OppenheimerFunds’ Justin Leverenz owes a lot to Tencent Holdings.
The stock, which he started accumulating in 2007 when it traded for about HK$6 (77 cents) or about 1/60th of its current price, has helped make his emerging-market mutual fund the biggest in the world.
Tencent and Alibaba Group Holding — China’s other internet giant and another top holding at Leverenz’s $37.9 billion Oppenheimer Developing Markets Fund — could double in price over the next five years to ten years as they expand worldwide, according to Leverenz. Not “the investing opportunity of a lifetime” that Tencent once presented, the fund manager said, but not too shabby.
“These companies have the capacity to go global and change the world,” Leverenz said in a telephone interview from New York.
Fueled by fast-growing sales, Tencent and Alibaba have almost doubled in share price this year, and both have market caps above $400 billion even after slipping recently. Their parallel climb explains in part why Leverenz’s fund has returned 31% in 2017, on track for its best year since 2009.
The stocks come with political risks. The Chinese government in September made creators of online message groups responsible for managing information within their forums, a move that chilled users of WeChat, Tencent’s popular social network.
“If you are an investor in Tencent you are basically betting on management’s ability to adjust to policies,” Duncan Clark, chairman of technology consulting firm BDA China, told Bloomberg News at the time.
Then there’s valuation. Mitchell Kim, an analyst with Maybank Kim Eng Securities USA and a self-described “ultra-bull” on Alibaba, cut his rating on the stock to “hold” in October, saying it was “a good time to take a breather.”
Leverenz acknowledges that Tencent, which has surged to $HK376 in Hong Kong, and Alibaba are expensive by traditional metrics, setting up the potential for a short-term selloff.
“Stocks this big that go up so fast can have meaningful corrections,” he said. Both stocks have tumbled in the technology sector’s recent slide.
Leverenz’s initial investment in Tencent was a mix of insight and good luck. As an analyst on the fund before taking over as manager in May 2007, he was fascinated by social networks, even in the early days. While traveling on the US West Coast, he ran into Tencent president Martin Lau, a former colleague at Goldman Sachs Group.
That spurred him to look closer at the company, which had millions of users but no obvious path to profitability. Leverenz believed Tencent would find a way to turn eyeballs into dollars, saying in a 2014 interview, “You have to have an extreme imagination.”
Leverenz at first predicted Tencent would succeed by selling ads, a business it’s only recently developed into a significant revenue source. Along the way, the company became a powerhouse in gaming and created WeChat, which has almost 1 billion active users.
“I clearly didn’t expect any of that at the origin,” Leverenz said.
Tencent could eventually make major inroads in two businesses where it trails Alibaba, the fund manager said: electronic payments and advertising. It can also profit from its strategy of taking minority positions in companies doing everything from ride-sharing to e-commerce. In November, Tencent acquired a $2 billion stake in Snap, the US-based social-media operator.
Leverenz bought shares in Alibaba when it went public in 2014 and built up his stake the next year, after the American depositary receipts tumbled. China’s largest e-commerce company today trades for $169, up from $68 at its initial public offering.
Alibaba, said Leverenz, can expand domestically in electronic payments, media and traditional retailing. The real opportunity for both companies is exporting their business models.
“In places like Indonesia, Vietnam, Africa, people don’t have wallets full of credit cards the way they do in the United States,” Leverenz said.
The Chinese system, where consumers buy most things by swiping their phones, could catch on quickly in many countries, he said, giving Alibaba and Tencent access to varied businesses. China accounts for about 95% of Tencent’s revenue and three-quarters of Alibaba’s, according to data compiled by Bloomberg.
Understanding the country is critical for any international investor, Leverenz said, because its economy is so dynamic. The 49-year-old stock-picker spends seven months a year traveling, including three in China, and speaks Mandarin.
“China is a country of extreme hunger, much the way the United States was in the late 19th century,” he said. “It’s a country on the move.”
Leverenz recently trimmed his position in both internet giants — they still account for about 11% of his portfolio — in part so he can invest in smaller companies that just might become the next Tencent or Alibaba.
“I hope to find at least one or two over the next couple of years,” he said.
© 2017 Bloomberg