Global Emerging Markets Sustainability

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Our Global Emerging Market Sustainability strategy was launched in 2009 and invests in between 30 to 75 high-quality companies that are contributing to a more sustainable future. The strategy’s bottom-up approach allows us to find only the very best businesses from an investable universe of some 65,000 companies. We are looking for companies well positioned to contribute to long-term sustainable development; businesses with high quality management teams, franchises, and financials.

Strategy highlights: a focus on quality and sustainability

Companies must contribute to sustainable development and make a net-positive impact to a more sustainable future. Portfolio Explorer >
We invest in high-quality companies with exceptional cultures, strong franchises and resilient financials. How we pick companies >
We avoid companies linked to harmful activities and engage and vote for positive change. Our position on harmful products >
Our approach is long-term, bottom-up, high conviction and benchmark agnostic
We focus on capital preservation as well as capital growth – we define risk as the permanent loss of client capital

Latest insights

Strategy update: Q4 2022

Global Emerging Markets Sustainability strategy update: 1 October - 31 December 2022

Over the course of this quarter, we exited four positions in the strategy where there was waning conviction in the quality of franchise.

These positions were Info Edge (India: Communication Services), Naver (South Korea: Communication Services), Nippon Paint (Japan: Materials) and AK Medical (China: Health Care). Full valuations at Info Edge and Naver, coupled with franchises facing increased challenges around competition and growth, led us to sell our holdings. We exited Nippon Paint due to rising concerns about the quality of management and financials in a cyclical business; and a small position in AK Medical, a healthcare company facing increased regulatory and pricing risks in China.

We used the proceeds from these sales to initiate two new positions over the past months. The first new position was in an Indian financial company, a leading provider of mortgages in rural India. The stewards of the business have focused on creating a conservative credit culture and passing on decreases in their costs to those they finance, building a resilient, long-term lending business. With mortgage penetration in rural India still hovering around 1% and low leverage on the balance sheet, the business has a long runway for steady growth without taking on unnecessary, short-term risks.

The second new position in the strategy is Advanced Energy Solution (AES) (Taiwan: Industrials), a leading supplier of battery packs to e-bikes and uninterrupted power-supply solutions. The business was spun out of Simplo, a company that has a history in making battery packs for consumer electronics. The safety, durability and customisation required in batteries for both e-bikes and servers has led to AES building a more profitable business model compared to battery pack providers in the past. The managers here are also working to build a niche in electric vehicles, providing another leg for long-term growth with a solid balance sheet to support this journey forward.

Through the past quarter, we also continued building positions in some Chinese companies where valuations provided the opportunity. These include Kingmed Diagnostics Group (China: Health Care), China’s leading diagnostics test provider, Glodon (China: Information Technology), the leading building automation software provider, and Silergy Corp (China: Information Technology), the leading analog chip designer.

As ever, we do not have a crystal ball to predict broad, top-down macroeconomics. Our focus remains on finding high-quality stewards who can nurture franchises that are resilient through economic booms and busts, based on solid fundamentals and financial strength. We continue to believe that this is the best recipe for creating robust portfolios that deliver strong, absolute returns for clients over the long term.

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.

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Strategy update
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Stewart Investors Quarterly Client Update Q4 2022

1 October - 31 December 2022

Risk factors

This material is a financial promotion for the Stewart Investors Sustainable Funds Group strategies – Asia Pacific and Japan Sustainability, Asia Pacific Leaders Sustainability, Asia Pacific Sustainability, European Sustainability, European (ex UK) Sustainability, Global Emerging Markets Sustainability, Global Emerging Markets Leaders Sustainability, Indian Subcontinent Sustainability, Worldwide Sustainability and Worldwide Leaders Sustainability – and is intended for professional clients only in the UK, Switzerland and EEA and professional clients elsewhere where lawful.

Within the EU/EEA and Switzerland, the European (ex UK) strategy is only available to investors via a segregated mandate account.

Investing involves certain risks including:

The value of investments and any income from them may go down as well as up and are not guaranteed. Investors may get back significantly less than the original amount invested.
Emerging market risk: Emerging markets tend to be more sensitive to economic and political conditions than developed markets. Other factors include greater liquidity risk, restrictions on investment or transfer of assets, failed/delayed settlement and difficulties valuing securities.
Indian Subcontinent risk: although India has seen rapid economic and structural development, investing there may still involve increased risks of political and governmental intervention, potentially limitations on the allocation of the strategy’s capital, and legal, regulatory, economic and other risks including greater liquidity risk, restrictions on investment or transfer of assets, failed/delayed settlement and difficulties valuing securities.
Specific region risk: investing in a specific region may be riskier than investing in a number of different countries or regions. Investing in a larger number of countries or regions helps spread risk.
Currency risk: the strategies invest in assets which are denominated in other currencies; changes in exchange rates will affect the value of the strategies and could create losses. Currency control decisions made by governments could affect the value of the strategies’ investments and could cause the strategies to defer or suspend redemptions of shares.
Concentration risk: the European Sustainability and Worldwide Leaders Sustainability strategies referred to in this material invest in a relatively small number of companies which may be riskier than a strategy that invests in a large number of companies.
Smaller companies risk: investments in smaller companies may be riskier and more difficult to buy and sell than investments in larger companies.

Where featured, specific securities or companies are intended as an illustration of investment strategy only, and should not be construed as investment advice or a recommendation to buy or sell any security.

If you are in any doubt as to the suitability of our strategies for your investment needs, please seek investment advice.

Investment philosophy

We are stewards: Our role is to allocate society’s capital to productive uses, in accordance with our Hippocratic Oath
We are long term: Our time horizon is measured in years, not weeks, and we value companies accordingly
We invest only in companies contributing to a more sustainable future: We engage constructively as owners to help companies on their sustainability journeys
We invest only in high-quality companies: We seek out companies with exceptional cultures, strong franchises and resilient financials
We believe capital preservation is important for capital growth: We define risk as the possibility of the permanent loss of client capital

Investment objective

To generate attractive long-term, risk-adjusted returns by investing in the shares of high-quality companies that are particularly well positioned to contribute to, and benefit from sustainable development.

Full Quarterly client update >>

Strategy update: Q3 2022

Global Emerging Markets Sustainability strategy update: 1 July - 30 September 2022

Over the course of another turbulent quarter, our focus remained on bottom-up stock picking. We continue to believe that identifying competent stewards who manage growing, resilient franchises with defensive financial profiles continues to be the best route to delivering sound absolute returns over the long term.

As a result, we have initiated positions in two new companies in the portfolio. The first new addition is Komerční Banka (Czech Republic: Financials), a well-capitalised, conservatively-run Czech bank. With a solid deposit base and strong asset quality, Komerční had de-rated to close to one times book with an attractive dividend yield.

We also bought a small position in an Indian IT services and embedded software provider focused on the automotive sector. The two co-founders of the company remain in the position of Chair and CEO, and have consistently managed the business for the long term, building strong relationships with key automotive original equipment manufacturers (OEMs) globally. They have recently taken a decision to shrink the business to a third of its original revenue base – a difficult decision in the short term, but one that ensures a focus on their core competence in auto engineering over the long term. To us, this is a great indicator of stewards who can resist short-term market pressures to build sound, sustainable franchises. The company’s focus is on software and services related to electric vehicles and automated driving systems, benefiting from a long runway for growth in the coming years.

During this quarter, we also trimmed positions in Info Edge (India: Communication Services) and Estun Automation (China: Industrials), where valuations were becoming increasingly full and could prove to be a headwind to long-term returns. Lastly, we exited one position in the strategy – Mahindra Logistics (India: Industrials) – as we struggled to build further conviction in the focus and evolution of the franchise.

In a scenario of increasing geopolitical tensions and macroeconomic uncertainty, we continue to believe that bottom-up analysis, a focus on fundamental quality and sustainable growth tailwinds, is the best route to tapping into the opportunities and protecting against the risks of investing in emerging markets.

Strategy update: Q2 2022

Global Emerging Markets Sustainability strategy update: 1 April - 30 June 2022

During the second quarter, markets were exceptionally volatile and weak, as investors began to price in the likelihood of sustained inflation in the developed world, higher interest rates and the potential for global recession.

In the past, such episodes have tended not to be pleasant experiences for emerging markets, and the first half of 2022 has been no exception.

At the time of writing, on a sector basis only utilities and financials have delivered a positive return year to date in emerging markets. Materials and energy have also held up relatively well, given rises in commodity prices. All told, beneficiaries of rising inflation and higher interest rates – banks, energy and commodity companies – have been comparatively strong.

We rarely hold companies in these sectors for clients because they seldom meet our quality and sustainability requirements. In contrast, sectors like healthcare, technology and consumer staples – where we do tend to find attractive ideas – have been weaker. Performance over the very short term has been commensurately weak.

In an environment such as this, we have continued to focus on bottom-up stock selection, focusing on identifying high-quality stewards managing franchises with growth tailwinds and resilient financials. Reflecting this, we have recently added four new companies into the portfolio.

We believe retailers Dino Polska (Poland) and Jerónimo Martins (Portugal) are likely to remain resilient in the current environment. Grocery stores tend to remain stable through periods of inflation, and both Dino Polska and Jerónimo Martins are very well stewarded by the founder and founding family respectively. Jerónimo for example is a 230 years old business, now represented by the fourth generation of the dos Santos family. Their consistent focus on high-quality, low-cost retail and long-term time horizons with regard to nurturing businesses in new geographies has served them well through the past decades.

Over the course of the past year, we re-initiated a position in Pigeon (Japan), a consumer goods franchise focused on high-quality products for infants and mothers. Stewarded by the founding Nakata family, Pigeon has consistently focused on building consumer trust and creating a brand around their reputation for quality. At reasonable valuations, we believe Pigeon has the ability to continue growing across geographies where they have been laying the foundations for long-term growth.

We also initiated a position in Banco Bradesco (Brazil). We have owned Bradesco on behalf of clients in the past and, over recent months, the Bank had de-rated to valuations around one times price to book with 7-8% dividend yields¹ providing an attractive entry point. Bradesco remains one of the best banks in the country, well positioned to continue growing through increased penetration across Brazil and adapting to a more digital ecosystem.

We also added to a number of existing holdings which had suffered from more acute weakness, including Silergy Corp (Taiwan), Techtronic Industries (Hong Kong) and MercadoLibre (US listed, headquartered in Argentina). We remain convinced of the quality and attractive long-term growth prospects of these businesses, and so took the opportunity to purchase more shares at prices substantially below where they have traded lately.

We funded some of these purchases by reducing cash and trimming some companies which had held up relatively well, like Unicharm (Japan) and Mahindra & Mahindra (India). We also exited one small holding, Hualan Biological Engineering (China), in which we have found it difficult to build conviction in the ability of the company to mitigate growing competition from state-owned peers.

Going forward, it seems as though we are in a period of fairly unprecedented macroeconomic policy uncertainty. Monetary policy has shifted from ultra-loose to a rapid tightening with frantic speed, and may well overshoot, with accordantly dramatic impacts on equity prices in the short term. In such an environment, it seems less than fruitful to try to predict the near-term future direction of inflation or interest rates. Instead, we are focused on building portfolios full of resilient companies with long-term tailwinds which should benefit over the longer term from the opportunities in emerging markets.

1 Source: Bloomberg

Strategy update: Q1 2022

Global Emerging Markets Sustainability strategy update: 1 January - 31 March 2022

Over the course of this quarter we made a small number of meaningful transactions in the strategy.

After a more than 50% rally from its trough, we made the decision to exit our position in Alibaba (China). In light of the comparatively more muted growth prospects the company has going forward, a lower price-to-earnings or price-to-cash-flow multiple would seem appropriate. Our primary mistake has perhaps been in being too backwards looking in assessing quality of franchise. It is a truism, no less powerful for its simplicity, that all companies – indeed all organisations – are at any given time either strengthening or weakening relative to their competitors. The last two years have seen the company, encouraged by regulation designed to promote competition and weaken the market power of incumbents, slide into a much more competitive, capital intensive and less profitable position than it had been previously.

We used some of the proceeds from exiting our position in Alibaba to add to a number of our Chinese holdings. These included companies like Estun Automation, the leading domestic robotics manufacturer, and Yifeng Pharmacy Chain, a rapidly growing drug retail chain consolidating China’s highly fragmented market. We believe these companies to be either lower risk or at an earlier stage of life (and thus enjoying greater prospects), or both. Both companies benefit from strong sustainability tailwinds, improving efficiency and reducing prices in the respective sectors in which they operate.

We also purchased Tube Investments, an Indian industrial conglomerate. The founding Murugappa family continues to own 48% of the business, and next generation owner-manager, Vellayan Subbiah, has embarked on a journey to both improve execution within the core franchise and broaden the remit of the business. Looking to the histories of global industrial conglomerates such as Halma and Danaher for inspiration, and with a wonderfully long-term time horizon, Tube has set out to create something similar in India. The first step on this journey was the acquisition of CG Power, an electric motors business that is the beneficiary of strong, sustainable tailwinds selling into electric vehicles and renewable energy. India is home to numerous small, family-owned industrial businesses that are looking for homes for their franchises when the next generation might not want to take control. The reputation of the Murugappa family, Vellayan’s history of successful execution, and the strength of the balance sheet, mean that Tube has the opportunity to provide these companies this home and continue to grow their own business. This balance of a century-old family legacy alongside the ambition to create something that endures for at least another century, we believe, provides an opportunity for solid returns over the coming years.

Along with Tube Investments, we also initiated a position in IndiaMART, an online B2B classifieds platform in India, connecting suppliers and buyers across a range of end industries. Founded by the Agarwal cousins in 1996, IndiaMART has grown to control 60% market share in the country, about 10 times larger than their nearest competitor, but are only at the starting stages of continued penetration of the platform, with only a small percentage of small and medium-sized enterprises (SMEs) across the country having a digital presence. The founders have demonstrated a focus on building a resilient business over the long term, balancing growth and profitability, and on maintaining a solid balance sheet. This is a cash-generative business, and the managers have consistently reinvested behind growth to remain beneficiaries of the structural growth tailwinds around them.

Our strategies do not invest in oil, gas or coal, and we are always likely to underperform on a relative basis for short periods when fossil fuel markets are rallying. As ever, our focus remains on long-term absolute returns, which we believe are best achieved through avoiding investing in fossil-fuel reliant businesses. Through this period, we have continued to build up position sizes across a number of our favourite companies – such as Mahindra & Mahindra (India), WEG (Brazil) and Network International (UK-listed company operating in the Middle East and Africa) – where we have high conviction in quality as well as the long-term opportunity.

Proxy voting: Q4 2022

Global Emerging Markets Sustainability proxy voting: 1 October - 31 December 2022

Proxy voting by country of origin

Proxy voting by proposal category

During the quarter there were 51 resolutions from 12 companies to vote on. On behalf of clients, we voted against one resolution.

We voted against the election of a director to the supervisory board at Foshan Haitian Flavouring as we do not believe they are truly independent. (one resolution)