Nalu FM Finance Podcast. Insight into the Financial Markets.
[00:10] - Charles Sunnucks
If you don't have a devil's advocate with the greatest respect to people in finance. It's difficult to necessarily challenge everyone on a team and not come out in quite an uncomfortable place sometimes
[00:23] - Sponsor
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[00:45] - Stefan Wagner
Today on the Nalu Finance podcast, I'm joined by Charles Sunnucks, Portfolio Manager at Oldfield Partners and author of the Company Valuation Playbook. In this conversation, I'm looking to understand not just the framework behind this book, but how actually applies valuation discipline in real-world emerging market investing. When noise is high, data can be unreliable, and behavioral biases often dominate decision-making. I want to explore how Charles separates a good company from a good investment, how he balances qualitative judgment with a quantitative rigor, and how his CORE, CASL, and MOTE framework helps reveal genuine opportunity versus structural risk.
We'll dig into practical tools like DCF and reverse DCF, discuss how investors can stack the deck in their favor and understand where Charles currently sees mispricing and why. And finally, I hope to hear more about his journey from analyst to author to portfolio manager, the ideas that shaped him and the personal passion that drives his work. Hello, Charles. Thank you for joining us. Let me jump right in. What inspired you to write the Company Evaluation Playbook and how has it shaped your investment process at Oldfield Partner Emerging Market Strategy?
[02:04] - Charles Sunnucks
Thanks for having me on your podcast, Stefan. The book was written partly out of frustration as much as it was written on love for the topic. And that was frustration that so many books on this space were either grotesquely oversimplified to the point of being quite one-dimensional and ultimately actually quite risky. And then on the other end of that extreme, you had quite a bit of content, so a lot of the certification exams such as CFA, CAIA, FMVA, which went into extreme detail and often missed the broader headline points on valuation. I set out to write the book, ideally within 200 pages, being as roofless as I could in terms of only putting in there what mattered and only including examples that I felt were really additive and interesting to a reader.
[02:57] - Stefan Wagner
You argue in your book that price is what you pay in value is what you get. How does that philosophy hold up in volatile emerging markets?
[03:04] - Charles Sunnucks
Surprisingly well. It's, of course, counterintuitive that in a growth market like emerging market, as an asset class that is, you should be applying a valuation discipline. But in practice, actually, we know that the overwhelming weight of academic evidence demonstrates that when applied consistently over time, value investing does generate high returns. But there's far less talked about why where that is. And so much of it really, in my view at least, is around those animal spirits. I think that's Benjamin Graham, one of the forefathers of value investing, that said, you're looking to buy from the cynic and sell to the optimist. In emerging market, those animal instincts and irrational market behaviors you can see really amplified out. And that's a great searching ground for a value investor that is seeking to buy low and sell high.
[03:59] - Stefan Wagner
In In practice, then when it comes to how do you actually distinguish between what you call the good company versus a good investment?
[04:08] - Charles Sunnucks
In the book, I make quite a clear distinction between the two. We would all love to own good companies, and we can show off at cocktail parties about how brilliant our companies are in every respect. But that's not the name of the game, in my view, at least for investing. If you want to generate a higher total return, it should be understanding the numbers. If you to invest in a stock, what would your return be on that? You're not just investing to hold a piece of paper and show it off. You're investing because you expect more back in return. And what's great about value investing is it just gives you that numerical framework to be disciplined about what you invest in. Sometimes it leads you into quite contrary in parts of the market, not particularly great companies. But if you can make your money back in a matter of years on a company and then some beyond that, that's always an That's an interesting starting point in my view.
[05:01] - Stefan Wagner
Yeah, no, I couldn't agree more. Part of your framework is your CORE, CASL, and Mode framework. Can you go a little bit deeper on how do you apply that when you're evaluating emerging market companies?
[05:14] - Charles Sunnucks
Yeah, so the CORE, Castle, and Mode approach. I, of course, pinched two of those from the great Warren Buffet, who uses that castle and moat analogy. You want to find a good castle in a robust moat so that you buy into a durable business. I added caught because I look at mostly merging market companies, and it is so much more important there to buy into also reasonable management and have boards that are protecting shareholder interests. To some extent, we just have to trust in management that they are going to do right by shareholders.
[05:47] - Stefan Wagner
How do you then integrate qualitative investments, management quality, governance, and incentive into a quantitative evaluation process?
[05:57] - Charles Sunnucks
Investing, in my view, is largely There is some art to it. But all of these, management, uncertainty, management, downside, risk, you can quantify because if better management, it's lower risk, and you can reflect that in your discount rate or the multiple that you're applying on the business and vice versa for bad management. So, all these things, I think, as long as you have a consistent framework to understand what is good and what is bad. I'd also add that we're probably a bit more quantitative about what makes management good, because quite often I think, invest investors will grade management on how well they effectively market the company to investors. Then you look at the numbers and it's, have they added value? Have they generated value? And the answer, typically the one is the same thing, but perhaps more often than you would expect, they're not.
[06:45] - Stefan Wagner
When it comes to the emerging markets, analysis of the equities, what are the most common valuation errors that investors make?
[06:54] - Charles Sunnucks
The way we look at it is doing free cycle valuation. I try to draw out this distinction in some respects in the book, but not looking at simply the P-multiple on the next year forward multiple, because a company, and not simply saying low multiple bad, high multiple good, the point for us is finding business services that have demonstrated performance over time. It doesn't even have to be stable performance, frankly, but just as long as it's got a durable product or service, reasonable management. And then we're trying to look at the free cycle value valuation.
So, to take one example, if I was looking in an automaker, I'd be looking as far back as possible to understand the margin trend over time and what roughly is a normalized level of profitability for that business rather than necessarily trying to look into '26, '27 and suggest that I can predict what happens in those years and putting a multiple there. The consequence of that is that I quite rarely need to update my view on valuation because it's very much through cycle, it doesn't whip around with the market. If a company is under earning, it will effectively have a higher forward multiple and vice versa
[08:08]
And that also draws out quite different stocks as well. You're not penalizing stocks simply because their current year earnings multiple is high.
[08:16] - Stefan Wagner
Fair enough. Yeah, good. So particularly in the emerging markets where data quality can be a bit volatile or even uneven in sense, how would you handle the balance between intrinsic and relative valuation in the in the market.
[08:31] - Charles Sunnucks
Data quality is definitely a consideration that we look at, and we battle that in emerging markets by just really focusing only on the businesses that we understand. At some point, you really just have to apply common sense. If you don't understand why a company is so profitable or growing so much, you probably shouldn't be investing in it.
[08:52] - Stefan Wagner
At one point, you have to trust your guts.
[08:54] - Charles Sunnucks
I think there's element of that, absolutely.
[08:57] - Stefan Wagner
In your book, you warn about behavioral biases and so on. Which biases have you seen most affect merging markets investors and how do you yourself guard against them?
[09:09] - Charles Sunnucks
Like you said, the emerging markets interesting space that they can be quite wild at times. The one that I see, at least in ourselves, and we've tried to protect against to the extent possible, I guess, to name a few. The first is anchoring, focusing on a specific point. Quite often a share price, so saying it was 50 and now it's 10, and therefore it's cheap. That's behavioral bias. I think that's so many of us. It's so easy to manifest rather than just going back to basics and doing the numbers. We try to take shortcuts. And so that's something I'm always conscious of when looking at companies myself.
Something that actually we deploy here, which we have only done really over the last year, but has made quite a big difference in terms of managing our biases, and that's having a devil's advocate. I think so often you see confirmation-biased investors, and I include myself in that. You're always looking for information that confirms your own view and dismissing information that counters it. In a way, and I'm doing a stock at the moment and I got a devil's advocate on my back, and they are literally just setting out to find the counter case, to try and bring down your investment case, to dig out all the information. If you don't have a devil's advocate hurt with the greatest of respect to people in finance, it's difficult to necessarily challenge everyone on a team like that and not come out in quite an uncomfortable place sometimes.
[10:41] - Stefan Wagner
When I was in my own investment career, but I was working for an investment bank, I had some really painful experiences in the emerging market when suddenly the political environment changed overnight and the government enforced exchange rules. You couldn't suddenly We don't trade the currency even anymore, but we had a 10-year exposure in an option. How do you think about these currency risks and political risks when valuing EM companies?
[11:14] - Charles Sunnucks
It's certainly a consideration in emerging markets. Interestingly, I think it's probably a bit of a lesser one than it has been in the past. What we do, though, one of our first places I'll look when looking at an emerging market company as the sovereign bond yield. And just if we're being told anything by that, because quite often it explains so much. Those bond investors are pretty savvy, pretty colluding quite often to what's happening in the country. And it won't explain why it is high or why there's such an excessive real return. But it does point you in the right direction that perhaps something odd is going on in a country.
[11:49] - Stefan Wagner
Very good point. Got to keep that in mind. When you decide whether a valuation gap reflects genuine opportunity or structural risk, how do you decide whether it is a valuation gap for an opportunity or a structural risk?
[12:03] - Charles Sunnucks
We discuss this quite a bit internally, actually, because there is a risk that you are buying into a cyclical trend rather than a structural trend. As a Somebody who looks at company valuation on a free cycle basis, being able to weasel out what is structural and what is cyclical, what genuinely has changed, and what are we seeing just in terms of we're at this season of a cycle There never seems to be an easy answer in my view on this, and it's quite often fairly specific to the companies. But was it Mark Twain, the famous saying history may not repeat, but it does rhyme in your book, you discuss DCF, discounted cash flow margin, and the reverse DCF.
[12:53] - Stefan Wagner
How do you use those tools in your portfolio construct? But also, when do you use which one, the DCF or the What's the use of the REST-DCF?
[13:01] - Charles Sunnucks
Yeah, so there's two real tools, I guess, I unpack in the book. And one is relative valuation, where you're using primarily multiples, and then DCF, where you're saying the argument is less that it's attractive relative to others, and it's more it's attractive in its same terms. And I think there's merit to both. And we try to come at valuation from as many angles as possible. You would hope that they give you roughly the right answer. It's not always the case. The one warning I feel I should give with the DCF, though, is that is the difficulty in forecasting. Our industry has some insanely smart people, but the history of forecasting just tells us that it is so difficult to get that right over time.
And so, in my own career, and I feel increasingly I do this, is looking back at a company and understanding where it's come from, what it's done in terms of those fruit cycle returns, rather than trying to, let's say, do a five year or 10-year DCF and believe that I can generate an outcome that's got really any volatility. I feel like I've been humbled on that point over time.
[14:14] - Stefan Wagner
Yeah. I find often they overestimate their revenue growth and underestimate their cost growth.
[14:22] - Charles Sunnucks
Yeah, it's interesting. As soon as you get some margin expansion, people always want to extrapolate that out, don't they?
[14:29] - Stefan Wagner
Yeah. When it comes to the AM markets, do you think it more rewards patience or more than analytic precision?
[14:37] - Charles Sunnucks
The problem with our industry is that you got so many investors that are very well-resourced, very well-smart. How do you generate excess returns beyond the benchmark when the market is so efficient? In my view, to be able to do that consistently over time, you do need to put yourself in uncomfortable positions and you do need to be able to sit it out and wait.
[15:00] - Stefan Wagner
I'm always a bit of a cynic when it comes, number one, to benchmark. One, because most benchmarks are designed so they can be beaten, very cynically. The other one is that the objective of the investment might be very different. You wanted some more defensive or you wanted something that behaves actually different than the rest of the market because you wanted diversification. Why are you comparing it to the benchmark? It's not that easy sometimes. You call it stacking the deck in your favor. I assume you're not making a sleight of hands playing when you play poker or anything. What does it actually look like in practice for a long-term value investor like you?
[15:43] - Charles Sunnucks
Yeah, absolutely. It's slightly around the concept of we're going to absolutely get things wrong. We can have a base case assumption, but any investor looks back at your old investment notes and see how wrong you get it. Where we try to be disciplined is protecting ourselves on the downside. So, we're looking at a range of outcomes, and we've got a base case. We think that's which path it will take, but inevitably, over three years, it will take a different path. And we just want to make sure that if it does better than that, we can make lots of money. But if we're wrong, then there's very much, I think it was Buffett and Benjamin Grant talk about this valuation buffer concept. There's a limit to how much you can lose.
[16:25] - Stefan Wagner
Yeah, good point. Can you share an example, actually, where your valuation framework, identified a compelling mispricing if you feel comfortable?
[16:34] - Charles Sunnucks
I think one example, actually, an interesting one from earlier this year was Samsung, for example. That's quite an interesting business. You can actually trace it back three generations back to the 1930s, when we were able to buy that earlier in the year, the overwhelming weight of historic evidence is that you couldn't really lose money on a free view when buying at that valuation. Now, there's always the chance that something radically changes and you do lose money. But those are the businesses where you can feel relatively comfortable that if you put your fingers in your ears and close your eyes and hold your nose, perhaps also, that you can ride through the storm and you'll be making money on a three-to-five-year view.
The other type of company that we do buy, which I think feel comfortable you get a valuation buffer with is companies with just large net cash positions. So, you're getting the operating business, not just for free, but there's a huge opportunity for them to buy back shares and generate shareholder wealth one way. We got one position that's got more net cash than market cap, for example. That could go down, never say never, but it's hard to believe that it goes down another 20, 30%, say.
[17:44] - Stefan Wagner
When it actually comes When it comes to emerging markets, you said about modes. As Warren Buffet talks about it, a good moat really helps you protect your investment, the downside of your investment. Are moats more fragile in emerging markets given regulatory change or technology strategy leapfrogging. How do you look at this when you look at the emerging market?
[18:05] - Charles Sunnucks
As a high-level point, I think moat's always interesting and helpful to look at in terms of being able to have greater certainty in your forecasts when you got a durable melt. Where I have my problems is paying up heavily for a moat when over a 10-year view, so often they're found to be more fragile than was otherwise expected.
[18:25] - Stefan Wagner
I think this is particularly true in emerging markets as well, where there's so much more dynamic, I want to talk a little bit about the fund actually itself, where you currently work and what you have a market outlook, if that's okay. What differentiates the Oldfield partner-EM strategy from your peers, or maybe also use a value investment strategy? There's a very broad range of value investment strategy. Everybody has a slightly different interpretation, but how do you differentiate yourself?
[18:54] - Charles Sunnucks
To your point, I think it probably depends how you define peers. A lot of our peers, I US are using the benchmark as a starting point in terms of their own portfolio construction. We're very different to that. We have about 90% active share, so I'd say almost radically different index. We only have 24 holdings. We believe that the emerging market index is a very, very, very inefficient place. Two areas alone, China and Taiwan, make up about half the index. The top four countries make up about 75% of the index.
But emerging markets, it It's huge. It's a huge space. 24 countries, Indonesia, Philippines, Mexico, all these places, it gets included in the emerging market index, but utterly underrepresented. The stocks that interest us are that much more diverse across the emerging market universe. There are a few funds, I'd say, that look really that similar to what we are doing. In terms of your point on value investing, it's an interesting one because it's quite in my view, at least, quite a broad range from deep valley to classic valley. I'd say we're probably a bit more on the deep valley end.
[20:09] - Stefan Wagner
You just mentioned that many of these emerging countries exist and also maybe under weighted in the index. Which regions or sectors you currently think offer the most opportunities or miss pricings?
[20:28] - Charles Sunnucks
Stefan, we're very bottom up, I guess a couple of areas where we're seeing more opportunities than others. The first is staples. Markets have gone up this year quite considerably. Emerging markets have had a good year, too. Most staples have done bad, and not just bad in terms of lag, but in quite a few cases, actually declined in terms of returns. So, you've seen a real decoupling across that area of the market. And when you talk about motors and durable businesses, those businesses They're going to be boring. They're not going to whack it out of the park in terms of high growth anytime soon.
But when you can buy quite a number of these businesses now on double-digit free cash flow yields, that's a really appealing place, I think, to be searching for companies. Other areas that are currently interested in, the first one, I'd say, is conglomerates. These are grotesquely complex businesses. But if you look in emerging markets, there's a whole bunch of conglomerates where the underlying holdings themselves listed. Actually, we can have a very informed view of what the net asset value of that conglomerate should be. And there's quite a few cases where you can buy these conglomerates at a 50, 60 % discount to net asset value.
[21:42]
And in quite a few of these cases, they're not even badly run businesses at all. So, the third and final, I'd say one other place that we're finding more and more opportunities from a value perspective, and that's Asian. That's another place that's really lagged over the past 12 months. It's just not kept up with anything. If you look at Philippines, Indonesia, for example, they've had their issues. The markets probably declined at this point. We're seeing a number of opportunities really present themselves in those markets.
[22:12] - Stefan Wagner
It's probably fair to say the value investing overall in the world has a little bit was challenging over the last decade. Nobody really paid for value and everybody went just on buying the index or buying, which is basically momentum investing. Has it been worse in the EM versus the rest of the world? Do you see the cycle turning?
[22:34] - Charles Sunnucks
I think it's probably been less of a drag than on, if you look at US and Europe. It's quite interesting. The original farmer and French paper that they did on looking the different factors that drive markets, and their conclusion was in emerging markets, it was generating higher returns over time when applied consistently. I think you've seen that also this year as well. It's very It's a killer thing this year because if you look at the MSCI value index, it's actually lagged the headline index. But that's because of this very odd way that they construct the index. They actually control for country weights.
And so, the countries that have been very undervalued, actually performed very well. Korea, Brazil amongst the two big performers this year. But value stocks in those countries weren't necessarily performing that well. But most value investors this year have had a strong year in terms of performance.
[23:29] - Stefan Wagner
And finally, a little bit of a career advice for anybody who wants to do this. What advice would you give startup investors, trying to apply valuation discipline in today's fast-moving market? Sometimes it feels like it's not really worthwhile doing all that effort.
[23:46] - Charles Sunnucks
It comes back to the point that you were asking earlier on patience, actually. There's no immediate thing, I think, that you can do. It's just being rooflessly consistent and disciplined and pushing everything through a framework to the extent possible when investing.
[24:05] - Stefan Wagner
There's always a couple of questions I always want to ask people at the end of the interview. Hope that's okay. It's a little bit more personal. Let's start with what drives you, or can you tell us something about yourself that most people maybe not know?
[24:19] - Charles Sunnucks
I'm an avid drummer. I'd say there's one thing, there's something about a tension release, perhaps. But no, there's something like my That is fine about the consistency of a drum beating there to flourish off around that, I find.
[24:36] - Stefan Wagner
I really enjoyed reading through your book, the Company Evaluation Playbook. But is there another finance book that Besides your own, that really is your favorite or you could recommend for people?
[24:50] - Charles Sunnucks
Yeah, there's lots of, I think, brilliantly written finance books, actually. One that quite heavily influenced me was Anthony Bolton's book, Investing Against the Tide. There's a lot of learning points from a very successful value investor there. Some of those also financial history books, I think, are a brilliant starting place. I should also mention a simple but not easy written by Richard Oldfield, the founder of this firm. It's a very interesting book, and it goes back to basics in some respects, but just common-sense investing. It's things you read and you think, oh, that makes sense. But unless you're told them and reminded them, it's so easy to overlook them in the day-to-day.
[25:31] - Stefan Wagner
You read it and you think, Yeah, makes all sense. Yeah, I'll apply that. And then you catch yourself a couple of months later having completely ignored it again. I mean, Charles, this was very insightful. Thank you very much for sharing all your insights and knowledge. Thank you for coming on.
[25:48] - Charles Sunnucks
No, thanks for having me.