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
Strategy update: Q1 2023
Global Emerging Markets Leaders Sustainability strategy update: 1 January - 31 March 2023
This quarter was a comparatively active one for us. We exited three holdings and initiated two new positions in the strategy.
We sold out of a small holding in robotics company Estun Automation (China: Industrials). Nothing significant has changed in our view of the quality of the company. However, we felt that after some share-price strength, which has taken valuations towards extremes, the opportunities for attractive returns have diminished significantly and there are now more attractive alternatives available.
We also exited MediaTek (Taiwan: Information Technology), a Taiwanese chip designer with earnings primarily driven by smartphone demand in China. As consumer sentiment has returned with the re-opening of that country, the share price has performed well. We feel there are likely companies with better earnings-growth profiles within the semiconductor sector that we would rather own for the long term.
In particular, during the quarter we have initiated a position in German semiconductor supplier Infineon Technologies (Germany: Information Technology). Infineon Technologies is a company we have long held in our Worldwide strategy, yet the majority of the company’s sales are to emerging markets in Asia. Infineon specialises in chips that control power supply, with 2.5x the market share of the #2 competitor1. This gives the company great exposure to rapidly growing end markets, like renewable energy, smart grids and electric vehicles.
In making the switch from MediaTek to Infineon, we feel we have exchanged a company primarily exposed to more saturated consumer technology to one primarily exposed to more quickly growing industrial end markets. Given extremely similar valuations, and that it seems more likely that Infineon can deliver sustained earnings growth over the long term, this felt like an upgrade in likely future returns.
In the case of Natura (Brazil: Consumer Staples), we felt that the investment case had changed considerably from our initial thesis. During the last short while, a difficult economic environment has exposed some weaknesses in the franchise, the balance sheet has deteriorated, and the company has changed senior leadership. Exiting a position and realising a significant loss is never a pleasant experience, but it is usually best to avoid sunk-cost fallacy and anchoring biases, and to focus on quality. After much discussion, we decided the company faces a tough road ahead and that we have better ideas at attractive prices today.
One such opportunity is Globant (Argentina: Information Technology), an IT services company that primarily serves US corporates in their digital transformation projects, in which we have re-initiated a position during the quarter. We held Globant from early-2020 until early-2021, and sold based solely on valuation concerns after shares increased in value almost 5-fold. Since then, shares have more than halved and valuation multiples are back to the lows seen during the initial covid sell-off, as investors are now worried about potential spending slowdowns if there is a recession in the US. While we have no predictions of the macroeconomic environment, we know these IT service businesses have proven resilient through past cycles. When the short-term concerns of markets gives us opportunities to accumulate shares in great companies at reasonable prices, we will certainly do so.
1 Company Q1 2023 FY update
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 2022
Global Emerging Markets Leaders Sustainability strategy update: 1 October - 31 December 2022
Over the course of this quarter, we exited positions in the strategy where there was waning conviction in the quality of franchise.
These positions were Info Edge (India: Communication Services), Naver (South Korea: Communication Services), and Nippon Paint (Japan: Materials). Full valuations at Info Edge and Naver, coupled with franchises facing increased challenges around competition and growth, led us to sell our holdings. We exited Nippon Paint due to rising concerns about the quality of management and financials in a cyclical business.
We used the proceeds from these sales to increase positions in existing holdings. There were no new companies purchased during the quarter.
Towards the end of 2022, valuations of some of our favourite Chinese companies provided an opportunity to modestly increase our holdings. These included Kingmed Diagnostics Group (China: Health Care), China’s leading diagnostics test provider, and Amoy Diagnostics (China: Health Care), a specialist oncology diagnostics company, as well as Glodon (China: Information Technology), the leading building automation software provider, and Silergy Corp (China: Information Technology), the leading analog chip designer.
In all cases, these small additions were not made with a view to the short-term impacts of reopening in China. We simply believe these four businesses are well placed to flourish over a long period of time and offered attractive entry points during the quarter.
Over the quarter we have also considerably increased our position in retailer Jerónimo Martins (Portugal: Consumer Staples), which derives the vast majority of its sales from its discount supermarket chain, Biedronka, in Poland. Jerónimo is a very resilient business, which tends to perform relatively predictably in times of both recession and high inflation. Strong retailers like Jerónimo Martins tend to gain share in difficult times like these and the company continues to deliver very strong results.
As ever, we do not have a crystal ball to predict broad, top-down macroeconomics. Our focus remains on finding high-quality stewards who can nurture franchises that are resilient through economic booms and busts, based on solid fundamentals and financial strength. We continue to believe that this is the best recipe for creating robust portfolios that deliver strong, absolute returns for clients over the long term.
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.
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Strategy update: Q3 2022
Global Emerging Markets Leaders Sustainability strategy update: 1 July - 30 September 2022
Over the quarter, we exited our small position in Pidilite Industries (India: Materials). We believe Pidilite is undoubtedly one of the highest-quality companies in India and indeed in emerging markets.
Its dominant brands underpin a franchise with exceptional pricing power, run by extremely competent managers. The issue has been valuation. Over the last 10 years, the company’s price/earnings (P/E) ratio has expanded from 22x to 75x1. The small size of our holding – less than 1% of the portfolio – reflected our nervousness around valuations.
This is illustrative of our approach to valuation. We seek to invest in great companies and hold on to them for as long as possible. However, this has to be coupled with some sensible price discipline. There is a price at which even the very best companies can become poor investments. We know we are not able to accurately value companies to the second decimal point, and for this reason prefer not to be highly active on a daily basis in trimming and adding on small market movements. But we do act when we feel valuations have got so extreme as to minimise the probability of an attractive return going forward. Pidilite, we felt, had reached that point and so we chose, reluctantly, to sell.
The proceeds were reinvested in one new position, Delta Electronics (Taiwan: Information Technology). Delta is a company which we have known for a very long time, hold in our Asia strategies, and have held before in this strategy.
Delta’s products include equipment for industrial automation, IT infrastructure and power management. As experts in electrification and power management, the company is benefiting from tailwinds arising from the transition from fossil fuels to renewables, and from internal combustion engines to electric vehicles. Its highly efficient solar inverters and electric vehicle (EV) charging equipment will be critical in helping emerging Asia shift to a more sustainable development path. Having proven over the last few years the company’s ability to benefit from these shifts, we felt comfortable reinitiating our holding following some share price weakness.
Lastly, we trimmed three Indian companies during the quarter: Mahindra & Mahindra (India: Consumer Discretionary), Dabur (India: Consumer Staples) and Info Edge (India: Communication Services). In each case, this was to contain position sizes given valuations, and to ensure our overall weighting in India did not continue to creep upwards over time with the good contribution Indian investments continue to make to overall performance.
In a scenario of increasing geopolitical tensions and macroeconomic uncertainty, we continue to believe that bottom-up analysis, a focus on fundamental quality and sustainable growth tailwinds, is the best route to tapping into the opportunities and protecting against the risks of investing in emerging markets.
1. Source: FactSet as at 30 September 2022. The price/earnings ratio quoted is based on a twelve month forward-looking basis.
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: 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.
Proxy voting: Q1 2023
Global Emerging Markets Leaders Sustainability proxy voting: 1 January - 31 March 2023
Proxy voting by country of origin
Proxy voting by proposal category
During the quarter, there were 123 resolutions from 15 companies to vote on. On behalf of clients, we voted against four resolutions.
We voted against Amoy Diagnostics’ request to increase share capital and share count as we did not have sufficient information at the time of voting for the justification of these amendments to articles. (one resolution)
We voted against Banco Bradesco’s remuneration policy as we believe it lacks long-term alignment with company performance and market best practice. We also voted against the company’s request to recast votes for an amended slate of directors as we do not believe this is in shareholders’ interest. (two resolutions)
We voted against the appointment of the auditor at Infineon Technologies as they have been in place for over 10 years and the company has given no information on intended rotation. We believe rotating an auditor on a relatively frequent basis (e.g. every 5-10 years) helps to ensure a fresh pair of eyes are examining the accounts and follows best practice. (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 2022
Global Emerging Markets Leaders Sustainability proxy voting: 1 October - 31 December 2022
Proxy voting by country of origin
Proxy voting by proposal category
During the quarter there were 62 resolutions from 14 companies to vote on. On behalf of clients, we voted against one resolution.
We voted against the election of a director to the supervisory board at Foshan Haitian Flavouring as we do not believe they are truly independent. (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: Q3 2022
Global Emerging Markets Leaders Sustainability proxy voting: 1 July - 30 September 2022
Proxy voting by country of origin
Proxy voting by proposal category
During the quarter there were 182 resolutions from 21 companies to vote on. On behalf of clients, we voted against three resolutions.
We voted against the election of a director at Dabur as we do not believe they are truly independent. (one resolution)
We voted against Philippine Seven’s request for management to approve all other business matters before the annual general meeting (AGM) of shareholders. We consider ourselves active shareholders and prefer to vote on such matters at the AGM. (one resolution)
We voted against the election of the chairman of the audit committee at Vitasoy as the committee met less than four times during the last fiscal year. (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: 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.
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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 31 March 2023.
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: © 2014–2023 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), or enabling (supported or made possible by products or technologies provided by that company).
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