Global Emerging Markets All Cap

We added eight new names to the portfolio and sold six. Although it is unusual to see so many names entering and exiting the portfolio, turnover as a percentage of assets under management remained low, at around 9%¹. We were, in essence, simply tidying up a number of our smaller positions – the ‘tail’ of the portfolio.

In China, we sold out of Glodon (China: Information Technology) and Hangzhou Robam (China: Consumer Discretionary). These sales were informed by our view of the country’s property market, where we don’t see the issue of oversupply being resolved any time soon. Glodon provides software for construction and development companies. The majority of Hangzhou Robam’s appliances, meanwhile, are sold to housing developers. These sales also allowed us to reallocate the capital to new investment ideas such as Alibaba (China: Consumer Discretionary), S.F. Holding (China: Industrials) and Mindray (China: Health Care).

Alibaba is one of China’s leading e-commerce platforms.  It is using the strength of its balance sheet to invest in building its AI capabilities. S.F. Holding has grown into one of China’s leading logistics businesses since its founding in 1992. Its founder remains involved in the day-to-day management of the company. Mindray is a leading medical company. As trade barriers are thrown up around the world, it has the potential to benefit should there be a shift in China towards buying domestically sourced products.

Through the last quarter of 2024, markets had to contend with the re-election of Donald Trump and all the expected geopolitical noise that will come over the next four years, as well as the continuing strength of the US dollar. We remain focused on bottom-up stock picking which is at the core of our portfolio construction process and we will continue to seek out long-term growth opportunities regardless of who is the President in the White House.

We added one new position and sold out of two companies through the quarter. We have built a position in Naver (South Korea: Communication Services), the leading South Korean internet search engine with a very strong market share. It was founded inside Samsung SDS before being spun out on its own in 1999. It is still run by the founder, Lee Hae-jin who has recently brought in a new management team which is aiming to return the company to a path of steady and profitable growth. One key aim for them is to use the stickiness of their search engine client base to drive increased e-commerce down the same channels. Their e-commerce business is the second largest in South Korea². Naver’s attractive valuation presented a good opportunity to invest in a business that should achieve double-digit earnings growth each year.

We sold out of two positions, one of which is Advanced Energy Solution (Taiwan: Industrials). The company makes battery module units for e-bikes and backup servers and after a tough few years, management announced that they could see light at the end of the tunnel with demand from artificial intelligence (AI) coming through from their server clients. We have repeatedly asked for an update call with management without success. Given this lack of communication, we find it difficult to build conviction and have therefore exited the position. We added to Samsung Electronics (South Korea: Information Technology) and AirTAC International (Taiwan: Industrials) with some of the proceeds of this sale. 

Over the course of the quarter, we have sold out of one of our Indian banks. RBL Bank (India: Financials), which we purchased in December 2023. The new management team seemed determined to move the bank towards less risky (more secured) lending which at 1x price-to-book (P/B)¹ appeared attractively priced. Unfortunately, the quarter after we purchased the company, it became clear that unsecured bank loans had been growing at over 30% and the path to a more balanced loan portfolio would be a lot longer than we had expected. Added to that, we are seeing a few banks that are struggling to grow their deposit base which impacts how they can fund their loan growth. For many years, most depositors avoided the public sector banks fearing either insolvency or potential loss of deposits. They have been cleaned up and professionalised which is great for the Indian saver and borrower but tougher for the private sector banks who benefitted from weak competition in the public sector. With prospects for RBL looking riskier and with better ideas elsewhere, we decided to exit.

We exited Yifeng Pharmacy Chain (China: Consumer Staples) which was another name where we were becoming worried about increased regulatory oversight having a negative impact on profit margins. We are confident that they will continue to roll up the pharmacy sector in China – in much the same way that RaiaDrogasil (Brazil: Consumer Staples) is doing in Brazil – but we worry that Beijing could well impose price cuts on those drugs purchased through medical insurance plans.

Claudia Sheinbaum was elected the first female President of Mexico with such a resounding victory that her party now holds a two-thirds majority in both congressional houses, which means it could make constitutional changes such as the proposal that Supreme Court judges would be directly elected by popular vote. India completed the largest democratic election in the world with a surprise vote removing Narendra Modi and the Bharatiya Janata Party’s absolute majority in the Lok Sabha (also known as the House of the People and the lower house in the Indian Parliament). The Nifty 50 (top 50 stocks by market capitalisation listed on the National Stock Exchange of India) rose the day before the election on the expectation that Modi would get over 400 seats. It then fell 7% when the news broke that he had lost his absolute majority before rising again in the days afterwards as the market decided Modi staying in power with a reduced majority was a positive for Indian democracy¹. It is at times like this that we are thankful for our philosophy and bottom-up stock picking process with a focus on quality and a 10-year time horizon on growth, allowing us to take advantage of irrational price movements.

We sold out of seven companies and only added one through the second quarter which is higher turnover than previous quarters. We sold Amoy Diagnostics (China: Health Care) after a period of better performance. Whilst we still like the way the business is managed, the high operating margins (c.27%) generated in the healthcare sector means we have become worried about the regulatory environment potentially aiming to reduce those margins. We sold Kingmed Diagnostics (China: Health Care) for the same reason and both Amoy and Kingmed are good examples of where top-down or macro views on a country and sector can break an investment case.

We also sold Tech Mahindra (India: Information Technology) and Dabur (India: Consumer Staples) having bought into both in 2009. Tech Mahindra (known then as Satyam) and Dabur have delivered mid-teen annual performance since first bought. Whilst we still believe that they are good companies, valuations are becoming problematic. Tech Mahindra has been a great investment over the last ten years but we believe we have a better option for the next ten years in Tata Consultancy Services (India: Information Technology). Tech Mahindra has seen margins reduce and it is also expensive. Dabur is a soaps and detergents producer in India which has delivered high earnings but we expect growth to be lower in the future. Valuations in India remain one of our biggest concerns and we have been trimming back our positions there including Marico (India: Consumer Staples) and Mahindra & Mahindra (India: Consumer Discretionary) due to valuations. We also sold Pigeon (Japan: Consumer Staples) as we lost conviction in the speed and extent of the evolution of the franchise which is facing rising headwinds such as declining birth rates.