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The strategy was launched in February 2009 and invests in companies in emerging markets or whose business is predominantly based in emerging markets and are positioned to benefit from and contribute to sustainable development.
1 April - 30 June 2021
We initiated a number of new positions during the quarter in the strategy.
During the first half of 2021, there has been a continuing rotation away from quality-growth and towards value-cyclicals, as economies around the world rebound from the COVID-19 pandemic and associated lockdowns. The broader market has been attracted to owning companies that have the best chance of rapid earnings growth in the next twelve months. In many cases, this means companies in cyclical commodity industries like shipping and mining whose earnings collapsed last year and which are most sensitive to re-opening. Whilst these companies may outperform in the short term, we believe in the long run the owners of their equity will likely realise a return more commensurate with their modest returns on invested capital.
One consequence of this rotation has been that a number of high-quality companies which were more resilient throughout 2020, but which now do not offer the same short-term upside, have become much more reasonably valued. This has been particularly true in China, the country which is most advanced in its economic recovery.
Many of the most attractive long-term companies to own in China have become significantly more affordable over the last two quarters.
For instance, we have been watching one specific Chinese plasma and vaccines company for some years. Our first meeting with the company was ten years ago, but it has been in the last few years that we built conviction up to feeling the company met our quality criteria. It has a well-stewarded balance sheet, a competent owner-manager and is the domestic leader in China in an industry we know well, having been long- term shareholders in companies like CSL in Australia.
Since February, the company’s share price has fallen by around a third as solid, defensive earnings streams have become less popular relative to those driven by re- opening and recovery. With a return on capital above 20% and medium-term growth rates at a similar level, this felt like an opportune time to initiate a position in what we believe will be a long-term winner in China.
The same pattern and fundamental logic underlies recent new positions in a China software company and two Chinese medical diagnostics companies, plus Mercadolibre, an Argentina; e-commerce and fintech company.
In order to fund these ideas, we trimmed some existing positions. These were primarily holdings which have done very well and where a combination of resultant position size and valuation multiple has led us to take some profit, whilst retaining meaningful exposure.
One example would be EPAM Systems, a Belorussian IT services company listed in New York, which has benefited hugely from a surge in corporate spending on ‘digitalisation’. Another would be Dabur, an Indian ayurvedic consumer goods company which has seen very strong results as people increasingly spend on wellness products in the wake of the COVID-19 pandemic.
We continue to believe the companies we own in the strategy in emerging markets offer attractive long-term opportunities for capital growth.
1 April - 30 June 2021
Global Emerging Markets Sustainability
During the quarter there were 403 resolutions from 31 companies to vote on. On behalf of clients, we voted against 11 resolutions.
We voted against Vinda International and AK Medical Holdings’ request to repurchase issued shares, and issue shares without pre-emptive rights, as the share discount rate had not been disclosed and the share issuance was excessive. (four resolutions)
We voted against Shenzhen Inovance Tech’s issuance request to adopt a long-term stock ownership request incentive plan as there was a lack of disclosure and transparency on the plan. We also voted of against their request to elect an individual to their Supervisory Council as we do not believe they are truly independent. (four resolutions)
We voted against Natura’s request to establish a Supervisory Council as we do not believe it necessary given they are a one share, one vote company and we are comfortable with management. (one resolution)
We voted against Tencent’s request to issue without pre-emptive rights as the share discount rate had not been disclosed and the share was excessive. We also voted against their to adopt the share option plan of a subsidiary as there was a lack of detail provided on the terms the plan. (two resolutions)
Jack Nelson gives an update on the Global Emerging Markets Sustainability Fund.
View our list of investment terms to help you understand the terminology within this document.
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