Global Emerging Markets Letter

This document contains information which is no longer up to date. As such, it is maintained solely for information purposes to provide historical information. This document should not be relied upon, including for the purposes of making an investment decision. Reference to the names of each company mentioned in this communication is merely for explaining the investment strategy and Stewart Investors does not necessarily maintain positions in such companies.

Risk Factors

In the UK, EEA and Switzerland, this document is a financial promotion for the St Andrews Partners Global Emerging Markets strategies intended for retail and professional clients in the UK and professional clients in Switzerland and the EEA only and professional clients elsewhere where lawful.

Investing involves certain risks including:

> The value of investments and any income from them may go down as well as up and are not guaranteed. Investors may get back significantly less than the original amount invested.

> Emerging Market risk: Emerging markets tend to be more sensitive to economic and political conditions than developed markets. Other factors include greater liquidity risk, restrictions on investment or transfer of assets, failed/delayed settlement and difficulties valuing securities.

> Currency risk: the strategies invest in assets which are denominated in other currencies; changes in exchange rates will affect the value of the strategies and could create losses. Currency control decisions made by governments could affect the value of the strategies investments and could cause the strategies to defer or suspend redemptions of its shares.

Reference to specific securities (if any) is included for the purpose of illustration only and should not be construed as a recommendation to buy or sell. Reference to the names of any company is merely to explain the investment strategy and should not be construed as investment advice or a recommendation to invest in any of those companies.

If you are in any doubt as to the suitability of our strategies for your investment needs, please seek investment advice.

Stewardship is the primary quality we look for in the companies we choose to invest our clients’ funds. We are only interested in backing management teams who run their companies with a long term ‘owner-manager’ mind-set.

We obsess over the history of key people at our companies, assessing their attitudes towards minority shareholders, employees, suppliers, government and the environment they operate in. Any sign of mistreatment is a red flag to us, as it tends to suggest that if a company cuts corners in one area, it is likely to do the same in other areas, which could ultimately have repercussions for minority investors. We acknowledge the fact that the future is inherently risky and unpredictable. Therefore the best way to mitigate this risk is to back management who have historically displayed risk-aware or conservative behaviour, and built resilient businesses.

Unfortunately, many companies listed on public stock exchanges suffer from a serious ‘principal agent’ conflict.1 Interests of management teams (the agents) are not aligned with the shareholders of the companies (the principals), as management’s compensation is often linked to short term incentive plans. Therefore it is quite rare for us to find the true qualities of ‘stewardship’ we are looking for in a management team. More often than not, we find them in companies with a large dominant shareholder. 

Well stewarded family owned businesses are usually run with a view to preserve and build wealth for the next generation. Hence they take a far longer term view in decision making than businesses with no dominant owner; which are purely run by professionals, with managers often incapable of seeing beyond their 3-5 years bonus cycle. In an intensely competitive environment, a longer time horizon and willingness to take short-term pain for the sake of long-term gains becomes a key competitive advantage. 

Tata Consultancy Services (TCS), an Indian IT services business is a good example of this dynamic. TCS is majority owned by the house of Tata, known for its long termism and integrity. Indian IT services is a highly competitive industry, where firms not only compete for clients (largely on the basis of cost), but also for software talent. Most firms are organised as monolithic armies of engineers with a strong focus on costs and are quick to cut employees as soon as business becomes tough. TCS is run very differently. The company is organised more as multiple independent cells each with its own profit and loss, which fosters entrepreneurial risk taking. Even during the depths of Global Financial Crisis in 2008, TCS chose to take a short-term hit to margins rather than laying off its employees. This long term focus on building the right ‘culture’, and respect for employees, has kept their staff attrition rates low within their industry and cemented their position as one of the lowest cost IT services providers in the industry.

Uni-President Enterprises in Taiwan is a family business we have known for almost 30 years. Through patient, consistent compounding of capital, which not only requires competence in running their operations but also very careful capital allocation; they have become one of the pre-eminent consumer businesses in Asia. They launched their first instant noodle brand in Taiwan in 1967, became the dominant food business in Taiwan over the next two decades; set up President Chain Store, a 7-11 Franchise in Taiwan, which later became one of the most successful convenience store chains in the world; entered mainland China in 1992, and later became the leading beverage and noodle company in the country. 

While they are conservative, they are forward thinking and ‘counter cyclical’ in allocating capital. They do not shy away from taking short-term risks, if it improves the long-term sustainability of the business. A few years back, they dramatically improved the quality of their noodles in China, making them healthier, but raising prices at the same time. Yes, their volumes did suffer for a while, but it was more than made up through higher profitability resulting from a higher quality product portfolio. Similarly, they aggressively invested in the Philippines, expanding their 7-11 network post the Asian Financial Crisis in the early 2000s; and the Philippines has now become a key growth driver for their President Chain Store business.

Our willingness to invest for the long-term means that we focus more on judging the quality of ‘people’ behind the business, than the business itself. Often these businesses might be going through a difficult phase making them unpopular. Our expectation is that as long as our judgement on the ‘people’ is correct, businesses should recover or evolve into something more robust. 

Universal Robina Corporation (URC) in the Philippines is one such example. It’s a Filipino consumer business expanding into Vietnam and Indonesia. The steward here is Lance Gokongwei, from the Filipino-Chinese Gokongwei family which controls JG Summit, one of the leading business conglomerates in the country. 

When Lance took over URC in 2013, we received very good references on him from a few key business people we respect in the country. For the next three years, we repeatedly met not only URC management teams, but also their key competitors, ex-employees, suppliers and their joint venture partners; and learnt that Lance is highly focused on improving the overall quality of operations of the company. He brought in high quality professionals, partnered with high quality business groups in the region and built a culture of true meritocracy, where the Gokongwei family members in management positions are now held accountable to very strict standards. Last year, Irwin Lee, who has spent almost 30 years at Procter & Gamble in Europe, joined URC as CEO, while Lance restricted himself to the company’s board; this, to us, is another sign that URC’s quality has significantly improved under Lance. 

While changes initiated by Lance were in full swing, URC suffered market share losses, partly as a result of a new aggressive competitor from Indonesia. URC in our view, has a good combination of competent professionals (‘agents’) running the daily operations of the company; and a dominant shareholder (‘principal’) who is long-term focused to ensure sensible capital allocation. 

Although our investment philosophy is focused on the quality of people at the top, we acknowledge that certain businesses are inherently difficult to manage well, even with very high quality people at the top. One such business is Vodafone Idea, the leading mobile service provider in India. 

We believe that there were too many mobile service providers in India, resulting in low tariffs and poor economics for most players. Eventually, it seemed likely that only a few providers would survive, and the economics of the industry would improve. India has one of the lowest per user spending on telecoms in the world, and there is practically no fixed line network in the country, which means future prospects for the mobile providers who manage to survive should be very bright. We were correct to an extent that effectively only three providers have survived now. However, tariffs have been cut so much that no one makes any profits, and the balance sheets of all the providers have been destroyed. 

Companies already held in the strategies and deemed ‘investable’ are constantly scrutinized by the team for anything which breaks our investment thesis, and often debating our investment thesis itself. One such company is an oil exploration company which we disposed of this year. For an oil exploration company focused on Africa, taking care of communities impacted by their activity is absolutely essential to secure social license to operate.  We had huge regard for their track record in managing community relationships in Ghana, but we were not sure whether under new management team they can keep up with their record, especially in new geographies such as Kenya. 

Long-term success of a bottom-up investment process like ours relies on an investment culture which relies on open, honest debate where fresh ideas are encouraged. New investment ideas need to clear quite a few of our quality hurdles, and often a few years of work and debate in the team, before they become ‘investable’ from our view point. And even in ‘investable’ companies, we often begin investing with small positions, conscious of valuations, and build conviction over several years.

St Andrews Partners
January 2019

Source for company information: Stewart Investors investment team and company data. For illustrative purposes only. Reference to any companies mentioned in this communication is merely for explaining the investment strategy, and should not be construed as investment advice or investment recommendation of those companies. Companies mentioned herein may or may not form part of the holdings of Stewart Investors.

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Important Information

This document has been prepared for general information purposes only and is intended to provide a summary of the subject matter covered. It does not purport to be comprehensive or to give advice. The views expressed are the views of the writer at the time of issue and may change over time. This is not an offer document, and does not constitute an offer, invitation, investment recommendation or inducement to distribute or purchase securities, shares, units or other interests or to enter into an investment agreement. No person should rely on the content and/or act on the basis of any matter contained in this document.

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References to “we” or “us” are references to Stewart Investors. Stewart Investors is a trading name of First Sentier Investors (UK) Funds Limited, First Sentier Investors International IM Limited and First Sentier Investors (Ireland) Limited. First Sentier Investors entities referred to in this document are part of First Sentier Investors, a member of MUFG, a global financial group. First Sentier Investors includes a number of entities in different jurisdictions. MUFG and its subsidiaries do not guarantee the performance of any investment or entity referred to in this document or the repayment of capital. Any investments referred to are not deposits or other liabilities of MUFG or its subsidiaries, and are subject to investment risk including loss of income and capital invested.

Past performance is not a reliable indicator of future results.

Reference to specific securities (if any) is included for the purpose of illustration only and should not be construed as a recommendation to buy or sell. Reference to the names of any company is merely to explain the investment strategy and should not be construed as investment advice or a recommendation to invest in any of those companies.

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In Hong Kong, this document is issued by First Sentier Investors (Hong Kong) Limited and has not been reviewed by the Securities & Futures Commission in Hong Kong. In Singapore, this document is issued by First Sentier Investors (Singapore) whose company registration number is 196900420D. This advertisement or publication has not been reviewed by the Monetary Authority of Singapore. Stewart Investors is a business name of First Sentier Investors (Hong Kong) Limited. Stewart Investors (registration number 53310114W) is a business division of First Sentier Investors (Singapore).


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  1. The Principal-Agent problem occurs when the incentives of the agent are not aligned with those of the principal.