Indian Subcontinent Sustainability


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Strategy overview

The strategy was launched in November 2006 and transitioned to the Sustainable Funds Group in 2008. The strategy invests in companies based in or having significant operations in India, Pakistan, Sri Lanka or Bangladesh and which are positioned to contribute to, and benefit from sustainable development.

 

Strategy update

1 January - 31 March 2022

The strategy's performance during the quarter was disappointing but not surprising. The conflict in Ukraine has added to the inflationary pressures that were building up globally.

As a large importer, India’s currency has faced severe pressure during periods of fast-rising oil prices in the past. History will rhyme but may not repeat. India’s foreign exchange reserves are the healthiest they have ever been, and the current government has demonstrated that it does not intend to subsidise domestic fuel prices. Consequently, we believe the government’s finances and the currency will fare better this time. This shift in approach is important and fundamentally positive long term. It will force productivity improvements and accelerate transition to more environmentally friendly technologies.

Our portfolio companies are mostly consumers of commodities. As category leaders with structural growth opportunities, they are better placed to manage inflationary pressures. However, in the short term, profits may be impacted. Companies may choose to absorb inflation to improve market positioning or might not be able to raise prices straight away due to longer product cycles. Our portfolios will underperform in such markets given limited exposure to commodity businesses and our philosophy of not investing in oil and gas companies. However, such markets provide us fantastic opportunities to buy high-quality businesses at attractive valuations. Many of the transactions conducted during the quarter reflect this.

We have been adding to quality Indian financials such as HDFC, Kotak Mahindra Bank and Aavas Financiers who are at the cusp of a strong lending cycle. HDFC is trading at its cheapest valuations in the last three decades, as measured by its price to book. We added to Mahindra & Mahindra as valuations continue to ignore the credible turnaround underway at the group. We also added to consumer companies such as Marico, Godrej Consumer Products and Tata Consumer Products. These are some of the highest-quality companies in our universe and the current inflationary environment may provide an opportunity to increase our holdings further in all these businesses.

We sold out of Metropolis Healthcare and added to Dr. Lal PathLabs. Metropolis has delivered attractive returns for our clients. However, we believe Dr. Lal’s is a better quality group and its resolute focus on affordable diagnostics bodes well for the coming decade. We exited Biocon as we felt management has taken significant balance sheet risk to acquire Viatris. We continue to admire their focus on affordable drugs and will continue to monitor their progress in the coming years. We also exited Cyient as we felt the valuations were full for the quality of the franchise.

The prospect of an extended war, and its second-order impacts, drives some caution in deploying rising cash levels. The conflict serves as a useful reminder of the rising geo-political risks globally and the fragile borders India shares with its nuclear-armed neighbours. Meanwhile, India peacefully conducted elections in five states. A strong federal election system remains one of the cornerstones of the democratic process in the country. Such checks and balances are crucial to our ability to allocate capital long term. The long-term opportunity for India remains intact.

1 October - 31 December 2021

This quarter, we initiated a position in one new company in the Indian Subcontinent Strategy; Tarsons Products.

India has seen a number of private companies choosing to list over the course of the past year. With our bottom-up investment process focused on quality and sustainability, we remain very selective with all of our investments and IPOs in particular. Tarsons is an example of one of the new listings we have chosen to invest. The company continues to be run by the founding Sehgal family, with the third generation now involved in the business. The family has slowly and steadily grown the franchise to become one of the leading labware equipment makers in the country. They have incrementally improved the complexity of their products, and built trust-based relationships with Indian healthcare companies. This is essential in this industry, where establishing a reputation of consistently high-quality products is critical to success. With a strong balance sheet and steady stewards, we believe Tarsons has a runway of growth to continue taking market share from their multinational competitors.

We also continued adding to HDFC, a mortgage financing provider, and Mahindra & Mahindra, a farm equipment and automobiles company. Both companies have robust long-term stewards, who have seen their respective companies through multiple periods of turmoil, and have opportunities to grow and improve over the coming years. We believe valuations at both companies remain quite reasonable given this combination of quality of stewardship and opportunity, combined with the sustainability tailwinds they will enjoy over the decade ahead.

As we added to these companies, we have trimmed Cyient, an Indian IT services provider. Cyient remains stewarded by a quality family and continues to slowly improve the efficiency and profitability of the franchise. The core franchise however, providing IT services, less robust compared to some of their larger peers. As valuations continued to rise, we believed that we had other opportunities to allocate clients’ capital to, and have trimmed Cyient as a result.

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 sold out of Hemas, ABB India and Tata Chemicals.

These are high-quality companies and ones we would revisit should investment conditions for them become favourable.

The strategy has been invested in Hemas since 2009. Hemas is one of Sri Lanka’s highest quality conglomerates stewarded by the Esufally family. The company continues to be well positioned to grow its consumer and healthcare businesses in Sri Lanka. Our sale was reflective of the weakening fiscal and current account situation in Sri Lanka. Our experience in emerging markets has reminded us that waiting in the queue to get money out of a country is never a healthy sign. ABB India is well positioned to benefit from India’s industrial cycle and the underlying automation tailwinds. But valuations are now very stretched leaving no room for error. Tata Chemicals is looking to evolve into a niche chemicals enterprise through its ventures into nutraceuticals and an electric vehicle battery ecosystem. While we are excited about this journey, valuations are already reflecting much of the optimism. The company’s indebtedness also exposes it to rising interest rate risks. We also sold Square Pharmaceuticals to fund higher conviction ideas.

We added to many of our existing financial services companies as valuations became a little more palatable. We also added to Bosch India, Mahindra & Mahindra, Blue Dart Express and CG Power as they continue to be attractively valued given their potential over the coming decade.

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

During the course of this quarter, we initiated two new positions in Cholamandalam Financial Holdings and Blue Dart Express in the strategy.

Cholamandalam Financial Holdings owns a 45% stake in Chola Finance, an NBFC (Non-Banking Financial Company) we have previously owned in this strategy, and a 60% stake in Chola MS General Insurance. The business is 49% owned by the Murugappa family, who have a century-long history of conservative growth in India. We have watched the family evolve over the past decades, and built comfort in their stewardship and improving capital allocation. We are encouraged to see the management changes in the insurance business, and a growing focus on underwriting profits. In an insurance market as underpenetrated as India is, a conservative insurer keen to grow profitably with the Murugappa heritage behind them is well set up to continue taking market share.

Our second new position this quarter, Blue Dart Express, is the Indian express logistics subsidiary of the Deutsche Post Group who continue to own 75% of the business. Average tenure of senior managers within the business is 15 years, with the current CEO having been with Blue Dart for over 35 years. These managers have built the leading express franchise within the country, consistently reinvesting behind expanding the reach of their network. In the face of multiple rounds of price-based competition, they have also demonstrated the ability to remain focused on their core strengths of quality and speed, enabling them to retain their strong competitive position. We believe Blue Dart remains well situated to continue benefiting from the tailwinds around improved logistics and connectivity within India.

We also continued to add to businesses like CG Power and Bosch India, that stand to benefit from sustainable tailwinds around industrial growth and improved penetration of electric vehicles. Both businesses are managed by competent stewards, with long runways for structural growth. Bosch, the only listed subsidiary of the international group, is owned ultimately by a foundation which gives them the benefit of a time horizon measured in decades rather than quarters. This has allowed them to make early investments into electrification across automotives. Similarly, CG Power’s electric motors are essential in sustainable infrastructure across the country. Emerging from bankruptcy under its previous owners, the company is now well set up to focus in on profitable growth under their new stewards, Tube Investments, which is also a large holding in the strategy and a Murugappa company.

We decided to exit our position in SKF India, a maker of ball bearings for automotive and industrial end uses, choosing instead to add to what we believe to be higher quality industrials, mentioned above. While SKF India remains a well-managed company, we believe the others have better opportunities for growth in the decade ahead.

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

Indian Subcontinent Sustainability

During the quarter there were 15 resolutions from six companies to vote on. On behalf of clients, we did not vote against any 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. 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

Indian Subcontinent Sustainability

During the quarter there were 12 resolutions from five companies to vote on. On behalf of clients, we did not vote against any 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 July - 30 September 2021

Indian Subcontinent Sustainability

During the quarter there were 237 resolutions from 33 companies to vote on. On behalf of clients, we voted against 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

Indian Subcontinent Sustainability

During the quarter there were 53 resolutions from nine companies to vote on. On behalf of clients, we did not vote against any 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. 

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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.