Asia Pacific and Japan All Cap

During the last few days of the quarter the Chinese central bank and government announced monetary and fiscal stimulus measures for the economy, causing Chinese stocks to rally significantly. Whilst it is heartening to see the Chinese authorities attempting to address the problems within the economy it remains unclear whether this stimulus will adequately address broader structural issues like the lack of consumer demand.

The portfolio purchased Yiheda Automation (China: Industrials), China’s leading supplier of factory automation components. This is a model we have seen create large, profitable businesses elsewhere in the world. Due to the capital intensity of these businesses and the close relationships they form with customers the early leaders tend to be difficult for newcomers to catch up with. Whilst Yiheda are currently affected by falling industrial demand, in the long run we believe they have the opportunity to consolidate a growing market that is still largely dominated by small family run businesses.

During the quarter we added to Aavas Financiers (India: Financials). We also took advantage of lower valuations in businesses exposed to China to add to AirTAC International (Taiwan: Industrials) and Inovance (China: Industrials).

We sold RBL Bank (India: Financials) and Hamamatsu Photonics (Japan: Information Technology), both of which were smaller positions where conviction waned over time. We also sold Kotak Mahindra Bank (India: Financials) to fund better ideas elsewhere.

We controlled the position size of our large holding in Mahindra & Mahindra (India: Consumer Discretionary), and trimmed Fisher & Paykel Healthcare (New Zealand: Health Care) and Unicharm (Japan: Consumer Staples).

During the quarter the portfolio initiated a position in Samsung Electronics (South Korea: Information Technology). The company is a leader in consumer electronics and chip manufacturing. Over the past 50 years Samsung has emerged as a leader in its cyclical markets due to the conservatism and longtime horizon that is has been managed with. During the good times management set aside cash to be used to acquire and outlast rivals when the cycle turns. This simple, yet effective, approach sets them aside from rivals and has allowed them to consolidate previously fragmented semiconductor markets. Recently we have been pleased to see governance improvements within the Samsung Group and have initiated a position at a reasonable valuation.

We took advantage of a lower valuation to add to SHIFT (Japan: Information Technology) and elsewhere, reflecting our conviction in their quality and long-term prospects, we continued to add to our positions in AirTAC International (Taiwan: Industrials), Voltronic Power (Taiwan: Industrials), Techtronic Industries (Hong Kong: Industrials), MonotaRO (Japan: Industrials), Japan Elevator Service (Japan: Industrials), Mainfreight (New Zealand: Industrials), Aavas Financiers (India: Financials), Samsung Electronics (South Korea: Information Technology), and Anest Iwata (Japan: Industrials).

We trimmed Mahindra & Mahindra (India: Consumer Discretionary) and CG Power (India: Industrials) to control the size of their position within the portfolio. We trimmed Marico (India: Consumer Staples) due to valuation concerns and reduced Tech Mahindra (India: Information Technology) to invest in better ideas elsewhere.

During the quarter we initiated new positions in Samsung C&T (South Korea: Industrials), Techtronic Industries (Hong Kong: Industrials) and Sysmex (Japan: Health Care).

Samsung C&T is the holding company for Samsung Biologics with sizeable positions in group companies such as Samsung Electronics (c.5%).

Samsung Biologics is a world leader in affordable healthcare. Samsung Electronics is a global leader in consumer electronics and chip manufacturing.

In its core business, the company is aiming to invest into areas with strong demand tailwinds such as renewable energy and battery recycling. The group aims to improve governance practices by returning excess cash to shareholders, cancelling treasury shares, improving profitability in core assets and articulating a clear strategy for future capital allocation.

Techtronic Industries is dominant internationally in an array of cordless, hand, measuring and trade power tools for both home and commercial use. They have ownership of strong brands in consolidated areas which results in pricing power. The company is positioned well to grow organically and by acquisition.

Sysmex is a global leader in haematology (blood) diagnostics and one of the largest companies providing in-vitro disease testing diagnostics. Their products and services play a key role in the early detection and prevention of diseases.

High-quality companies at reasonable valuations tend not to come along too often. In the absence of such opportunities, we are very comfortable long-term owners of companies in the portfolio.

During the quarter we initiated two new positions in Wuxi Biologics (China: Health Care) and RBL Bank (India: Financials). We have been studying Wuxi Biologics for a number of years. It is a leading contract research provider and manufacturer for pharmaceutical companies. The stewards have spent the last decade nurturing strong relationships with customers across geographies, and are building on their research relationships to scale up manufacturing services. The nature of the business, where the timeline from drug discovery to manufacturing can be decades, means that long-term customer relationships are crucial, and the trust built is difficult to disrupt. RBL Bank is a full-service bank that provides services to over 13 million customers across India. Under a new and reinvigorated management team, RBL is in early stages of building a high-quality lending institution.

We took advantage of recent share price weakness to add to MonotaRO (Japan: Industrials), Yifeng Pharmacy Chain (China: Consumer Staples), Glodon (China: Information Technology), Nihon M&A Center (Japan: Industrials) and Centre Testing International (China: Industrials). Centre Testing International provides inspection and certification services for industrial and consumer products across China, ensuring product quality and safety standards. The franchise benefits from being one of the first movers in the country, and continues to take share in a fragmented market as scrutiny rises on health, environmental and product standards. The balance between long-term family stewards and a professional manager who spent decades at one of the world’s leading inspection and certification services firms helped us build conviction in the quality of people here as well.

We sold the holding in Unilever Indonesia (Indonesia: Consumer Staples) following some recent management changes and we trimmed Tata Consumer Products (India: Consumer Staples) and CG Power (India: Industrials) to control position size.