asian, in the future, I’m sure American companies as well to go there and set up businesses there.

So when I started getting to know the place, I also…you know, I spent the ’90s in Eastern Europe so I saw the transformation there, which was a bit of chaotic but presented big opportunities. And the pace of the adjustments that were happening in the economy in different industries, was very fast. I mean, that you could never see that again in the future when the pace got more mature, more institutionalized, and so on.

So I was too young to do anything in Poland in the ’90s, and I saw Iran as potentially the biggest transformational opportunity since Russia. I was in Eastern Europe in the ’90s. And I also had some Eastern European investors, for example, from Russia on investor trips in Tehran. We were stuck in traffic in Tehran in a taxi, and they were looking around they’re saying, “Wow, it’s like Moscow from 25 years ago.” So it was also visible to them.

And the thing that also strikes you is that there is a lot of good entrepreneurial spirit that you can see around you. So people are doing stuff, everyone is doing something, some small business, some trading, you know, here trading there. So it’s also the type of people that I see there it’s a great mix of demographics, the right attitude, meaning people who want to work, very good education, and very low, cheap labor costs.

Meb: The unique scenario, you mentioned the analogy of Russia, Eastern Europe in the ’90s. I think China, probably also a good analog, but also there are some eventual potentials. Some of the communist countries like Venezuela, I think I’ve seen you mentioned, or North Korea. So much of this reminds me of the old Jim Rogers books, right, “Venture Capitalist,” “Investment Biker.” I think it was Rogers and I could be wrong. Someone was talking about collecting as collectibles a bunch of North Korean, like, propaganda art and things as a way to get access to some interesting investments. But it’s unique in the sense that it’s not like a frontier market that’s starting from scratch. Like, you have a large population, a functioning economy, a functioning stock market, which is a bit unique with a non-trivial market capitalization.

So tell me all right, so now we’re to the starting gate where you say I’m going to start this up. This is 2017 I think. You go through all the headaches of launching a money management business, which to the listeners, if you’ve never done it, one of the biggest pieces of advice or commentary I give to young investors that want to get started, I’d say investing and the business of investing are two very different things, right? You got to deal with regulators, you got to deal with lawyers, compliance, raising money, yadda, yadda, brokers, all that stuff. So you get started, walk us through kind of what the last five years have been like. I assume the early investor is mostly individuals, family office?

Maciej: So look, it still hasn’t been five years, it’s been like three-and-a-half, let’s say, of track record.

Meb: Feels like five, maybe?

Maciej: Actually, you know what, whatever happens in Iran in terms of macro, in terms of the cycles is pretty much the same as everywhere else. But everything is happening faster and with a bigger magnitude. So when the currency depreciates, it goes down by, you know, 85% over the last 4 years, and then everything else that is linked to such a big currency move. So it feels actually like 2 proper cycles, so I don’t know, 10 years or something. Yeah, so definitely at least five.

Look, we launched in July 2017, first couple of months was testing, moving money in, moving money out, buying, selling different instruments. So we actually launched our equity strategy, it was ready in January 2018. All our investors, our high-net-worth individuals, family offices. We have one small fund, but it’s too early, still too early for institutional investors to get involved because still, you have U.S. sanctions. What does it mean? Have primary and secondary sanctions.

Primary sanctions say that U.S. persons cannot touch the market and that’s it. The secondary sanction say that everyone else shouldn’t do business with a long list of individual and legal entities on the sanctions list. And also in certain industries like oil and gas, transportation, shipping, and so on. So that means that all the big financial institutions had some links to the U.S. so for them, it’s really a no-go. For most of the other institutions, it’s a complicated case, right, because you actually need to know, you need to know the sanctions environment, and so on. So compliance would usually say no.

So that’s why it’s still all the investors there are high-net-worth individuals, family offices from across Europe, and also from Asia places like Singapore, Hong Kong, and Australia, actually quite a lot from Australia. But our first investors…so I actually had to launch with friends and family money because people were getting scared of the change in the U.S. administration. So all the soft commitments actually evaporated. But I had a strong conviction about the expected returns based on the valuations and asymmetrical risk-reward of the local investment opportunities that we decided to launch anyway.

But the first thing that we had to do is actually finish setting up the fund. So what I wanted to say earlier is that only investors initially thought that this was a scary investment idea. So I wanted the fund to be in a good transparent jurisdiction so onshore in Europe, with some good regulator, good and stable legal environment with good service providers. So that’s why we launched in the Netherlands, managed to convince a top-tier administrator, fund administrator, top-tier auditor to work with us, at least to make investors say in a way that okay, even if they lose money investing in an exotic place like Iran, the vehicle itself is safe, is transparent, is solid. So, institutional grade.

So 2017, we launched 2018, we were invested in equities. And then later in 2018, we started seeing sanctions coming from the Trump administration. And this has changed the outlook completely. So first of all, our investment universe started to shrink because out of the 600 companies, you know, one or 200 are probably not liquid enough. But then, right now, probably around 100 or more are one way or another linked to sanctions. So we are left with, let’s say 300 companies, which is our investment universe. Still not bad but we would like to invest in many companies that we cannot touch in order to be compliant with all the sanctions, including the U.S. ones.

Then, obviously, the first thing to react to U.S. sanctions was the currency. So this is the asset class that is reacting to all the geopolitics. What we had to learn, and very quickly, is how to hedge our exposure and hard currency foreign investors in a country where you don’t have currency forwards, for example, you cannot hedge it using normal banking products. So we got rid of…basically, we got rid of everything that we had in the portfolio. And we had companies that we liked long term like this amazing glass manufacturer because Iran is probably the best place in the world to produce glass, or this utility company, or some software companies.

And we focus on one thing, we were building simple models to find the companies with the highest sensitivity of VPS to the dollar price. And actually, there’s a lot of companies in the index that are either exporters or sell locally, but at prices that are set against some Asian benchmarks, for example, steel prices, or domestic producers selling domestically that also benefit from depreciation of the local currency. So we managed to create a portfolio that was not only naturally hedged against the dollar but was actually benefiting from the dollar rally and the local currency depreciation.

And this is actually a much better hedge than if you were using a currency forward because currency forward will give you a linear hedge to the currency. And imagine that you’re an exporter, dollar goes up by 50%, your revenues will also go up in local currency by 50%. But because of operational leverage, because your costs are in the local currency, your margins will expand so your earnings will grow up much more than that. So we have companies that benefit from weak shaky geopolitics and this is part of the reason why the Iranian economy has been so you could say successful and resistant despite the sanctions of the biggest economy in the world.

Meb: I think one of the bigger surprises for me…I was going through your deck, which is great, it’s actually a pretty diversified economy despite being…I think if you were to ask everyone, where does Iran corporate get all their earnings? I think everyone would just say energy, oil, not gas, they have some of the highest reserves in the world, if not the highest. But if you look at the sectors as percentage of listed market cap, it’s actually pretty diverse. And a lot of the traditional energy-based is actually not the majority. Maybe talk us a little bit about that composition. One of your favorites was a glass company. What is the market look like? You said it’s up to about $300 billion today, is that about right?

Maciej: Yes. So the market is around $300 billion market cap. And liquidity last year on average was around $400 million per day. So the market, both the economy and the stock market, are really diversified. So as you said, Iran has the highest combined oil and gas reserves in the world but this is just 15% of GDP. Well, it used to be before sanctions, now it’s much less, but 15% of GDP and the rest is spread across different sectors.

So they produce more than 1 million cars per year. So you also have a big steel industry, you know, big tire producers, whatever, car parts producers. Petrochemical industry is huge. Iranian and Saudi Arabian petrochemical industries are the most profitable in the world. Why? Because they have plenty of natural gas. Then you have mining, one of the highest zinc reserves in the world iron ore, and so on. You have banks, telecom, software companies, a lot of consumer companies from consumer staples like cleaning products, or food manufacturers, the producers, to local machinery producers.

So it’s a really diversified economy and it’s also reflected in the stock market. Actually, oil and gas is not listed because it’s tightly held by the government or state-linked entities so investors cannot. Maybe within energy you have some refiners are listed but that’s it, which is great because the market is not driven by oil prices or any single commodity prices it gives you a good exposure to the Iranian economy.

Meb: And so you can give me more color on this. Over the past three years of your involvement, to my knowledge, it seems like post-launch, the market went down a little bit, then it had a face ripper up. And then correct me if I’m wrong, by the way, kind of slid a little bit in the recent year. But walk us through the last few years of A, turning the page on potential policy changes in the U.S., new administration. It seems like from your comments that there’s a pretty significant influence the U.S. tends to have on this geopolitical stage. And then how the market has kind of worked over the past few years, and walk us all the way up through the pandemic too.

Maciej: Yes, look, so geopolitics is turning and it’s visible and it’s happening. It was, I think, on the right track after Obama signed the JCPOA so the nuclear deal, which was then basically ripped by the Trump administration, who left the agreement. And I’m used to…all our experience in the market is that every quarter things are getting worse. So it’s either new sanctions or some threat of military confrontation. So things are getting worse and worse, the currency devalued by 85% during the Trump administration.

So it was a huge impact on the country and had a massive impact on the Iranian economy, which wasn’t all that bad in all areas. So a lot of areas got hurt so Iranian consumers got hurt the most because cheaper currency. So depreciated currency is basically a transfer of income from the consumers who are short the dollars, who are experiencing the inflation of all the basic products that they need to buy. And income is transferred to manufacturers who are exporting, who are basically long the hard currency so this was visible.

Now, with Biden’s victory, things could change and I think they’re already changing. Biden has been consistent in terms of his approach. He said that if Iran is compliant with the nuclear agreement, then the U.S. would get back to the nuclear agreement as well. It still hasn’t happened and I think it will take time. But right now, you know, the discussion is over, okay, who goes first, right who does the first step? Iran is going back to be compliant or whether it’s, you know, U.S. should be the first to go because it was the U.S. who left the agreement in the first place.

Well, it will take time but this is already negotiating so they’re already negotiating, they’re already talking. And there is a lot of factions happening as well. So for example, U.S. is changing its stance in the Middle East region. So relations between different countries, not only in Iran, with the U.S. are likely to change. But also in Iran suddenly, a couple of weeks ago, you heard Swiss ambassador, and Swiss embassy is also acting as an embassy for the U.S. and Iran because there’s no U.S. Embassy there. They said that the biggest Swiss companies such as Nestle, Novartis, and so on, that they are ready to invest in Iran, even before U.S. sanctions are lifted. But they don’t have to wait technically because they’re not covered by U.S. sanctions and they operate in the humanitarian area, which is not under sanctions anyway.

But still, so far, all the companies decided to wait and wait until at least the rhetoric changes. So even without the lifting of U.S. sanctions, they need to see that, you know, U.S. and Iran start talking, that there are no threats of military conflict and so on. Then Iran has a lot of funds locked up abroad in bank accounts in South Korea and Japan because they used to sell oil there. Then after sanctions were imposed on Iran, they stopped selling oil, and companies in South Korea and Japan were suddenly unable to pay for the purchases.

So they have a couple of billion dollars locked up for the products that they already sold to those markets so it’s theirs but there was no physical possibility of just transferring this money. And suddenly you have South Korean ambassadors saying that it seems that the solution has been found. And there are no restrictions or limitations on Iran to just reclaim their assets and use it to purchase whatever they need in the West, and so on. So all these things are happening because there is support from the Biden administration. So it will take time. I mean, with Iran it’s always complicated. And you have also presidential elections in Iran in June so it definitely will take time. But I think geopolitics are definitely becoming more supportive and the momentum has changed already. So this is about geopolitics.

Now, when you look at the market over the last couple of years. So first of all, you can look at…the market has quite a lot of history. So it has around 20 years of track record and the main index was launched in 2008. So you can look at the history of the local benchmark since 2008 in dollar terms. And the performance is interesting because the annual return like the compound annual return from the stock market in Iran in dollar terms since 2008, is around 13%, 14% per year. In a country that went through at least two 70% devaluations of the currency, that had in the meantime UN sanctions, U.S. sanctions, Ahmadinejad, which was a populist president and still okay with huge vol. So volatility, I don’t remember, must have been more than 30%. A lot of drawdowns in hard currency for foreign investors, you had plenty of 50% drawdowns.

But still, in a country in such difficult, you know, environment, the stock market was producing you know, 13%, 14%. I think I was checking last year, it was 15%. So maybe it’s even closer to 15% a year, which is amazing, and why? You know, you’re buying low valuations, you’re paying low valuations for companies that are effectively dollar assets that just happen to be listed in Tehran. So it doesn’t matter what’s happening to the currency, you know that these assets, these companies will hold their dollar value basically and your investment with buying them at four times earnings, you know, your investment risks are low. You will have volatility due to geopolitics, but the asset itself will keep its value. So this is quite amazing.

And then when Trump got to the office and started imposing sanctions, the first thing that reacted was the currency. The currency dropped, you know, initially, we had this you know, 50%, actually 70% drop in the first year of Trump. We had one quarter when the currency dropped by 50%, but our portfolio managed to do more than 100% in local currency in this quarter. So we were able to show plus 1% in euro terms to our investors, which was relieving because we just went through a huge storm.

So that was 2018, it was tough. I mean, it was every quarter for us it was plus-minus 20%. So a lot of volatility no returns. I think we went down after the first year by roughly 15%, 20%. But then, in the second year, what we realized is that the currency depreciation started feeding into companies earnings. And the first companies to react were exports obviously because it was easiest to see, and it was the most direct exposure to the currency.

But what we realized later is that actually…because what we did, okay, what we did is that we studied the previous 15 or 20 years of the stock market in different currency regimes. So when the currency was stable, when the currency was devaluing strongly. What we found is that very often domestically-oriented industries were benefiting the most. Why? Because local producers were benefiting from import substitution. So cheap local currency and sanctions were causing imports to plummet basically. So all the companies exporting stuff from China we’re not competitive anymore because it was just too expensive for Iranian consumers. Also, because of sanctions, everything is just more difficult, more complicated, to organize shipping, to organize payments, you know, insurance, and so on.

So what we saw with the local producers, is that suddenly we saw that their sales are going up. And then it’s amazing how much data you get in Iran because the market is organized pretty well. So they have quite strict reporting requirements, they not only have to report quarterly, annual, financial statements, but also a lot of monthly data. So sales data but broken down into main product categories into volumes, into prices. So you know, every month, we actually analyze a couple of thousand data points.

Meb: Is that data pretty hard to come by? Is it like something you can look up on Bloomberg? Or is it something that you need a boots on the ground office in Tehran and whatnot?

Maciej: So Bloomberg, they don’t have any data covering Iran, you need to use local providers. So you need to find good providers of data in Iran. Some of them actually have databases in English, 20 years of history of financial data. And then when there are additional announcements by the companies or some additional updates, then you have to have local people. So we have a local office with analysts on the ground, that can translate everything, that can find data, that can call the CFO and ask him questions. But the majority of data is actually out there and you have databases in English with aggregated data works really well.

So we had certain ideas in terms of who might benefit from the changes in the currency and in the economy post the devaluation. And then we were able actually to confront these ideas with the data that was coming in every month. So we were building initial positions in the companies that we thought might benefit the most. And then where we were getting confirmation from the data, we were increasing our positions. And what we saw was that both volumes were going up for domestic producers, and also they were able to raise unit prices much faster than inflation because their next competitor was this Chinese exporter that was now much more expensive.

So even though the overall market in those industries were not growing, market share of those Iranian companies was going up massively and their earnings just exploded. I mean, we had companies that quadrupled or even more their earnings in 2019 on the back of the depreciation that happened in 2018. And we were buying those companies in the last quarter of 2018 and then adding to the positions early 2019, and we saw that forward valuations are likely to be very low. And very low means lower than three times forward earnings, so anywhere between two and three times forward earnings, this is the prices that we were paying.

So the stocks were just jumping higher because then companies started reporting earnings, so investors reacted to better earnings numbers. So the share prices started gaining momentum, then all the local momentum investors. 90% of local flows are retail investors, not sophisticated crowd, which is at the end of the day, short-term momentum.

Meb: Give me some more color on that. How many other funds like you guys are there? I assume Vanguard and BlackRock aren’t doing anything. Are there a lot of other funds like yourself, or is it pretty lonely?

Maciej: No, it’s very lonely. So I know of one or two private equity funds that have some exposure to Iran. In terms of funds focused on the public market like us, there are just local providers. I don’t know of any other foreign fund investing there. There were some in 2016 but they gave up basically. We took over one portfolio from a London hedge fund in 2017, there was a fund in France, in Switzerland, and they gave up. So yeah, it’s pretty much us. And U.S. has…I mean, all the blog posts…you can Google actually interviews with fund managers from Templeton, yes, they say that, yes, Iran is probably the most exciting market for the next decade, right, but they just cannot touch it. So we are in this very, I mean, fortunate I’m enjoying this position, you know, of being able to front-run all the big money that will eventually get there.

Meb: What’s the lay of the land look like now in 2021? I imagine you can speak to some of the effects of the pandemic but are valuations still cheap? And then maybe give us a few case study names or examples of companies or sectors, industries that are looking pretty juicy here in 2021.

Maciej: So the pandemic had an impact in many areas. But for Iran, I mean, on one hand, the country is quite lucky, like many other emerging markets because the populations are just young. I think it’s just 1% of the population that is over 80-years-old so this obviously helps with the mortality rates and so on. And they haven’t really implemented proper lockdowns. So they had the same black swan or you know, surprise in terms of, you know, the pandemic, but they didn’t have the biggest black swan for the markets which were you know, policies, the government policies such as lockdowns.

But what actually affected the economy the most were the closures of the borders. So the borders between Iran and Iraq, for example, and Afghanistan, and all the countries around Iran were shut down because of the pandemic. And this is the most important source of hard currency inflows into the country. So suddenly, exports were down, so no foreign currency coming into Iran, but Iran still needs to import some products. And some of those products, like some food products or medical products, they will have to import them whatever the price of dollar is. So the currency got squeezed in the sense that there was demand for dollars, which was not realistic. I mean, they just had to import $10 billion worth of goods at any price. And there was no supply of dollars coming into the country. So that’s why the currency dropped quite a lot because of pandemic you can say.

And this is what happened last year, you had another currency depreciation, the currency at some point was down by roughly 70%, then it stabilized, then it came back. The stock market rallied around up to July, August, and then had a correction. So what happened is that a lot of retail investors joined the stock market. You had suddenly 4 million new investors on the stock market, like new, setting up, opening up their brokerage accounts for the first time. And most of them managed to lose money despite the fact that the market is up. So the sentiment changed.

Right now, we have a very negative sentiment because people were losing money because Biden has been in the office already for, you know, a couple of months and still there is no deal between U.S. and Iran. So expectations were high that, you know, it will happen immediately. And hence you had the market that is going sideways, slightly lower, despite the fact that you have geopolitics turning, that you have earnings growing at high double-digit or, in some industries, triple-digit rates year over year. And sales updates are pointing to even a bigger growth this year because well, last three months or three months training sales, median three months training sales for 400 biggest companies are up almost 200% year over year. So this is much more than the dollar is up, right? So it’s not only because of the currency effect, it’s much more than that.

So we are looking again, at valuations low single-digit depending on the sector, depending on the company. But we are seeing anywhere from three times to six times forward meaning 2021 earnings with retail investors selling. With the regulator also trying to implement some policies to help retail investors, which are…well, the recent ones were probably not that great because, at some point, they decided to put the limit on the daily change of the share price to 2%, plus-minus 2%.

So with plus-minus 2%, suddenly liquidity evaporated because, well, when people want to sell, they can sell up to minus 2%. And what happens then? Well, price cannot go lower. So we have a long queue of people who want to sell, no buyers, so liquidity dries up and every day you have this minus 2%, minus 2%, minus 2%. And it’s been like this for the last couple of weeks. Now the regulator is changing its policies that the companies got a new requirement, they need to publish their financial forecasts, so earnings forecast, quarterly earnings forecast starting I think next month, which in the current environment will be super supportive.

You have valuations that we see as really no single-digit P. And then geopolitics, it may take time but it’s definitely not getting worse, it’s definitely improving. So I’m in a situation where, you know, it’s something that only can happen in an inefficient, emerging frontier market. And yes, we’re enjoying this very much because everyone is selling, you can actually buy companies that are difficult to buy when the stock markets starts to move higher.

Meb: What’s the portfolio look like? You hold like 10 names, like 100 names? Does it look indexy? I assume the answer to that is no. But I assume you would probably characterize most of the companies as small or mid-cap, what’s the portfolio look like?

Maciej: So we have between 15 and 20 companies. This, in my view, gives you most of diversification benefit, but it allows you to be focused on each individual position. We have exposure to various sectors so we have pretty much all the sectors that we are allowed to have. We cannot touch the biggest companies because the biggest companies are usually either on sanctions list or somehow related to sanctions list. Which is not great because it would be nice to be able to invest in the biggest copper producer right now in Iran, or some of the steelmakers, or some of the petrochemical makers.

But you have smaller companies that we like very much and also in different industries. So for example, we like one cement company, but not because we are super bullish on the cement industry in Iran, but because this company has a subsidiary in Iraq. And when you’re producing building products in Iraq, and everything sells and they sell there in dollars, so the company gets actually dollar revenue from there. And their operations are close to the Iraqi border so it’s actually easy to export cement to Iraq. So we’re looking at individual stories there but across different industries.

Meb: I imagine you travel to Tehran a lot, has the research you’ve done, is there any spillover effects where you’re like, this also looks like a lot of opportunity in X, Y, Z countries? You know, you tend to have this spiderweb or lattice of information that you probably have that’s unique. I love to read your investing letters that you put out. Are there any other countries that this spills over to that you think have a lot of potential, is it the region in general? Any other thoughts that are non-Iran specific?

Maciej: So I think that Iran is actually quite special. And countries that are not integrated with the rest of the world are special because the chance of finding mispriced assets, mispriced investment opportunities is much bigger because most of the investors don’t have access to this country. You don’t have any other hedge funds, or algos, or any market participants that are looking for similar investment opportunities. It’s just you, a couple of local institutions, and retail investors, which are more than 90% of daily flows.

So this will change. And also because of that, Iran is not correlated to anything else in the world. When you check correlation between the Iranian index in dollar terms and any other index, or on any commodity, the correlation is you know, between minus 5%, and plus 5%, plus 10%, so it’s really low. So from foreign investors’ perspective, I mean, adding this to a diversified portfolio, you know, the asset can be volatile, but it’s volatile at different times so it actually lowers the volatility of the overall portfolio.

But I think it will all change in the future once big inflows happen. Then you will probably see more of the same cycle like in emerging markets that, you know, risk-on, the money moves into emerging market, risk-off, money goes back to the U.S. or Japan or whatever. Before this happens, money needs to flow in first, right. And when this happens, it could be the case that it might look the same as some countries that were opening up to foreign investors like Russia in the ’90s, or China in the ’90s.

So you may actually see a bubble, like a proper bubble at that time. The market, I could see the market going you know, from 5 times earnings to 50 times earnings, and then obviously, go down and back up and so on, but it will be a different story. So I liked Iran not only because it offers a great long-term growth potential because of all the catch-up that the economy needs to do and all the investment opportunities there for global companies, not only because the valuations were so cheap, but also because it was so inefficient.

So there is like an additional layer of opportunity there where we look at the market, obviously, we try to find companies that are just underpriced versus their future earnings growth potential. But we also look at the market itself and look for inefficiencies. We trade share rights, so companies issue rights and those rights are trading all over the place, you know, because you actually need to hold them for two months before they get converted into the underlying stock. And two months is just too long a time frame for retail investors.

So we often can buy rights with a 30% discount to the underlying stock of a company that we like anyway, or you have ETFs that can trade, ETFs that consist of the liquid public positions with daily NAV prices. And then they tend to trade from plus 10% premium one week to minus 30% discount 3 weeks later. Now, you have options market, which is not very liquid but I hope it will become more liquid. And this inefficiency there is even bigger, right, so implied volatilities very often through the roof. So these are the opportunities that very often are just as close to, you know, free lunch as can get.

Meb: I imagine the time to sell will be when we get approval to launch an Iran ETF. I imagine that won’t be for another 5 to 10 years, if ever. Wave me a wand, what is the sort of best-case bull scenario look like as far as the next decade, and what’s the big risk or risks that could really impact a portfolio of Iranian securities? So walk us through both, take a pick, which is first.

Maciej: Okay, so the risk, you have volatility risk. So 50% drawdowns in dollar terms happen frequently. On the other hand, if you look at the previous 15 years, 50% drawdowns are exactly…which is not surprising, probably the best moments for foreign investors to enter the market and buy local assets. Because they take advantage of the cheap currency and buy local shares that still haven’t reacted to the fall of the local currency and the rally of the dollar. So this is volatility risk. So if you have a long-term perspective, you know, part of diversified portfolio, I think you can ignore this one if you’re buying at low valuations.

The big risk, I guess, would be more sanctions but not more U.S. sanctions, but like global sanctions, like UN sanctions. So I imagine, you know, Iran decides to cancel all the discussions, all the negotiations, say they’re going to build a nuclear bomb. Then the UN imposes sanctions, we are not allowed to hold our position, we need to sell, we need to move money out, or focus on some private companies, perhaps. So this is the big risk that I could imagine, yes, this is the biggest one that I could imagine.

Now, the positive scenario…there’s a couple of phases to the positive scenario that I think some of them are already happening. So first of all, you have bigger interest coming from European and Asian investors because of the change in the U.S. administration, and the change in the rhetoric. So no more threats and sanctions, but more negotiation type of vibe that should lead to a new U.S.-Iran agreement.

One thing is going back to JCPOA, so okay, the positive scenario will be that U.S. and Iran manage to negotiate going back to the previous nuclear agreement, or setting up a new agreement which would be better for both sides actually. Then this will still not lift the U.S. sanctions. A new agreement could mean that U.S. sanctions would be lifted, and then you would see the inflow of U.S. money, or actually global investors’ money flowing into the market. That could also be accompanied by, you know, the MSCI indices, including Iran in frontier market index, or maybe emerging market index, because it’s actually big enough, but it will probably take time.

But the best positive scenario is that global investors including U.S. investors will be able to invest in Iran. I think it could easily happen within the next couple of years. I think it will happen in the next decade. And then you might actually see a bubble when first, you know, all this money will be flowing into the country, then you will have all the emerging market-focused funds that will need to have a location to Iran because you know, the market is big, it’s too big to ignore, basically. And then you will have all the passive money also index-tracking money flowing in to the market. So this is the most positive scenario that could see the market go up, whatever, 10 times from here.

Meb: If we know anything about frontier markets, that’s not out of the question. In the annals of history with some of these countries, 10x is certainly possible with a little volatility along the way. You know, I imagine over the last three or four years, you’ve had quite a few memorable experiences travelling to Tehran, talking to companies, investing, any particularly memorable investments stick out over your career?

Maciej: Yes, absolutely. So actually, I didn’t finish going through the market and the performance of the market under Trump. So look, the good thing is that even if it takes longer, for example, for U.S. and Iran to get to some sort of agreement, even in a tough environment like U.S. sanctions under Trump administration, the market doubled in U.S. dollar terms or more than doubled. So you can actually profit from the local capital market despite the currency volatility, and so on.

So as I was saying, the first year of sanctions was pretty powerful, a lot of volatility and not much returns. In the second year, when the currency move started fitting into company’s earnings, we were up plus 170% in euros, after fees, the market went up 100-something per cent. So this is the type of the scale of returns that you can make when you’re buying, on one hand, the low valuations but also in the right macro moments, so when earnings just start to accelerate.

And the investments that were most memorable actually happened in that period, 2019, and then also in 2020. And these were all the domestic producers that were benefiting from the currency depreciation. And we were long local food producers. Our best position was a chocolate biscuit producer that was benefiting in so many ways. On one hand, they had quarter of their production was exported to Iraq so they were benefiting, obviously, from hard currency revenue. Then they were also benefiting from food inflation that was happening in Iran at the time after the currency drop. Because those biscuits became a cheap food alternative, like a snack instead of a full meal, you know, a lot of meat-type of meal, lunch, for example, that people used to have.

And it was totally overlooked, we were buying it at, again, less than three times forward earnings, those earnings more than quadrupled. Yes, times four or times five, and the stock went up time seven during the year, we obviously started selling it too early. But other companies that were very memorable are cleaning products companies that produce, you know, from toothpaste to dishwasher liquid, and so on. And you can buy those companies that are non-cyclical, again, at, you know, five times earnings.

And imagine also, when the market opens up and you have more investors coming in, there will be a lot of obvious takeover targets on the market. So we are looking, for example, at one holding that has controlling investment in many cleaning products, personal hygiene products makers in Iran, they control roughly, let’s say, 40% of the Iranian market in those products. And this holding company is valued at around $300 million. I mean $300 million for 40% of the market where you have 84 million consumers, in non-cyclical industry, anyone would love to buy this type of exposure, they wouldn’t even think about it, to get this to get the distribution channels, everything.

Again, we expect the currency because it already started stabilizing, it was the same in 2019 after the big draw, it had 12 months of pretty much, you know, stability, it looks quite similar this year as well. We also expect certain industries to outperform the market big time. But also those takeover targets, because of the higher inflow of foreign investors, I think they will be more interesting and you will see a lot of activity, additional activity in the market coming from foreign investors. We are already seeing I mean, we just had the best quarter in terms of inflows from investors. So this is our micro scale and I’m sure that this is also happening somewhere else. So the change in the attitude of foreign investors is quite evident.

Meb: Where’s most interest coming for you guys on the investor LP base? Is it Asia? Is it Europe? Is it South America? Where is it all coming from?

Maciej: So pretty much around the world. It’s always mainly Europe, within Europe, most countries from Germany, Switzerland, to U.K., Poland, to different countries. Recently, Australia is number one for some reason. Now I think 10% of our investors are from Australia, but we also have investors from, you know, Hong Kong, Singapore, Canada, Costa Rica, speaking to investors in Thailand, in Peru, and Panama. I mean, pretty much around the world.

Meb: Costa Rica, I love it. This show oddly has…if you’d, like, plot out countries where there’s like a disproportionate number of listeners, Scandinavia and Italy. So if you get some inbounds, listeners, what’s up? I don’t know why but you may get some inquiries from there. If people want to learn more…I mean, obviously, this is like when you talk about real value add, due diligence, boots on the ground, something nobody else is doing, people want to learn more about what you guys are up to but also about just investing in Iran in general. Are there any resources, things that people can look into? As you said, it doesn’t have a Bloomberg function yet so where do people go? What do they do?

Maciej: So you can go to the Tehran Stock Exchange website but really, there aren’t any publications on investing in Iran. All we do is, you know, primary research. I mean, we look for companies, we analyze companies, ourselves, we build models, we talk to local brokers. But it’s more about getting data from them than actual recommendations. You know, it’s easier to read about geopolitics, but then it’s important to read different sources.

I mean, I read everything, not only the U.S. papers but also obviously Iranian, but also papers in the Gulf, or in Israel, everything just to get every perspective of what’s going on. But in terms of the economics, financial markets, not many sources. So yes, we publish something quarterly so we are happy to share our market updates, but nothing that I could recommend.

Meb: What’s the general reception by the way, since there are so few institutions and outside investors, are most of the companies pretty receptive to you guys and chatting, and inquiries? Are they a little wary like what are these guys doing? What’s the general vibe?

Maciej: It varies. We contact companies usually when we want to understand something better in terms of their operations. So usually, the best person to speak to is the CFO. Sometimes they want to have a chat, and they’re happy to explain, to spend time with you and so on. But sometimes they’re just not interested they don’t see any value coming from talking to some investor. And so what, right, because they don’t value investor relations yet, they’re not used to. I think this will be changing, but it’s not there yet.

Meb: When do you estimate that I can tag along for my first due diligence trip to Tehran? When’s that going to happen? Does that happen in the next three years?

Maciej: Well, you can go to Tehran, I think, anytime. I mean, after pandemic, it’s easier, obviously, right now with travel restrictions. But I meet a lot of Americans in Tehran, you can go skiing, I mean, it’s great skiing. Tehran is already quite high altitude, and you have pretty big mountains. So half an hour drive from Tehran, you get to 4,000 meters above sea level and you have some amazing skiing. So I meet Americans over there. You just cannot do any business in Iran. Who knows? It must be probably a couple of years before that happens because it’s a legislative process in the U.S. that needs to happen and it always takes time.

Meb: Well, I like the sound of that, ski trip to Iran. You know, we were looking to doing a trip…I haven’t skied that much in Europe, too, so that’s on my to-do list. But also Kashmir was one that is a little off the beaten path that I’m interested in. Maybe when the world reopens again next year we’ll see. Where do people find more about you guys? Where do they go? They want to get interested in the fund, Amtelon Capital, what’s the best spot?

Maciej: So, our website, we’re working on a new website but the current one has an email address so we are happy to share our materials if we get an email from the website. I’m also on Twitter, I try to share some interesting news about Iran, about the markets, not about politics, but about the markets and about the economy.

Meb: What’s the most likely airport to find you at of the Amtelon, Amsterdam, Tehran, London, or Canary? Where would someone cross your path the most in the post-corona world whenever that happens?

Maciej: So for me, prior to corona was London and Tehran. So Tehran every two months, London is base, but also pretty much Singapore, Hong Kong, Amsterdam, Zurich, Switzerland a lot. Anywhere between London, continental Europe, Tehran up to Singapore.

Meb: Awesome. This has been an amazing discussion, thanks so much for joining us today.

Maciej: Yes, thank you for having me, was great.

Meb: Podcast listeners, we’ll post show notes to today’s conversation at mebfaber.com/podcast. If you love the show, if you hate it, shoot us feedback at feedback@themebfabershow.com. We love to read the reviews, please review us on iTunes and subscribe the show anywhere good podcasts are found. Thanks for listening, friends, and good investing.