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Sticking with emerging markets

November 21, 2013, 12:33 PM UTC
Leverenz, photographed in New York in 2012
Photo: SPENCER HEYFRON

It’s little surprise that an emerging-markets specialist like Justin Leverenz, 45, spent a decade in Asia or speaks Mandarin. What is unusual, however, is that part of his research involves reading novels. The self-proclaimed “misfit” takes a thematic approach that emphasizes rising affluence, technology use, and aging, combined with “bottom-up” stock picking. The results for the $37 billion Oppenheimer Developing Markets Fund, which he’s led since 2007 (it’s closed to new investors), have been superb: 17.3% average annual returns over the past five years, trouncing the 12% for the emerging-markets index. Many investors view these newer markets as vulnerable to an inevitable rise in U.S. interest rates; that, they think, will choke off financing. Leverenz disagrees. Edited excerpts:

Pundits say the debt-ceiling battle and Janet Yellen’s finally getting the nod as Fed chair will have big impacts on emerging markets. Are they right?

These things matter to traders, not investors. There’s a view that emerging markets need outside capital to overcome decades of underinvestment, that capital is available only when global liquidity is good, and Yellen is more likely to keep it that way. But this dynamic is no longer as relevant because, by and large, the emerging world is the creditor in the system, not the debtor. The developing world has flexible currencies, limited fiscal debts, and relatively healthy banks. From a solvency perspective it’s completely different than it was in the ’80s and ’90s.

Are some countries more appealing in that sense than others?

The emerging world is heterogeneous. That said, what I’m really interested in are industry characteristics — industries where companies can have extreme, lock-hold advantages that can be sustained for many years. Those are extremely rare. Most businesses in the world are like, say, most musicians: They aren’t that talented. I’m only interested in the virtuosos.

The virtuoso executives?

Sometimes great companies don’t need to be managed by great people. Unilever, for example. I’m not saying its managers don’t have talent. But even if they didn’t, the advantages of their businesses are so extraordinary they’d thrive anyway. In other businesses that are evolving much faster, stewardship does matter a lot. My second-largest holding is the Chinese Internet company Tencent. I bought when it was a $6 billion company. It’s now $100 billion. Historically, Internet companies have been locked into their markets. But Tencent is now becoming international. Same thing with a Korean company I own called Naver, the dominant search engine there. Naver decided to take on Japan with a messaging app called Line. It’s gone global and is now the dominant messaging platform in Japan, Thailand, Taiwan, and Spain.

Do you have any investing gurus?

There are people whom I have a great deal of respect for, but I’m a bit of a misfit, so I’m more inclined to learn from other investors’ mistakes.

Why do you call yourself a misfit?

Our company has a tag line about our “unconventional wisdom.” To have that, one must be comfortable being unconventional — and most people aren’t because they’re very social. I’m not a very social person, and it doesn’t bother me at all to be outside of the social norm. The only things I look for are extraordinariness and optionality. When I bought Tencent, for example, I thought they’d be able to monetize through advertising. Frankly, I was wrong. Instead it became an app-distribution platform. And that option was invisible when I bought the stock.

What are some other examples?

Another is Estacio Universities, a Brazilian education company. About 15 years ago Brazil decided to privatize education to educate more students, and thousands of universities were created. But none were scalable, and the range of standards was extremely wide. I realized a handful of companies would be able to roll up the industry and provide a much more efficient platform. So I took big positions in two companies: Kroton and Estacio. A few years later, Kroton is now the largest market-capitalization education company in the world, and Estacio will soon have almost a million students; it’s a juggernaut.

How do you find these companies?

I have two senior analysts on my team. We spend 70% of our time developing deep knowledge in one area or industry and then expanding our knowledge into adjacent areas. And then the other 30% we try to develop peripheral vision and do crazy things. It’s like the Google idea: Do things that are completely unrelated because that enables you to make connections you otherwise would have missed.

What do you do with your 30%?

I’m a reader. I love literature. I often tell my investors that if you want to understand the reality of the places that you are committing your money to, then read their literature. One book I recommend is The White Tiger by Aravind Adiga. It’s important because it exposes the myth that India is the next China. Or if you want to understand why the Arab Spring really happened, read The Yacoubian Building by a dentist-turned-novelist in Cairo named Alaa al-Aswany. It’s a really wonderful book.

This story is from the December 09, 2013 issue of Fortune.