Asia Pacific and Japan Sustainability

There have, however, been a couple of opportunities to initiate positions in new Chinese holdings: Milkyway Chemical Supply Chain Service (China: Industrials) and Midea (China: Consumer Discretionary). Milkyway is China’s leading independent specialised chemical logistics company. We believe their reputation for quality and safety as well as their long-term, aligned, management team has the ability to benefit from the consolidation of a very fragmented industry while improving the outcomes in a critical, but fragile, industry. Midea is a leading provider of household appliances in China. Their strong balance sheet, entrepreneurial culture and robust cash flows provide a solid foundation from which we believe they can evolve the franchise to potentially dominate in robotics and industrial sectors.

To fund these new purchases marginal positions in Foshan Haitian Flavouring (China: Consumer Staples) and Info Edge (India: Communication Services) were sold. Relatively inflated valuations alongside growing unease around the long-term resilience of their business models led to their sale.

There were also a number of smaller transactions across the portfolio with the most material being the trimming of positions in Mahindra & Mahindra (India: Consumer Discretionary) and Tube Investments (India: Consumer Discretionary). Both companies performed well over the last year and had come to dominate the top ten of the portfolio. We continue to have long-term conviction in these franchises but are mindful not to let the portfolio become overly exposed to a small set of companies.

Weakness in existing Chinese holdings, Zhejiang Supor (China: Consumer Discretionary) and Glodon (China: Information Technology), allowed us to increase the weight in two very high-quality companies, with industry leading brands and technology.

We started a position in Cyient (India: Information Technology), as we believe, under a new management team, the company has set itself on a clear path of improvement as they refocus their efforts on becoming a leading provider of outsourced engineering services.

Our holding in Aavas Financiers (India: Financials) was increased over the period. We believe Aavas has a fantastic opportunity to generate very attractive levels of long-term growth thanks to their leadership in providing low-cost mortgages to low-income households in India: a market where mortgage penetration is around 11% compared to over 60% in the UK¹. We have a lot of respect for the conservative manner in which Aavas has built its balance sheet, which helps provide resilience in times of stress while also reducing the cost of providing mortgages which Aavas then passes on to customers.

There were also opportunities to add to three of our Japanese holdings: Nihon M&A Center Holdings (Japan: Industrials), MonotaRO (Japan: Industrials) and MANI (Japan: Health Care). In each of these names we are slowly building positions in companies that we believe are very well managed by long-term stewards and who have the ability to generate above average growth in free cash flow, regardless of what happens to the Japanese economy. The position in Advanced Energy Solutions (Taiwan: Industrials), a leading provider of battery solutions, was increased as top-down concerns around electric bike sales offered valuations which we believe fail to reflect the opportunity for longer-term growth in data-centres and electric vehicles.

Zheijang Supor is a leading manufacturer of cookware and small domestic appliances in China. Supor is majority owned by the French company SEB, who itself has family ownership behind it. Leading the business day to day is a high-quality, professional management team that boasts experience at Microsoft and Nestle: we believe family ownership and a competent management team is a very powerful combination. Longer term, Supor is well positioned to benefit from China’s middle classes want to spend time and money on eating at home. In other countries we have seen kitchen appliances are relatively defensive purchases and not tied to housing cycles: we believe that to be the case with Supor.

We also initiated a position in Japan’s leading provider of SME (Small & Medium sized Enterprises) advisory services, Nihon M&A Center. Japan has a looming succession crisis in its pivotal SME sector: 3.6m companies that employ roughly 70% of private sector employees¹. With the average age of these entities now over 60 years old and only half having a successor in place, they must either sell or be shut down. Nihon M&A Center plays an important role in matching sellers and buyers of SMES through their large network of tax accountants and regional banks. The opportunity that lies ahead of Nihon M&A Center to facilitate progress in Japan’s SME market remains vast, and we believe the people at the helm have the right combination of long-termism and competence to ensure Nihon continues to be a leading franchise in this space.

We increased our position in Aavas Financiers (India: Financials), a leading provider of home loans to low and middle-income households, mostly in urban locations in India. Through multiple conversations and a study of history, we believe the people and culture at Aavas Financiers operate at the other end of the spectrum to the financial institutions that have grabbed headlines over the course of the last month or so. This is backed up with tremendous asset quality and a conservatively levered balance sheet. With mortgages to GDP levels at 4% in the areas Aavas Financiers focuses², compared to 68% in the UK³, we believe there are many years of growth ahead for a trusted partner for those looking to buy their home for the first time. We have admired Aavas Financiers for a long time, but only in recent months has the valuation reached levels we were comfortable paying.