We talk to James Fearon, an analyst on the investment team, to hear his thoughts on why stewardship is so important when investing in emerging markets, discussing three Indian companies that are owned in the portfolios and their response to the coronavirus pandemic.
These days it seems almost impossible to interest anyone in a fund that doesn’t tout its ESG credentials. ESG of course denotes environmental, social and governance considerations. Investors increasingly understand that unbridled shareholder maximizing capitalism often creates poor outcomes for society at large, which is not only ethically questionable but also runs tangible financial risk in the form of increased regulation, taxation and consumer boycotts of a company’s products.
How do you think the Stewart Investors’ investment philosophy is suited for investing in China? There are many good quality companies in China which we believe have a bright future. We currently find the valuations of these companies excessive.
With the weighting of Latin American stocks in the Global Emerging Markets benchmark slipping below 10%, down from 25% two decades ago, the region has become something of an investing backwater. So why then are we optimistic about the region?
In 1901, US President Theodore Roosevelt began the process of dismantling the country’s sprawling monopolies, gaining the name ‘Trust Buster’. The history of this episode provides an interesting lesson about investing in companies with dominant market positions.
On a visit to Turkey in November last year, the country’s political backdrop was showing clear signs of increasing tension, with President Erdogan’s attempts to maintain his tight grip having recently been challenged, highlighted by the defeat of his AK Parti in the Istanbul June 2019 mayoral elections.
Strong and independent institutions are one of the requirements for a country’s long-term success. South Africa undoubtedly faces many severe issues that will continue to be extremely challenging to navigate in the years ahead, and the road to their resolution will be long and littered with pot holes. Nevertheless, for long-term investors, we are positive given that the country is blessed with institutions that have proven themselves to be functional in recent years.
The financial panic of 1825 has been described as the ‘first modern financial crisis.’ It resulted in a major banking crash across Britain, economic recession and multiple bank failures, with ripples reaching as far away as Latin America. There were many associated bankruptcies, including the world’s best-selling novelist.
Liquidity is a characteristic of a market for an asset whereby an individual or firm can quickly purchase or sell an asset without causing a drastic change in the asset’s price. By definition, liquidity is a confidence trick.
‘Enormous initial dividends were paid on these modern trust companies, with the result that in the nicely arranged match between founders and shareholders… the founders romped home while the shareholders were nowhere.’ The Bankers Magazine (1893)
Life was madness, nightmare, desperation, chaos. Extreme inflation or hyperinflation is in the news as price rises in Venezuela hit the stratosphere. The cataclysm of hyperinflation is both a symptom and cause of deep-rooted economic and political malaise. The example of Germany in 1923 may be an instructive historical example for investors today.
Stewardship is the primary quality we look for in the companies we choose to invest our clients’ funds. We are only interested in backing management teams who run their companies with a long term ‘owner-manager’ mind-set.
The Tequila Crisis is a classic example of an emerging market financial debacle. After years of strong returns for equity investors, the Mexican currency and stock market crashed in 1994. An examination of the reasons for this crisis provides a number of lessons for equity investors today.
London, 1969. A shop assistant at Harrods makes a fortune from her investment in an unknown Australian mining company. A major nickel find has resulted in a speculative bubble in Australian mines. The Poseidon mining boom, as it is now known, offers a number of lessons for investors today.
The Nifty Fifty was the name given to a group of US growth stocks which performed very strongly in the 1960s and early 1970s, becoming symbolic of the spirit of the times. They traded on stratospheric valuations over many years. How do the valuations of the Nifty Fifty compare with the FANG stocks of today?
The mania for buying and selling tulip bulbs in the Netherlands during the 17th century was arguably the earliest asset bubble in history and the precursor of financial manias over the following centuries. Tulipmania still provides valuable lessons for investors today.
In good times, many businesses appear to be resilient and good quality. Our investment process is focused on thinking about risks - we worry constantly about the downside risks to the businesses we invest clients’ money in. It is impossible to tell whether the many risk factors we obsess about will materialise.
In October 1878 the doors closed at the City of Glasgow Bank, one of Scotland’s largest financial institutions. The bank’s demise, which was the biggest banking failure in the UK until the global financial crisis of 2007/8, highlights a number of issues around investing in bank shares.
Because we have employed the same investment philosophy for almost thirty years, we believe our definition of “quality” has been consistent and has revolved around the ownership, management and culture of an organisation.
Debt binges are common in financial history - huge accumulations of debt by companies, individuals or governments. The deflation which may follow in their wake can transform economies and societies. A lesser known example occurred in Scotland in the 17th century when Highland chiefs amassed a mountain of debt.
On 24 November 1898 the Scottish whisky firm of Pattisons was given a clean bill of health by its accountants. Thirteen days later Pattisons went bust, marking the end of the whisky bubble of the late 19th century. At their trial, which was a major media event at the time, it emerged that the brothers behind the company were swindlers of the first rank, pursuing every accounting scam in the book.
Perhaps the worst financial scam in financial history. In January 1823 a ship sailed from Leith in Scotland with 200 settlers bound for Central America. Two months later, when they reached their destination, the colonists were shocked to find virgin jungle rather than the mature settlement described by the scheme’s promoter. They were victims of a cruel fraud.
Rue Quincampoix, Paris, 1719. The French capital was in the throes of something unprecedented in history – over the summer, the dirty, narrow street in the heart of the city became the epicentre of world finance, a veritable vortex of share trading. A new financial and cultural phenomenon had appeared on the scene – the stock market bubble.
In 1696 a Scottish company raised a huge amount of money in an early financial mania. The company attempted to establish a colony in Darien in Central America. It was an unmitigated fiasco and every penny of the capital was lost. Scotland’s greatest corporate disaster highlights the importance of management, franchise and financials in any commercial enterprise.
As part of our investment philosophy we say that we invest in quality companies. We develop this further by saying we invest in companies with sound financials, strong franchises and responsible stewardship. What do we actually mean by this?