Global Emerging Markets Leaders Sustainability

WalMex is the dominant grocery retailer in Mexico and Central America, with overwhelming scale advantages. Through formats ranging from neighbourhood Bodegas to Sam’s Club warehouse stores, it provides necessary staples to millions of people on a daily basis. Over extended periods, it has proven well-run and resilient, with very robust margins, a strong balance sheet and steady sales growth. After a sell off, shares have approached the lowest price-to-cash flow multiple they have traded on over the last decade, presenting what we think will prove an exciting entry point to what can be a core long-term holding.

Our relative inactivity does not signify neglect of our fiduciary responsibilities. Too often, asset managers are overactive, trading in and out of positions based on news flow, anticipation of short-term quarterly results, or share price momentum. It is an oft-quoted stat, but one worth repeating, that the average holding period for US equities is as little as 10 months¹.

We are undertaking a very different approach to do our best to deliver attractive long-term returns to clients, since we remain unable to forecast short-term corporate results, interest rate moves or inflation figures. We have learned over time that high-quality organisations with resilient cultures can prove persistently both robust in times of distress and well-placed to capitalise on their opportunities. It is extremely difficult to trade in and out of such rare high-quality companies with any success. The power of compounding is extremely powerful, but needs to be given time to work.

Once exceptional companies have been identified, the best forward-looking strategy is usually to hold onto our clients’ shares in those businesses, and focus on determining if the features enabling the company’s long-term success are still in place. This is a central tenet of our day jobs. Accordingly, all but one of our largest 15 holdings have been held since inception; across our broader Global Emerging Markets portfolios, we have held shares in these companies for 8.4 years on average, and none for less than 3 years².

We sold out of a small holding in robotics company Estun Automation (China: Industrials). Nothing significant has changed in our view of the quality of the company. However, we felt that after some share-price strength, which has taken valuations towards extremes, the opportunities for attractive returns have diminished significantly and there are now more attractive alternatives available.

We also exited MediaTek (Taiwan: Information Technology), a Taiwanese chip designer with earnings primarily driven by smartphone demand in China. As consumer sentiment has returned with the re-opening of that country, the share price has performed well. We feel there are likely companies with better earnings-growth profiles within the semiconductor sector that we would rather own for the long term.

In particular, during the quarter we have initiated a position in German semiconductor supplier Infineon Technologies (Germany: Information Technology). Infineon Technologies is a company we have long held in our Worldwide strategy, yet the majority of the company’s sales are to emerging markets in Asia. Infineon specialises in chips that control power supply, with 2.5x the market share of the #2 competitor¹. This gives the company great exposure to rapidly growing end markets, like renewable energy, smart grids and electric vehicles.

In making the switch from MediaTek to Infineon, we feel we have exchanged a company primarily exposed to more saturated consumer technology to one primarily exposed to more quickly growing industrial end markets. Given extremely similar valuations, and that it seems more likely that Infineon can deliver sustained earnings growth over the long term, this felt like an upgrade in likely future returns.

In the case of Natura (Brazil: Consumer Staples), we felt that the investment case had changed considerably from our initial thesis. During the last short while, a difficult economic environment has exposed some weaknesses in the franchise, the balance sheet has deteriorated, and the company has changed senior leadership. Exiting a position and realising a significant loss is never a pleasant experience, but it is usually best to avoid sunk-cost fallacy and anchoring biases, and to focus on quality. After much discussion, we decided the company faces a tough road ahead and that we have better ideas at attractive prices today.

These positions were Info Edge (India: Communication Services), Naver (South Korea: Communication Services), and Nippon Paint (Japan: Materials). 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.

We used the proceeds from these sales to increase positions in existing holdings. There were no new companies purchased during the quarter.

Towards the end of 2022, valuations of some of our favourite Chinese companies provided an opportunity to modestly increase our holdings. These included Kingmed Diagnostics Group (China: Health Care), China’s leading diagnostics test provider, and Amoy Diagnostics (China: Health Care), a specialist oncology diagnostics company, as well as Glodon (China: Information Technology), the leading building automation software provider, and Silergy Corp (China: Information Technology), the leading analog chip designer. 

In all cases, these small additions were not made with a view to the short-term impacts of reopening in China. We simply believe these four businesses are well placed to flourish over a long period of time and offered attractive entry points during the quarter.

Over the quarter we have also considerably increased our position in retailer Jerónimo Martins (Portugal: Consumer Staples), which derives the vast majority of its sales from its discount supermarket chain, Biedronka, in Poland. Jerónimo is a very resilient business, which tends to perform relatively predictably in times of both recession and high inflation. Strong retailers like Jerónimo Martins tend to gain share in difficult times like these and the company continues to deliver very strong results.

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.