Asia Pacific Sustainability


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Strategy overview

The strategy was launched in December 2005 and invests in companies in the Asia Pacific region (excluding Japan, including Australia and New Zealand), which are positioned to contribute to, and benefit from sustainable development. 

 

Strategy update

1 January - 31 March 2022

The strategy sold its investment in Xero (Australia) which provides small and medium-sized enterprises with professional software, particularly accounting software, from the cloud.

We have great respect for the quality of the franchise here but we could not reconcile current valuations with the imminent growth challenges facing the company. Mounting concerns about growth at Advantech (Taiwan), Delta Electronics (Taiwan) and Hualan Biological Engineering (China), resulted in us also reducing each of these holdings. To control position size we trimmed Unicharm (Japan). Proceeds from a reduction in Kotak Mahindra Bank (India) were used to finance the purchase of a new investment in a bank in Malaysia.

Returns at this bank are currently depressed, but the prospects for a healthier economy, and a stronger credit cycle, are likely to improve with rising commodity prices. This bank is well placed to benefit from this environment in a sustainably responsible manner. We also invested in two new healthcare companies which we believe are helping to improve the well-being of people in India and Indonesia. In addition to these purchases, we added to existing holdings in IndiaMART (India) and Techtronic Industries (Hong Kong) on recent weakness. We also increased the position size of the new holding in Malaysia.

1 October - 31 December 2021

Strengthening political headwinds and a weakening economy have dissuaded investors from many Chinese equities, particularly in the last quarter of 2021.

In contrast, investor enthusiasm for a number of Indian companies intensified throughout the year. Valuation multiples in India have risen but we believe, given the quality of companies and the duration of growth available to these companies, that they continue to offer attractive opportunities for the long-term investor. Over the quarter, we added to Kotak Mahindra Bank and HDFC. We also continued to build positions in a business-to-business e-commerce platform focused on India’s small and medium-sized enterprises as well as a high-quality industrial franchise where previously weak governance is likely to be improved under the new stewardship of the Murugappa family.

Elsewhere in the region we were able to add to Koh Young Technology (Korea), Fisher and Paykel Healthcare (New Zealand), Vitasoy (Hong Kong), Advantech (Taiwan) and Pigeon (Japan). To complement these additions we also invested in one of the leading pharmacy chains in China, as well as two new industrial companies from our quality list in Taiwan and India.

We have a preference for concentrated portfolios and for this reason we sold and reduced two of the smaller holdings in the strategy, Biocon (India) and Sundaram Finance (India). We sold out of MediaTek (Taiwan) because of mounting concerns over sustainability, cyclicality and valuation. For reasons of valuation only we trimmed Voltronic Power (Taiwan) where short-term market movements had pushed valuations ahead of fundamentals.

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

Companies listed in India were strong contributors over the quarter.

The most notable of these were Tech Mahindra (software services), Mahindra Logistics (logistics) and Tube Investments (industrial). Each company has high-quality family stewards, robust financials and quality franchises with the prospect of multi-decade growth. 

During the quarter we purchased India’s leading internet-based exchange for basic industrial goods. This company is in the nascent stages of development, recording sales of only US$70m last year. It has high-quality people at the helm and an attractive network-based business model from which to help Indian small and medium-sized enterprises (SMEs) grow. 

We trimmed Dr. Lal PathLabs (healthcare), India’s leading diagnostics business, on valuation grounds and sold Cyient (IT) and Square Pharmaceuticals to fund higher conviction ideas.

Strong gains prompted us to trim TSMC (Taiwan), MediaTek (Taiwan), Silergy (Taiwan) and Hoya (Japan). All of these companies are involved in the manufacture of semiconductors. The current shortage of integrated circuits is well documented and while demand is likely to remain strong, we are cautious on valuation, cyclicality and sustainability.

Concerns over franchise development and product pricing caused us to reduce Pigeon Corp (Japan) and sell AK Medical (China). Deteriorating politics prompted the sale of Hemas (Sri Lanka) and a reduction of BRAC Bank (Bangladesh). Political headwinds have also intensified in China.

In China there has been an increasing number of government edicts on the role and status of business within society. Economic activity has come under pressure and there are some signs of financial distress. This has had a negative impact on valuations, particularly in the banking, property and insurance sectors where the strategy has no exposure.The high-quality companies we own have been insulated from the worst of these tribulations and in response to lower valuations, we increased our holdings in six companies initially purchased last year.

We also had the opportunity to add two new companies: a leading manufacturer of soya sauce and the owner of one of the largest domestic paint brands in China. Both of these franchises are far from the interest and influence of the commanding political heights. Moreover, they are aligned with sustainable development, financed by robust balance sheets and stewarded by individuals with a passion for development over profit.

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 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

Our investment philosophy marries sustainability with quality.

We are most attracted to companies which occupy the intersection of both of these elements. We will not invest in a company for reasons of sustainability only. Nor will we invest in high-quality companies that are positioned poorly from a sustainability perspective. We evaluate quality across three broad measures: stewardship, franchise and financials.

During the period we sold the very marginal investment in Indigo Paints due to valuations reaching extreme levels post a much anticipated initial public offering (IPO). For reasons of valuation we also trimmed holdings in Dr. Lal PathLabs (India), Cyient (India) and Xero (Australia). We reduced Tokyo Electron Limited for reasons of cyclicality, sustainability and valuation. Fortunately, we had an opportunity to top up a number of existing holdings listed in New Zealand, Australia, Japan, India and Hong Kong for company specific attractions.

The Australian market is often dubbed ‘a commodity market’ because of the high number of successful resource companies listed on the Australian Stock Exchange. These companies, combined with a very dominant banking sector, frequently crowd out investor attention from some of the high- quality innovative business models that are also listed in Australia. During the period we concluded our evaluation of a founder-managed technology business that boasts 20% market share in the software design of printed circuit boards. We believe that this asset, and people-light business offers attractive financial characteristics, excellent stewardship and a powerful franchise that is capable of continuing to win market share from less focused peers. We added the company to the portfolio.

We increased the direct exposure to companies listed in China as we bought two new mainland A-Share companies, taking the number of Chinese listed businesses in the strategy to seven.

During the period we bought a founder-managed diagnostics business which stands distinct from government interference and assists patients with the early diagnosis of cancer. We also invested in an innovative, founder-managed, vertically-integrated, industrial automation business that improves manufacturing productivity, therefore benefiting from strong sustainability tailwinds and aligned with government ambition for national development.

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

Asia Pacific Sustainability

During the quarter there were 68 resolutions from 12 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 Sustainability

During the quarter there were 42 resolutions from nine 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 Sustainability

During the quarter there were 219 resolutions from 29 companies to vote on. On behalf of clients, we voted against four resolutions. 

We voted against Kasikornbank and 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. (two resolutions)

We voted against the election of two directors at Dabur as we do not believe they are truly independent. (two resolutions)

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 April - 30 June 2021

Asia Pacific Sustainability

During the quarter there were 274 resolutions from 26 companies to vote on. On behalf of clients, we voted against 11 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)

We voted against Selamat Sempurna’s request to appoint an independent auditor and their authority to set the auditor fees. At the time of voting the company had not disclosed its proposed auditor. (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. 

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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.