We talk to James Fearon, an analyst on the investment team, to hear his thoughts on why stewardship is so important when investing in emerging markets, discussing three Indian companies and their response to the coronavirus pandemic.
Can you please remind us what you mean by stewardship?
Our investment philosophy looks to identify some of the most honest and trustworthy individuals within the uncertain countries in which we invest our clients’ money. We obsess about the individuals and institutions operating in these countries, looking at family histories, value systems and collecting what may seem trifling anecdotes in order to build a picture of integrity - of stewardship.
Why is this important?
We do this because, as history shows, it is often during periods of stress that one’s true motivations are revealed. Families or business owners are presented with the option of preserving their own personal wealth, often at the detriment of others, be it their employees, customers, local communities or minority shareholders. In contrast, ‘stewards’ are willing to sacrifice short-term gratification, electing to do the right thing today by upholding their deeply rooted corporate values in order to strengthen their businesses for the future.
We seek to identify companies that are willing to sacrifice short-term profitability, in favour of strengthening their businesses for the future. The decisions they make during times of adversity, offer us invaluable insights into the underlying motivations and integrity of these businesses. They evidence that these stewards consider their role in society as more than just profit maximisation, but rather the building and maintaining of robust businesses that last the test of time by enhancing the lives of all stakeholders. As an aside, and as we have written about previously, we are yet to find an ESG scoring metric that ‘measures’ such behaviour.
Can you provide some examples on this topic?
Picking out ‘one-off’ examples can be misleading; it is often the worst offenders who have the longest sustainability reports, fuelled by large corporate budgets and the most to lose. That said, we of course take encouragement from some of the recent examples of positive stewardship in India during the coronavirus epidemic, these anecdotes merely serve to compound our existing admiration of these stewards’ values.
Syngene: India’s largest pharmaceutical contract research and manufacturing company*
Syngene is a leader in outsourced drug discovery on behalf of several global-leading drug companies, with the most established of these relationships being multi-decadal. The company is stewarded by one of the most impressive entrepreneurs in emerging markets, Dr Mazumdar-Shaw, who has been a long-term proponent of cheaper health care within India, with a particular focus on the treatment of diabetes. During the pandemic Syngene, and its parent company, have used their considerable expertise to partner with the Government of Karnataka to establish a vaccination centre at their Bengaluru campus, in addition to setting up testing centres that have provided support to the local hospitals by expanding the state’s testing capacity.
Tata Steel: India’s leading integrated steel manufacturer*
Another example might be Tata Steel - itself owned by Tata Sons, one of the largest philanthropic trusts and one of the most respected business houses in the country. Tata Steel has recently committed to pay for the education, health care and housing of the families of any employee who has been a victim of COVID-19. This is just one recent encouraging anecdote that reflects positively on the Tata name, but their reputation is one that has been built over several decades. This has benefited the company in several ways; their reputation as a debtor is excellent, meaning their various subsidiaries can enjoy a low cost of capital, whilst the broad trust in the Tata brand provides a strong competitive advantage as evidence by the build out of their branded-consumer business (Tata Consumer Products).
Hindustan Unilever: the largest subsidiary of the global consumer brand owner, Unilever*
Finally, a multinational whose local subsidiary has focused not only on supporting their own employees but is also collaborating with various medical institutions to use their leading supply chain to source medical supplies, such as oxygen concentrators which have been swiftly disseminated to hospitals across multiple states. They have also adapted their manufacturing units to set up temporary isolation facilities, or COVID-19 wards, to enable affordable and accessible health care focusing on the harder to reach rural communities. We continue to hold the Unilever Group in high regard, understanding the importance of doing business the right way for long-term prosperity.
*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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