During a 2004 business trip to several developing countries in Asia — beginning in South Korea and ending in India, with stops at all the investable markets in between — David Chon noticed that the hotels and restaurants he visited were comparable in quality to Manhattan’s finest. The evidence of wealth was so inconsistent with the general perception of economic conditions in these countries that Chon, 44, decided to take a closer look at how their gross domestic products were being calculated. He concluded that the methodology most people use to determine GDP for developing economies needs to be revised — and he has incorporated that belief into his investment approach as manager of White Plains, New York–based Atlas Capital Management’s emerging-markets hedge fund.
“When I started to think about and quantify the lifestyle and wealth status of the top-tier wealthiest people in individual countries, I realized that their living standard was much higher than you would expect,” says Chon, a co-founder of Atlas, whose flagship Discover Atlas Fund has $115 million in assets.
Following his trip Chon began digging into earnings statistics for individual Asian countries and quickly discovered that the total income of the top 7 percent of Asia’s population, excluding Japan, was equal to that of the entire U.S. population — a factor clearly not conveyed by the countries’ reported GDPs. That realization has helped him identify Asian currency plays and investment opportunities that some investors may have overlooked.
“One very long-term investment theme that we’ve developed on the back of this observation is a focus on domestic demand companies,” says Chon. He founded Atlas Capital in December 2006 with Harry Krensky and Rogerio Chequer after the trio left Discovery Capital Management, a hedge fund firm based in Norwalk, Connecticut. The three have been concentrating on Asian consumer goods, banking and other financial services companies. Another particular investment opportunity the group currently finds attractive is homebuilding plays in Brazil.
At Discovery Capital the three launched the Discover Atlas Fund in August 2004 with $20 million in assets, maintaining ownership rights to the fund that would eventually become the center of their own firm. Before Discovery, Chon worked in New York as a global emerging-markets equity strategist for Bear, Stearns & Co. Krensky was a director and senior portfolio manager for Deutsche Bank in New York, where he founded and managed the DB New World Fund, for which Chequer was head trader.
Chon says most investors rely on antiquated GDPs based on macroeconomic accounts, balance sheets and tables reflecting internationally agreed-upon concepts last updated in 1993. Eric Swanson, program manager for global monitoring at the World Bank, agrees, adding that many underdeveloped countries still use GDP estimate methodology from 1968.
Those statistics tend to overlook the underground economies of many emerging-markets countries — economies significant enough to sustain large groups of people. “Data from small vendors selling bags of vegetables that they produce doesn’t officially get picked up,” explains Ferenc Sanderson, a senior analyst at New York–based research firm Lipper.
To Chon, the biggest factor that current GDP data excludes is the radical change that has taken place within emerging markets over the past 15 to 20 years. “As a group, emerging markets ran at 50 percent-plus inflation,” says Chon, who received an economics degree and MBA from New York’s Columbia University. He notes that in the mid-1970s emerging markets had closed economies, inflationary monetary policies, large fiscal deficits and soft currencies whose values could change with the wind. “Now inflation is down to 5 percent, so many countries have pretty much conquered inflation problems in their macro policies,” he says.
Taking account of the transformation of soft currencies — those that tend to be weaker and more susceptible to depreciation because of a country’s political or economic uncertainty — into hard ones, which are viewed as much more stable, has a positive impact on wealth across the board.
“The last time the world saw something of this magnitude was when the U.S., at the turn of the century, went from an emerging market to a developed country and transformed the global economic map,” says Chon.
