Global Emerging Markets Leaders Sustainability

Global Emerging Markets Leaders Sustainability

The strategy invests in 25-60 high-quality emerging markets companies that we consider to be well positioned to contribute to, and benefit from, sustainable development.   

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The Global Emerging Markets Sustainability All-Cap strategy launched in February 2009. Due to capacity constraints of the All-Cap strategy and strong demand and desire to offer clients an emerging markets solution, we launched the Global Emerging Markets Leaders Sustainability strategy in April 2020. It invests in 25-60 high-quality emerging markets companies that we consider to be particularly well positioned to contribute to, and benefit from, sustainable development.

Leaders simply means that the strategy is focused on companies with a market cap value of at least USD1 billion.

Strategy highlights: a focus on quality and sustainability

  • Companies must contribute to sustainable development and make a net-positive impact to a more sustainable future. Portfolio Explorer >

  • We invest in high-quality companies with exceptional cultures, strong franchises and resilient financials. How we pick companies >

  • We avoid companies linked to harmful activities and engage and vote for positive change. Our position on harmful products >

  • Our approach is long-term, bottom-up, high conviction and benchmark agnostic

  • We focus on capital preservation as well as capital growth – we define risk as the permanent loss of client capital

Latest insights

Q2 2022

Global Emerging Markets Leaders Sustainability strategy update: 1 April - 30 June 2022

During the second quarter, markets were exceptionally volatile and weak, as investors began to price in the likelihood of sustained inflation in the developed world, higher interest rates and the potential for global recession.

In the past, such episodes have tended not to be pleasant experiences for emerging markets, and the first half of 2022 has been no exception. 

At the time of writing, on a sector basis only utilities and financials have delivered a positive return year to date in emerging markets. Materials and energy have also held up relatively well, given rises in commodity prices. All told, beneficiaries of rising inflation and higher interest rates – banks, energy and commodity companies – have been comparatively strong. 

We rarely hold companies in these sectors for clients because they seldom meet our quality and sustainability requirements. In contrast, sectors like healthcare, technology and consumer staples – where we do tend to find attractive ideas – have been weaker. Performance over the very short term has been commensurately weak.

As is often the case during rapid deteriorations in investor sentiment, high-quality businesses with attractive growth prospects have been de-rated indiscriminately. We consequently initiated a total of five new positions during the quarter, most of which we have held before.

Some of these companies are those we feel are most likely to be the most resilient in the current environment. They include retailers Dino Polska (Poland) and Jerónimo Martins (Portugal): grocery stores tend to be resilient during periods of inflation.

We also initiated positions in two banks during the quarter: Banco Bradesco (Brazil) and Komerční banka (Czech Republic). Both had been de-rated to valuations around one times price to book with 7-8% dividend yields1 which could be attractive entry points.

We also re-initiated a position in pharmaceutical manufacturer Dr. Reddy’s Laboratories (India). The company’s earnings growth should be somewhat independent of the global macroeconomic environment, and shares had become more affordable.

We also added to a number of existing holdings which had suffered from more acute weakness, including Silergy Corp (Taiwan), Techtronic Industries (Hong Kong), and MercadoLibre (US listed, headquartered in Argentina). We remain convinced of the quality and attractive long-term growth prospects of these businesses, and so took the opportunity to purchase more shares at prices substantially below where they have traded lately.

We funded some of these purchases by reducing cash and trimming some companies which had held up relatively well, like Unicharm (Japan) and Mahindra & Mahindra (India). We also exited one small holding, Hualan Biological Engineering (China), in which we have found it difficult to build conviction in the ability of the company to mitigate growing competition from state-owned peers.

Going forward, it seems as though we are in a period of fairly unprecedented macroeconomic policy uncertainty. Monetary policy has shifted from ultra-loose to a rapid tightening with frantic speed, and may well overshoot, with accordantly dramatic impacts on equity prices in the short term. In such an environment, it seems less than fruitful to try to predict the near-term future direction of inflation or interest rates. Instead, we are focused on building portfolios full of resilient companies with long-term tailwinds which should benefit over the longer term from the opportunities in emerging markets.

1 Source: Bloomberg

Source for company information: Stewart Investors investment team and company data. This stock information does not constitute any offer or inducement to enter into any investment activity. Portfolio data shown is from representative strategy accounts of the strategy shown above. Named new investments disclosed relate to holdings with a portfolio weight over 1%. It is not a recommendation or solicitation to purchase or invest in any fund. Differences between the representative account-specific constraints, currency or fees and those of a similarly managed fund or mandate would affect results.

Strategy update: Q1 2022

Global Emerging Markets Leaders Sustainability strategy update: 1 January - 31 March 2022

During the quarter we made a small number of meaningful transactions in the strategy.

After a more than 50% rally from its trough, we made the decision to exit our position in Alibaba (China). In light of the comparatively more muted growth prospects the company has going forward, a lower price-to-earnings or price-to-cash-flow multiple would seem appropriate. Our primary mistake has perhaps been in being too backwards looking in assessing quality of franchise. It is a truism, no less powerful for its simplicity, that all companies – indeed all organisations – are at any given time either strengthening or weakening relative to their competitors. The last two years have seen the company, encouraged by regulation designed to promote competition and weaken the market power of incumbents, slide into a much more competitive, capital intensive and less profitable position than it had been previously. 

We recycled some of the proceeds of Alibaba into a number of Chinese companies which we deem to be either lower risk or at an earlier stage of life (and thus enjoying greater prospects), or both. These have included the likes of Estun Automation, the leading domestic robotics manufacturer, and Yifeng Pharmacy Chain, a rapidly growing drug retail chain consolidating China’s highly fragmented market. We believe these companies to be aligned with the government of China and likely to benefit from strong growth and sustainability tailwinds for the foreseeable future.

We have been experiencing an unusual time in emerging markets lately, in particular the unusual combination of broadly weak markets combined with rapidly climbing energy prices. Our strategies do not invest in oil, gas or coal, and we are always likely to underperform on a relative basis for short periods when fossil fuel markets are rallying. As ever, our focus remains on long-term absolute returns, which we believe are best achieved through avoiding investing in fossil fuel-reliant businesses.

Indeed, broad market weakness during the quarter allowed us to build up position sizes in a number of our favourite companies. These included MercadoLibre (US-listed company operating in Latin America), Techtronic Industries (Hong Kong), Godrej Consumer Products (India) and Mahindra & Mahindra (India). In each case we have high conviction in quality as well as the long-term opportunity. We remain optimistic about the prospects for attractive long-term, risk-adjusted returns in emerging markets.

Source for company information: Stewart Investors investment team and company data. This stock information does not constitute any offer or inducement to enter into any investment activity. Portfolio data shown is from representative strategy accounts of the strategy shown above. Named new investments disclosed relate to holdings with a portfolio weight over 1%. It is not a recommendation or solicitation to purchase or invest in any fund. Differences between the representative account-specific constraints, currency or fees and those of a similarly managed fund or mandate would affect results.

Strategy update: Q4 2021

Global Emerging Markets Leaders Sustainability strategy update: 1 October - 31 December 2021

In our Global Emerging Markets Leaders Sustainability strategy, we exited two positions over the quarter; both weaker franchises in economies which are less likely to be resilient in a rising interest rates environment.

These were SPAR Group, the South African grocery retailer, and Banco Bradesco, one of Brazil’s largest financial conglomerates.

Both companies had been attractive to us a year or so ago based on what appeared, at the time, quite modest valuations; both companies have dividend yields over 5%. However, in our experience it can be difficult to preserve capital in companies that are by nature dependent on their local economic environment when those economies are sailing into solid global headwinds – as South Africa and Brazil appear to be now – even when they are trading at ostensibly cheap valuations.

As often as not, in companies like these without growth tailwinds, any value creation in local currency is more than offset by currency devaluation. Therefore, in countries like South Africa and Brazil, we tend to look for companies with sufficient growth to enable them to overcome the long-term impacts of devaluation. We believe this is our best chance of deriving attractive hard currency returns in these economies.

During the quarter, we re-initiated a position in a Brazilian electrical motor company that is an archetypal example of this kind of business. A world leader in motor efficiency, the company derives most of its sales outside Brazil, which means it is naturally hedged against devaluation. It is growing rapidly as it benefits from sustainable development tailwinds around energy efficiency, electric vehicles and renewable energy generation.

We had owned the company for many years but exited in late 2020 when we felt valuations had become excessive. In US$, the share price fell 23% in the year¹, to the point where we felt a small position is again an attractive addition to the portfolio.

We also initiated a small new position in a Chinese company; a leading drug store chain. We already own several such businesses (Raia Drogasil in Brazil and Clicks in South Africa), and we note numerous similarities between these companies and our new holding in China.

Leading drug stores benefit from a virtuous cycle that tends to see them consolidate fragmented local markets over time. Superior purchasing power and logistics efficiency enables lower costs, allowing large chains to offer reduced prices to consumers. This not only drives access to medicine for people at the bottom of the pyramid, but attracts more consumers and puts the company in an ever-better position over time to continue outcompeting smaller peers.

The result can be exceptional long-term value creation, when the model is run competently and is properly stewarded by high quality people. In the case of our new Chinese holding, the combination of a private entrepreneur as owner-manager as well as a cadre of executives who have joined from multinationals, means we believe the company can contribute positively to the portfolio over time.

The Global Emerging Markets Leaders Sustainability strategy became available to investors in the United Kingdom in December 2021, and is now available in Europe.

1 Source: FactSet

Source for company information: Stewart Investors investment team and company data. This stock information does not constitute any offer or inducement to enter into any investment activity. Portfolio data shown is from representative strategy accounts of the strategy shown above. Named new investments disclosed relate to holdings with a portfolio weight over 1%. It is not a recommendation or solicitation to purchase or invest in any fund. Differences between the representative account-specific constraints, currency or fees and those of a similarly managed fund or mandate would affect results.

Strategy update: Q3 2021

Global Emerging Markets Leaders Sustainability strategy update: 1 July - 30 September 2021

During the course of this quarter, we chose to exit a few of the positions in the strategy. These changes were driven primarily by our continued focus on incrementally improving the quality of the portfolio, and adding instead to companies we think have better long-term sustainable and structural tailwinds of growth for the decade ahead. 

Four of the positions exited include UnileverKasikornbankSamsung Electronics, and Tencent. We have slowly trimmed our longstanding holding in Unilever, and chose to exit this quarter as we have struggled to find conviction in their efforts to reinvigorate the franchise. Without this, their opportunities for growth over the next decade look to be more challenged than they have been over the previous one. We also exited our holding in Kasikornbank, which remains in our minds the best bank in Thailand. We admire the stewardship of the Lamsam family and the conservatism they have embedded in the bank post the Asian Financial Crisis. However, we worry about their limited opportunities for loan growth in the country and the rising threats from fintech disruption. We chose to exit the position and add to companies where we had more conviction.

Samsung Electronics is another company we exited through this quarter, primarily due to the cyclicality of earnings. Given our long-term approach, we are unlikely to be able to make a call on when memory chip prices reach their peak or trough, and thus chose to exit our position after Samsung delivered strong absolute returns for clients. We owned Tencent only for a brief period – unlike our typical holdings. We engaged with Tencent, shortly after we initiated a position, on issues around data privacy and government regulations. A few actions of the company, including de-platforming LGBTQ student groups, and the rising threats around government regulation led us to correct our mistake quickly, and we chose to exit the position.

We also exited our position in Avast. The company is a global leader in cybersecurity software for consumers, based out of the Czech Republic. While we believe the company has a long runway for growth, they have announced a merger with the US-based NortonLifeLock. The combined entity will be ineligible for our emerging markets funds and we have therefore had to sell out of our position.  

Through this quarter, we have re-initiated a position in Foshan Haitian, the leader in soy sauce and other condiments in China. Foshan is the domestic leader in these condiments by a high margin, continues to have a long runway to evolve into other condiments, and has focused on growing through volumes rather than by increasing prices. We had previously exited our position in the company due to valuations reaching all-time highs, and had an opportunity over these past months to buy back into the company at a more attractive valuation.

We also added to many of our other Chinese holdings including GlodonGuangzhou Kingmed, and Estun Automation, amongst others. We believe these companies continue to be well managed by their owner-managers and are the leaders in their respective industries, providing necessary products and services, setting them up well to continue growing in the coming years.

Source for company information: Stewart Investors investment team and company data. This stock information does not constitute any offer or inducement to enter into any investment activity. Portfolio data shown is from representative strategy accounts of the strategy shown above. Named new investments disclosed relate to holdings with a portfolio weight over 1%. It is not a recommendation or solicitation to purchase or invest in any fund. Differences between the representative account-specific constraints, currency or fees and those of a similarly managed fund or mandate would affect results.

Q2 2022

Global Emerging Markets Leaders Sustainability proxy voting : 1 April - 30 June 2022

During the quarter, there were 352 resolutions from 30 companies to vote on. On behalf of clients, we voted against 13 and abstained on seven resolutions.

We voted against Amoy Diagnostics’ request to transfer product rights and equity to a subsidiary, and to amend authorised share capital, as we did not have sufficient information at the time of voting. (two resolutions)

We voted against the appointment of the auditor and the election of two directors at Hualan Biological Engineering. At the time of voting the company had not disclosed a breakdown of the fees paid to its auditor, and we do not believe the directors are truly independent. (three resolutions)

We voted against Natura's request to adopt cumulative voting and to recast votes for an amended slate of directors. We do not believe these requests are in shareholders’ interests. Unfortunately, due to an operational voting error, we abstained from voting on the company’s remuneration policy and the election of a candidate to the supervisory council. We had intended to vote for the remuneration policy, but had flagged areas to follow up with the company on. Our voting intention was to abstain from voting on the establishment of a supervisory council and a separate election for board members. This error did not have a material impact on the results of the meeting. (two resolutions against, two resolutions abstained)

We abstained from voting on the election of Raia Drogasil’s supervisory council as we were happy to support the candidates presented by the minority and preferred shareholders. As a result of this vote, we voted against the recasting of votes for the amended supervisory council slate. (one resolution against, one resolution abstained)

We voted against Totvs’ request to adopt cumulative voting and for permission to re-consider voting instructions should the meeting be held on second call. We do not believe these requests are in shareholders' interests. We abstained from voting on the company’s request to establish a supervisory council as we did not have sufficient information to know who we would be voting for. (two resolutions against, two resolutions abstained)

We voted against WEG’s request to adopt cumulative voting and to recast votes for the amended board and supervisory council slate. We do not believe these requests are in shareholders' interests. We abstained from voting for a minority candidate as we prefer to support the board. (three resolutions against, two resolutions abstained)

Source for company information: Stewart Investors investment team and company data. This stock information does not constitute any offer or inducement to enter into any investment activity. Portfolio data shown is from representative strategy accounts of the strategy shown above. Proxy voting chart numbers may not add to 100 due to rounding. SHP means: Shareholder Proposal.

Proxy voting: Q1 2022

Global Emerging Markets Leaders Sustainability proxy voting: 1 January - 31 March 2022

During the quarter there were 56 resolutions from eight companies to vote on. On behalf of clients, we voted against one resolution.

We voted against the approval of fees to be paid to the directors and commissioners at Bank Central Asia as we believe they are excessive. (one resolution)

Source for company information: Stewart Investors investment team and company data. This stock information does not constitute any offer or inducement to enter into any investment activity. Portfolio data shown is from representative strategy accounts of the strategy shown above. Proxy voting chart numbers may not add to 100 due to rounding. SHP means: Shareholder Proposal.

Proxy voting: Q4 2021

As the strategy launched in December 2021, there is no proxy voting to report this quarter.

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For illustrative purposes only. Reference to the names of example company names 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. Holdings are subject to change.

Certain statements, estimates, and projections in this document may be forward-looking statements. These forward-looking statements are based upon Stewart Investors’ current assumptions and beliefs, in light of currently available information, but involve known and unknown risks and uncertainties. Actual actions or results may differ materially from those discussed. Readers are cautioned not to place undue reliance on these forward-looking statements. There is no certainty that current conditions will last, and Stewart Investors undertakes no obligation to correct, revise or update information herein, whether as a result of new information, future events or otherwise.

Source: Stewart Investors investment team and company data. Securities mentioned are all holdings which have/have had a portfolio weight over 0.5% from representative Asia Pacific Sustainability Strategy, Asia Pacific & Japan Sustainability Strategy, Asia Pacific Leaders Sustainability Strategy, European Sustainability Strategy, European (ex UK) Sustainability Strategy, Global Emerging Markets Leaders Sustainability Strategy, Global Emerging Markets Sustainability Strategy, Indian Subcontinent Sustainability Strategy, Worldwide Sustainability Strategy and Worldwide Leaders Sustainability Strategy accounts up to 30 June 2022.

The Stewart Investors supports the Sustainable Development Goals (SDGs). The full list of SDGs can be found on the United Nations website.

Source for Climate Solutions and impact figures: © 2014–2022 Project Drawdown (drawdown.org). Source for Human Development Pillars: Stewart Investors investment team.

Source for climate solutions and human development analysis and mapping: Stewart Investors investment team. Contributions are defined by the team as demonstrable contributions to any solution, either direct (directly attributable to products, services or practices provided by that company), enabling (supported or made possible by products or technologies provided by that company) or indirectly (companies that are involved in and around the solution). Indirect contributions are relevant for climate solutions only.

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