The strategy was launched in December 2003. In July 2016 the strategy transitioned to the Sustainable Funds Group. The strategy invests in large and mid-sized companies which generally have a total stock market value of at least US$1 billion in the Asia Pacific region (excluding Japan, including Australia and New Zealand) and that are positioned to contribute to, and benefit from sustainable development.
1 July - 30 September 2021
Political headwinds have intensified and economic activity has slowed in China.
Chinese bond and equity markets suffered with the most dramatic falls found in the education and property sectors.1 There are some signs of financial distress in pockets of the economy. This had a negative impact on the valuation of banks and insurance companies which may face financial losses.1 Fortunately, the strategy has no exposure to any of these industries.
Our views on China have not changed, we look to invest in high-quality companies that are aligned with sustainable development. We look for stewards who prefer anonymity over notoriety, franchises that are unencumbered by political patronage and financials that are resilient not frail. Our focus on quality protected the strategy from the worst of the recent falls in China and we remain indifferent to many of the large, well-known companies, regardless of lower valuations. We took advantage of market weakness to purchase two new high-quality companies in China.
The first company purchased is a leading player in soy sauce and other condiments. A trusted brand with three hundred years of history, which plays an important role in the company’s ability to generate attractive margins and free cash flow. We are also attracted to the long-term evolution into other condiments. The second is China’s largest decorative paint brand. In addition to these new holdings we topped up on four of the companies we purchased in the first half of 2020. Each of these companies have excellent financials, inspiring stewards and franchises built around products that complement China’s development.
The portfolio has benefitted from strong investor interest in Indian equities. Even after solid gains we are convinced that some of the highest quality companies in Asia, at reasonable valuations, are still to be found within the top ten holdings of the strategy. Indeed, we only trimmed Tata Consultancy Services to control the position size. For this reason the majority of the reductions were made outside of India.
We reduced TSMC (Taiwan), MediaTek (Taiwan), Silergy (Taiwan) and Hoya (Japan). All of these companies are involved, at different stages, in the design and manufacture of semiconductors. Each company has benefitted from strong industry tailwinds and is likely to experience buoyant demand for some time to come. However, we are increasingly mindful of valuations now being asked across much of the sector.
1 Source: FactSet
1 April - 30 June 2021
Markets often react differently to what might be expected in the short term.
Despite negative headlines about the new strain of the COVID-19 virus and the associated human suffering, equities in India have been notably strong in the first half of the year.1 In contrast, headline news from China has been more positive and yet equities have given back all of the large gains they recorded prior to Chinese New Year.1 Such top-down vagaries can be encapsulating but rather than ponder on their cause we find it more rewarding to focus on the quality and ability of stewards to contribute to, and benefit from, the many sustainable development challenges facing the societies in which they operate.
It is estimated there were over 4.5m new cases of cancer in China last year, contributing close to 25% of global cases.2 Late diagnosis, and treatment dominated by chemotherapy, sadly means that mortality rates are far higher in China than in Western countries. Similar to what we see in the US and Europe, precision oncology and early cancer detection are two avenues that present significant opportunity for better patient outcomes and more efficient use of valuable healthcare resources. We hold a number of diagnostic businesses across our portfolios as leading franchises tend to hold durable competitive advantages and generate attractive levels of cash flows while playing an increasingly important role in the development of healthcare systems. This quarter we were fortunate to be given an opportunity to initiate a position in China’s leading molecular testing franchise. This business is owned, and run, by private entrepreneurs and enjoys a robust position in this fast emerging market thanks to years of significant investment in research and development and close relationships with global multinational pharmaceutical companies. We also initiated a holding in a high-quality, privately founded, industrial automation business in China. This vertically-integrated company is benefitting from the ongoing substitution of capital for labour on production lines, and investing heavily in product quality improvements to capture market share from higher-priced foreign competitors. In addition to these two new holdings, we invested in a company listed in Australia which boasts a 20% market share in printed circuit board design software, which is an essential component for electronic goods.
We also had the opportunity to increase the position size of four of the newer and smaller holdings in the strategy: Tata Communications (India), Tata Consumer Products (India), Infosys (India) and Fisher & Paykel Healthcare (New Zealand). Over the period we met with each of these companies and our conviction in the quality of their franchises increased. On the other side, we reduced our holdings in semiconductor related businesses TSMC (Taiwan) and Tokyo Electron Limited (Japan) because of mounting concerns over sustainability, cyclicality and valuation. We also trimmed holdings in Tech Mahindra (India) and Xero (Australia) for reasons of valuation. These were small subtractions and there were no complete disposals over the period.
1 Source: FactSet
2 Source: World Health Organization. Global Cancer Observatory. 2020 data.
1 July - 30 September 2021
Asia Pacific Leaders Sustainability
During the quarter there were 155 resolutions from 21 companies to vote on. On behalf of clients, we voted against three resolutions.
We voted against Kasikornbank’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 two directors at Dabur as we do not believe they are truly independent. (two resolutions)
1 April - 30 June 2021
Asia Pacific Leaders Sustainability
During the quarter there were 247 resolutions from 21 companies to vote on. On behalf of clients, we voted against five resolutions.
We voted against Bank of the Philippine Islands’ 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 Shenzhen Inovance Tech’s request to adopt a long-term stock ownership incentive plan as there was a lack of disclosure and transparency on the plan. We also voted against their request to elect an individual to their Supervisory Council as we do not believe they are truly independent. (four resolutions)
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