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.

We have always believed that long-term returns for minority shareholders are far more correlated with a country’s improving rule of law than with rapid economic growth

We prefer to measure our stock successes and errors over at least a three year period. Over this time frame many of our Indian holdings have continued to do well for clients, as have some multinational companies which have significant exposure to emerging markets.

Some of the companies that have lost money for clients are those in which our conviction in the honesty and long-termism of the controlling shareholders has – certainly in the short-term – been trumped by matters of franchise or of business reality.

An example is a Hong Kong-based trading business, which we as a team have known for a couple of decades. During this time we have been fortunate enough to meet the owners and managers on many occasions. We hold the owners in the highest regard, especially in relation to corporate governance. However, of late, being a middleman between primarily Asian suppliers of clothes and furniture and primarily Western retailers has been tricky. Some of the company’s customers are attempting to cut out the middleman, while others are having a tough time themselves in a competitive retail sector.

The company of course, has seen much of this before. Clothes retailing has always been cut-throat and many of their customers’ brands don’t survive the test of longevity – i.e. whether a younger generation wants to be associated with brands championed by their parents. One of our long-held hopes for the company is that it can take more of a role, not only in sourcing garments, but also in improving and certifying the conditions in which they are made. Whether the disposable fashion generation wishes to pay up for better conditions remains to be seen. At present, action seems to be limited to tweeting politicians about sweat shops while wearing cheap T-shirts purchased on a low price deal.

Another example is a family controlled Chilean shipping business which owns a large stake in a Hamburg based container shipping line. We invested soon after they rescued the company from near-bankruptcy under its previous owners. We have probably bored many clients in the past with tales of why we respect this family, but, for example, they also own one of the only mining companies that emerged from the boom with net cash and which has therefore been able to acquire assets in the bust, rather than “streamline” operations. The mining company is London-listed and we also own this for clients.

We continue to own the company and have backed the family in capital increases. There are two probable errors here: the first is simply that some types of business may challenge and defeat even the best managers; the second is that the time horizons of some of the best stewards in emerging markets may be considerably longer than we imagine. We don’t buy companies for quick fixes or noisy shareholder activist-inspired turnarounds, but we would probably approach a three-to-five year plan differently from a twenty year project, in terms of how much to invest and how soon.

Trip reports

Recent team trips to places as far apart as the US, Denmark, Vietnam and Ghana have highlighted the usefulness of considering the difference between permanent and temporary capital. In a financial world dominated by short-term earnings guidance, the founders of Berkshire Hathaway regard the fact that they are known to be stable providers of permanent capital as a key advantage in being able to attract the best US businesses. Why? It is because the best business people are by nature focused on the long-term.

In Denmark, our view is that foundations play an analogous role as long-term owners of businesses and seem to have struck the right balance between the conservatism that comes from an indefinite time horizon with a willingness to take risks, to the benefit of all stakeholders. This suggests it is not just how we regard ourselves as custodians of clients’ money that matters, but how we are regarded by the recipients of the money too.

In places like Vietnam, where basic concepts of capitalism are not yet entrenched, we continue to question if our clients are regarded as low interest temporary lenders to local business people, rather than equity partners with them. In poorer, developing countries like Ghana or Nigeria, the attitude of private business people towards us is crucial to the likely outcome of investing with them. 

We deliberately seek out those companies that might regard our clients as genuinely long-term owners of their businesses. Unfortunately the private equity sector in Ghana, often funded by multilateral donors, looks set up to fail in funnelling long-term savings into an early stage developing economy. How is a local entrepreneur to regard investment from a private equity fund with a five year exit horizon in a country where development will take decades? It seems the Berkshire Hathaway approach of providing permanent capital is even more needed in the poorest countries than it is in the richest.

Outlook

We have always believed that long-term returns to minority shareholders are far more correlated with a country’s improving rule of law than with rapid economic growth, as measured by GDP statisticians. Our strategies are, we hope, “long: rule of law”. We have four or five times as much client money invested in India than China, partly for this reason.

This makes us more interested in whether (after two years in office) the Modi government in India is reducing levels of crony capitalism and state-owned-enterprise corruption than in whether GDP grows at 2%, 4%, 6% or 8%. If a “low” growth of 4% for several years were to coincide with an improvement in the ability of the huge state-owned banking sector to lend according to business logic, rather than at mates’ rates to the politically influential, this would justify our decision to invest roughly one in every five pounds of client capital in the country.

This result would be far more preferable to us than an economy clattering along at great speed, while enriching only a dozen compromised families and their bankers.

On a smaller scale, Nigeria is fascinating. There are certainly companies to invest in (an honest local bank and some multinational subsidiaries) and the market capitalisations are small. The tailwind could be a new government’s proclaimed wish to limit “leakage” in the economy. In an economy as sieve-like as Nigeria, small measures could reduce the amount of government expenditure that leaks from “the vast majority” down to “less but still an awful lot”. This may harm the recruitment prospects for a number of English boarding schools but would expand the domestic economy substantially.

Tom Prew
July 2016


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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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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