Asia Pacific and Japan Sustainability


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Strategy overview

The strategy was launched in June 1988. In September 2019, it was inherited by the Sustainable Funds Group and in May 2020, transitioned to become an Asia Pacific and Japan Sustainability strategy. This change means the strategy is able to invest in companies that derive the majority of their economic exposure from Japan. The ability to invest directly in Japan allows clients to own high quality Japanese companies far earlier in their Asian growth journeys as well as accessing a greater pool of domestic companies with attractive growth opportunities that are positioned to contribute to, and benefit from sustainable development.

 

Strategy update

1 January - 31 March 2022

Growing inflationary pressures and the long-awaited reversal of ultra-loose monetary policy by central banks provided the conditions for short-term market participants to “sell growth” and “buy value”.

This top-down trade saw a blanket sale of all things thought of as growth, with little regard for underlying business fundamentals or valuations. We have long been nervous about the valuations being asked of businesses with no track record of, or path to, profitability; a reliance on outside capital in the form of equity raising or cheap debt; and who sell their prospects by pointing largely to top-line growth and market size. It makes sense to us that this type of “growth company” was sold-off aggressively as we now look to a world with a rising opportunity cost of capital. However, as is often the case when large parts of the market trade as one, high-quality businesses with attractive growth prospects were sold indiscriminately. 

A number of high-quality Japanese companies were thrown out with this “sell growth” theme which provided us the opportunity to increase the position size of three of our current holdings: MonotaRO, Japan Elevator Service and MANI. Each of these names is a leader in their respective markets, with attractive levels of free-cash-flow generation, solid balance sheets and long-term management teams at the helm. We also added to names elsewhere in the region where we felt share price weakness failed to reflect the long-term opportunity for the compounding of growth: IndiaMART (India), Mainfreight (New Zealand), Silergy Corp (Taiwan), Techtronic Industries (Hong Kong) and Vinda International (Hong Kong). 

Over the period we chose to exit a number of marginal positions in the tail of the portfolio to allow us to fund larger weightings in the following names: Dr. Reddy’s Laboratories (India), Estun Automation (China), Tokyo Electron Limited (Japan) and Xero (New Zealand). The latter two names had been reduced in weight over the last year or so on valuation concerns.

1 October - 31 December 2021

Over the quarter, we initiated positions in four new holdings.

These are a diverse set of companies each offering a unique path to long-term growth while sharing our non-negotiables of high-quality people, franchises and financials. For now, they remain marginal positions so we will refrain from mentioning them by name.

Short-term concerns centred on the sustainability of earnings growth offered us lower prices to add to a number of existing holdings. We added to our position in Pigeon as we believe recent share price weakness, the result of an overly myopic view of Chinese growth, ignores the company’s longer-term opportunities in China as well as markets with attractive demographics, such as India and Indonesia. Similarly, Koh Young Technology experienced material weakness in its share price thanks to concerns over semiconductor shortages and diminished demand. Again, we believe the long-term opportunity is being overlooked. We remain very excited about Koh Young’s future as they begin to see traction in new markets after years of aggressive spending on research and development; exactly the kind of investment, and patience, we look for in long-term stewards.

Funding the above investments, while maintaining a concentrated portfolio, led us to sell Tata Communications. We bought Tata Communications last year, as we believed there to be meaningful value creation on offer should a renewed focus on profitability and financial health prove successful. However, we have a number of companies going through such transitions in the portfolio and Tata Communications is where we have the least conviction of long-term success.

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 each 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. 

1 July - 30 September 2021

During the quarter, we had the opportunity to invest in four new positions.

Two of which now bring the strategy’s exposure to Japanese-listed companies to over 13%. The first, Asahi Intecc is a family-owned, world leader in specialist surgical devices. Their ambitious plans for overseas growth together with investment in transformational new categories such as robotic surgery, lays the foundation for attractive levels of long-term growth while improving health outcomes for patients. Short-term concerns around pricing pressures in China as well as constrained profitability on the back of recent mergers & acquisitions (M&A) led to a significant share price decline. This offered us the opportunity to initiate a position at a relatively attractive valuation.

The second is a world-class provider of maintenance, repair and operation products to businesses across Japan. Their highly scalable digital platform offers unmatched convenience to customers who value their product selection and delivery times - outcomes that smaller, analogue-based competitors cannot match. With domestic market share of only 2% and nascent ventures in Indonesia and India, we believe there remains a long runway ahead for the company to continue their enviable track record of profitable growth. Relative weakness in India’s largest online business-to-business marketplace and China’s leading condiment brand allowed us to initiate starting positions in names we have long watched from the sidelines in the hope of more attractive valuations.

Growing political and economic uncertainty in China offered the opportunity to add to our favourite Chinese companies. These names are high-quality, unique franchises run by entrepreneurial management teams with strong balance sheets. Most importantly, they are focused on generating positive societal outcomes while being aligned with the Chinese Communist Party’s want to reduce dependence on foreign multinationals. Examples include China’s largest diagnostic laboratory provider, a leading molecular testing franchise focused on oncology precision medicine, a leading software provider to the construction industry, and an emerging robotic champion.

Maintaining a concentrated, high-conviction portfolio necessitated selling some names to fund the above purchases. Over the period, marginal positions in Cyient (India, IT), MediaTek (Taiwan, semiconductors) and AK Medical (China, healthcare) were sold. There were a number of small trims made in names where valuations are no longer as attractive as they once were; Hoya (Japan, IT), Tata Consultancy Services (India, IT), Dr. Lal PathLabs (India, healthcare), Shenzhen Inovance (China, industrials) and Silergy (Taiwan, IT). 

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 each 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. 

1 April - 30 June 2021

Over the quarter, a rare bout of volatility, in what have largely been unshakeable upward markets, presented the opportunity to increase our exposure to high-quality names in Japan and China.

In Japan, a position in AS ONE was initiated after “the market” took issue with short-term results. AS ONE is the leading wholesaler of scientific and healthcare instruments in Japan where dominant scale allows them to offer the broadest collection of products at vastly superior delivery times versus smaller peers, and in doing so creating significant value for researchers and scientists. Effectively operating as a “one-stop shop” for scientists and researchers, AS ONE, facilitated by a long-term family owner, has a unique business model that we believe is capable of weathering economic cycles while generating attractive margins, returns and cash flows. We have studied equivalent businesses in the US and Europe and believe this business model offers durable competitive advantages while playing a critical role in supporting global innovation. Longer term, we believe AS ONE has the potential to improve the quality of its franchise through the shift toward online ordering while also expanding their valued service to research departments in the rest of Asia.

We also added to the holding in Mani (instruments used in dental and ophthalmic surgery). Mani is another of our Japanese holdings that is very well positioned to take advantage of growth in emerging Asian markets.

Broad weakness in China offered the window to invest in two new names: we continue to build positions in these companies so will refrain from naming them directly. The first is a leading provider of molecular testing equipment that will play a critical role in addressing China’s growing cancer burden. The second, is an emerging local champion in China’s robot industry with attractive long-term tailwinds, driven by growing automation spend and the government’s want to reduce dependence on global multinationals.

These purchases were largely funded through the complete disposal of a small position in Dabur (India, Consumer staples) and trimming Xero (Australia, IT), Mediatek (Taiwan, IT) and Tokyo Electron Limited (Japan, IT) due to stretched valuations.

With many markets trading near all-time highs, volatility near all-time lows, the continued focus on narrative rather than fundamentals, a growing list of fraudulent activity and an unshakeable infatuation with high-growth companies, we are keeping an eye on capital preservation and downside protection rather than trying to outrun overly exuberant markets.

We are not in the forecasting business so won’t claim to know when things will change, only that they will. In response to that uncertainty, we look to build resilient portfolios from a diversified collection of high-quality businesses run by high-quality people on reasonable valuations. This disciplined philosophy has protected capital in most drawdowns while allowing us to participate in up markets: a combination that, over the long term, has delivered attractive long-term returns.

The opportunity that lies ahead of a long-term investor in the Asian region is an exciting one. It is home to some of the highest quality stewards, and highest quality franchises globally, with many avenues for long-term growth.

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 each 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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Proxy voting

1 January - 31 March 2022

During the quarter there were 62 resolutions from 11 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. 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 chart numbers may not add to 100 due to rounding.

1 October - 31 December 2021

Asia Pacific and Japan Sustainability

During the quarter there were 49 resolutions from 10 companies to vote on. On behalf of clients, we voted against three resolutions.

We voted against the approval of CSL's remuneration report and the equity-based remuneration of the CEO. We have engaged with CSL over a number of years on remuneration and whilst we appreciate and acknowledge the changes they have made to their remuneration structure, our concerns remain that their remuneration focuses on the shorter term over the longer term, and the absolute level of CEO pay and the gap between median pay. (two resolutions) 

We voted against Shenzhen Inovance Technology's request to make amendments to the procedural rules of the company's information disclosure management system as we did not have sufficient information at the time of voting to know what these changes were. (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. Proxy voting chart numbers may not add to 100 due to rounding.

1 July - 30 September 2021

Asia Pacific and Japan Sustainability

During the quarter there were 178 resolutions from 24 companies to vote on. On behalf of clients, we voted against 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)

Source for company information: Stewart Investors investment team and company data. Numbers may not add to 100 due to rounding

1 April - 30 June 2021

Asia Pacific and Japan Sustainability

During the quarter there were 245 resolutions from 23 companies to vote on. On behalf of clients, we voted against 10 resolutions.

We voted against Pentamaster International, 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. (six resolutions)

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)

Source for company information: Stewart Investors investment team and company data. Numbers may not add to 100 due to rounding

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Investment terms 

View our list of investment terms to help you understand the terminology within this document.

Important information

This information has been prepared and issued by First Sentier Investors (Australia) IM Limited (ABN 89 114 194 311 AFSL 289017) (FSI AIM).

Stewart Investors is a trading name of FSI AIM. FSI AIM forms part of First Sentier Investors, which is ultimately owned by Mitsubishi UFJ Financial Group, Inc (MUFG), a global financial group.

It is directed at persons who are professional, sophisticated or wholesale clients and has not been prepared for and is not intended for persons who are retail clients. A copy of the Financial Services Guide for FSI AIM is available from First Sentier Investors on its website. This material contains general information only. It is not intended to provide you with financial product advice and does not take into account your objectives, financial situation or needs. Before making an investment decision, you should consider, with a financial adviser, whether this information is appropriate in light of your investment needs, objectives and financial situation.

MUFG and its subsidiaries do not guarantee the performance of any financial products mentioned or the repayment of capital in relation to any financial products mentioned. Investments in any investment-type financial products mentioned are not deposits or other liabilities of MUFG or its subsidiaries, and investment-type products are subject to investment risk including loss of income and capital invested.

To the extent permitted by law, no liability is accepted by FSI AIM, MUFG or any affiliates thereof for any loss or damage as a result of any reliance on this information. This information is, or is based upon, information that we believe to be accurate and reliable, however neither FSI AIM, MUFG nor any affiliates thereof offer any warranty that it contains no factual errors. No part of this material may be reproduced or transmitted in any form or by any means without the prior written consent of FSI AIM.

Some of the information has been compiled using data from representative accounts. This information relates to existing Stewart Investors strategies and has been provided to illustrate Stewart Investors’ expertise in the strategies. This material is provided for information purposes only and does not constitute a recommendation, a solicitation, an offer, an advice or an invitation to purchase or sell any fund and should in no case be interpreted as such.

Reference to specific securities (if any) is included for the purpose of illustration only and should not be construed as a recommendation to buy or sell. Reference to the names of any company is merely to explain the investment strategy and should not be construed as investment advice or a recommendation to invest in any of those companies.