This is the latest in my “invest in …” series, which takes a look at promising developing markets around the world. Previous editions have featured Russia, Poland, Turkey, Pakistan, and Mexico. Today’s edition shows you how to invest in Colombia.
Ah, Colombia. If my stereotypes are correct (and they ALWAYS are), it is the land of beautiful weather, equally beautiful ladies, coffee, and, of course, mountains and mountains of cocaine. I’ve seen both seasons of Narcos on Netflix, so, yeah, I’m pretty much an expert.
Aside: my favorite Pablo Escobar story is one night the power went out in his house. His daughter complained she was cold so he burned the most readily available thing he had on hand — U.S. currency. Six million dollars later his daughter was warm.
Colombia has come a long way since Pablo and his boys were waging an all-out war against the government. Drugs are still a problem, but they’re under control. Some people argue that drugs are actually a bigger problem in Mexico and other Central American countries.
Colombia’s economy has grown into the 32nd largest in the world with a GDP of $385 billion (2014 numbers). GDP per capita has grown to a little over US$8,000 and GDP growth was solid for the first half of this decade. Major industries include oil, coffee (and other, uh, agriculture), and tourism.
This is normally the part of the post where I start talking about the country’s CAPE ratio — CAPE stands for Cyclically Adjusted Price to Earnings. Basically, it shows how expensive the market is on a trailing 10 year basis. That number exists for Colombia. I just can’t find it.
(Aside: if anyone knows where to find such information, please let me know!)
What I can tell you guys is the market isn’t cheap but it isn’t really expensive either — at least from a CAPE perspective. It’s cheaper than Canada or the United States, but more pricey than those cheap emerging markets we’ve already looked at. Keep in mind much of its index is associated with energy stocks which haven’t earned much in the last couple of years.
Invest in Colombia — Individual stocks
Let’s start with one of Ian Bezek’s (former) top picks, Bancolombia (NYSE:CIB). It trades at less than 10 times trailing earnings and at a small premium to book value. It’s the largest bank in Central America with operations all over the region. If you’re looking for a reasonable proxy for the region, you could do a lot worse. Shares trade on the NYSE and yield 3.8%.
Carton de Colombia (which trades under the ticker symbol CARTON on the Colombian Stock Exchange) is the nation’s largest maker of boxes and other packaging materials. It’s about as boring of a business as you can find. Bloomberg lists the company with a P/E ratio of 5.4 and it has a dividend yield of 6.85%. It trades at a price-to-book value ratio of 0.43. It’s a low margin business, but I’ll happily invest in a crummy business with that kind of valuation.
There’s just one problem. It’s going to be difficult for individual investors to get access to the Colombian market. You can’t use Interactive Brokers. If you want to invest in Colombia, you’re stuck doing it through ETFs.
There are two Colombian ETFs, and both aren’t very big.
Let’s start with the Global X MSCI Colombia ETF (NYSE:GXG). It’s assets are a little less than US$100 million with 10.53 million shares outstanding. Shares are up 21.9% since inception in 2009, but are down 56.1% in the last five years. Note also that dividends have also fallen off a cliff; in 2014 the fund paid out 41 cents per share. That payout dropped to 13.5 cents in 2016.
Bancolombia is by far the largest holding with 18.4% of assets, followed by Grupo de Invers Surameric (9.2% of assets) and Ecopetrol (6.6% of assets). It has a grand total of 25 different holdings and charges a management expense ratio of 0.61%.
The fund’s current P/E ratio is 14.32 (trailing earnings) and 12.24 (forward earnings) and it trades at a price-to-book value ratio of 1.04. That’s cheap! I’m excited! Exclamation points for all!
The other Colombian ETF is the iShares MSCI Colombia Capped ETF (NYSE:ICOL), which is about a quarter of the size of the Global X offering. It trades a mere 600 shares on an average day.
It’s a concentrated fund with just 30 total holdings. Bancolombia (12.5% of assets) is the largest holding (what a surprise) followed by Grupo de Inversiones Suramericana (8.9% of assets) and Inversiones Argos SA (5.5% of assets). Those two companies are in insurance/asset management and materials — specifically, cement — respectively.
It also has a management expense ratio of 0.61%. What a coincidence!
iShares lists the fund as having a P/E ratio of 14.5 and a P/B ratio of 1.22. Both are much cheaper than Canada or the United States.
The bottom line
Colombia has a number of things going for it. It has decent GDP growth, exposure to a depressed commodity, and the kind of valuations that make any value investor a little excited. You could do a whole lot worse than putting some of your portfolio to work there.