Global Emerging Markets Sustainability

Risk Factors

This information is a financial promotion for the Stewart Investors Global Emerging Markets Sustainability Strategy intended for retail and professional clients in the UK only.

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.
  • Currency risk: The strategy invests in assets which are denominated in other currencies; changes in exchange rates will affect the value of the strategy and could create losses. Currency control decisions made by governments could affect the value of the strategy’s investments and could cause the strategy to defer or suspend redemptions of its shares.

Reference to specific securities (if any) is included for the purpose of illustration only and should not be construed as a recommendation to buy or sell. Reference to the names of any company is merely to explain the investment strategy and should not be construed as investment advice or a recommendation to invest in any of those companies.

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


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Strategy overview

The strategy was launched in February 2009 and invests in companies in emerging markets or whose business is predominantly based in emerging markets and are positioned to contribute to, and benefit from sustainable development. 

 

Strategy update

1 July - 30 September 2021

During the course of this quarter, we chose to exit a few of the positions in the strategy. These changes were driven primarily by our continued focus on incrementally improving the quality of the portfolio, and adding instead to companies we think have better long-term sustainable and structural tailwinds of growth for the decade ahead. 

Four of the positions exited include Unilever, Kasikornbank, Samsung Electronics, and Tencent. We have slowly trimmed our longstanding holding in Unilever, and chose to exit this quarter as we have struggled to find conviction in their efforts to reinvigorate the franchise. Without this, their opportunities for growth over the next decade look to be more challenged than they have been over the previous one. We also exited our holding in Kasikornbank, which remains in our minds the best bank in Thailand. We admire the stewardship of the Lamsam family and the conservatism they have embedded in the bank post the Asian Financial Crisis. However, we worry about their limited opportunities for loan growth in the country and the rising threats from fintech disruption. We chose to exit the position and add to companies where we had more conviction.

Samsung Electronics is another company we exited through this quarter, primarily due to the cyclicality of earnings. Given our long-term approach, we are unlikely to be able to make a call on when memory chip prices reach their peak or trough, thus chose to exit our position after Samsung delivered strong absolute returns for clients. We owned Tencent only for a brief period – unlike our typical holdings. We engaged with Tencent, shortly after we initiated a position, on issues around data privacy and government regulations. A few actions of the company, including de-platforming LGBTQ student groups, and the rising threats around government regulation led us to correct our mistake quickly, and we chose to exit the position.

We also exited our position in Avast. The company is a global leader in cybersecurity software for consumers, based out of the Czech Republic. While we believe the company has a long runway for growth, they have announced a merger with the US-based NortonLifeLock. The combined entity will be ineligible for our emerging markets strategies and we have therefore had to sell out of our position.  

Through this quarter, we have re-initiated a position in Foshan Haitian, the leader in soy sauce and other condiments in China. Foshan is the domestic leader in these condiments by a high margin, continues to have a long runway to evolve into other condiments, and has focused on growing through volumes rather than by increasing prices. We had previously exited our position in the company due to valuations reaching all-time highs, and had an opportunity over these past months to buy back into the company at a more attractive valuation.

We also added to many of our other Chinese holdings including Glodon, Guangzhou Kingmed, and Estun Automation, amongst others. We believe these companies continue to be well managed by their owner-managers and are the leaders in their respective industries, providing necessary products and services, setting them up well to continue growing in the coming years.

We also initiated a position in Quálitas, a Mexican auto insurance company. We have long admired the conservative culture focused on steady, profitable growth that was built by the founders of the company over decades. Quálitas is the leader in Mexico, with opportunities of growth in continued penetration within the country and seeding new geographies for the long term too. The company maintains a very conservative balance sheet and remains well stewarded for the decade ahead. 

Source for company information: Stewart Investors investment team and company data. Portfolio data shown is from representative strategy accounts. 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.

1 April - 30 June 2021

We initiated a number of new positions during the quarter in the strategy.

During the first half of 2021, there has been a continuing rotation away from quality-growth and towards value-cyclicals, as economies around the world rebound from the COVID-19 pandemic and associated lockdowns. The broader market has been attracted to owning companies that have the best chance of rapid earnings growth in the next twelve months. In many cases, this means companies in cyclical commodity industries like shipping and mining whose earnings collapsed last year and which are most sensitive to re-opening. Whilst these companies may outperform in the short term, we believe in the long run the owners of their equity will likely realise a return more commensurate with their modest returns on invested capital.

One consequence of this rotation has been that a number of high-quality companies which were more resilient throughout 2020, but which now do not offer the same short-term upside, have become much more reasonably valued. This has been particularly true in China, the country which is most advanced in its economic recovery.

Many of the most attractive long-term companies to own in China have become significantly more affordable over the last two quarters.

For instance, we have been watching one specific Chinese plasma and vaccines company for some years. Our first meeting with the company was ten years ago, but it has been in the last few years that we built conviction up to feeling the company met our quality criteria. It has a well-stewarded balance sheet, a competent owner-manager and is the domestic leader in China in an industry we know well, having been long- term shareholders in companies like CSL in Australia.

Since February, the company’s share price has fallen by around a third as solid, defensive earnings streams have become less popular relative to those driven by re- opening and recovery. With a return on capital above 20% and medium-term growth rates at a similar level, this felt like an opportune time to initiate a position in what we believe will be a long-term winner in China.

The same pattern and fundamental logic underlies recent new positions in a China software company and two Chinese medical diagnostics companies, plus Mercadolibre, an Argentina; e-commerce and fintech company.

In order to fund these ideas, we trimmed some existing positions. These were primarily holdings which have done very well and where a combination of resultant position size and valuation multiple has led us to take some profit, whilst retaining meaningful exposure.

One example would be EPAM Systems, a Belorussian IT services company listed in New York, which has benefited hugely from a surge in corporate spending on ‘digitalisation’. Another would be Dabur, an Indian ayurvedic consumer goods company which has seen very strong results as people increasingly spend on wellness products in the wake of the COVID-19 pandemic.

We continue to believe the companies we own in the strategy in emerging markets offer attractive long-term opportunities for capital growth.

Source for company information: Stewart Investors investment team and company data. Portfolio data shown is from representative strategy accounts. 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.

1 January - 31 March 2021

The first quarter of 2021 witnessed a rally in emerging markets of what we would consider lower quality companies, driven by hopes of economic re-opening following the pandemic.

In a period of synchronised global growth, very loose monetary policy stances in developed markets, and commodities inflation from a very low base, we will usually underperform.

This is because the companies whose shares rise fastest in such an environment are those with cyclical cash flows, weak balance sheets and limited pricing power, usually led by banks, oil and gas, and mining companies. They are typically those that have fallen the furthest in the preceding bear market. We tend not to keep up in such environments because we will not own many, or large positions in, such businesses, for both quality and sustainability reasons. Our new purchases over the quarter fall into two broad categories.

We initiated some small positions in what we consider high-quality companies that nonetheless do stand to benefit from economic re-opening.

Features of these companies include operational leverage and the capacity to grow earnings quickly in the early part of the cycle. A good example would be Banco Bradesco in Brazil. We have owned shares in Bradesco for many years in the past and have no doubts around stewardship and governance: the bank is controlled by a very long-tenured group of managers, and is ultimately controlled by a charity, with dividends funding educational philanthropy. 

Banks are clearly cyclical and reflect the wider economy in which they operate, and given their leverage, see volatile earnings movements throughout the economic cycle. This is particularly the case in a country like Brazil with a risky currency. When we initiated our purchase, the market capitalisation, of Bradesco, was barely half the US dollar level that it was in 2011!1

Our thesis in owning the bank is very much around falling credit costs and recovering returns on equity, as the Brazilian economy hopefully normalises post-Covid during 2021 and onwards. The inherent risks to such a business mean that we remain cautious with position size.

The second type of company in which we have initiated positions are those high-quality, high growth companies which became less popular as investors rotated into cheaper and lower quality companies.

One example would be an Argentine e-commerce and fintech business, with operations across Latin America. The team first met with the company over a decade ago, and over time we have watched it grow into Latin America’s pre-eminent consumer tech platform. The company operates in a very large and unpenetrated market, and its very high quality management team and culture are ones we believe can continue to deliver on that opportunity. We were able to initiate a position after the company’s shares fell around 25% during the quarter as high growth stocks became less popular1.

In order to fund our new positions, we exited a total of five holdings over the quarter. We sold AVI Limited, a food producer in South Africa, and Jerónimo Martins, a grocery retailer with most of its cash flows from Poland. Both are companies whose earnings were relatively resilient during 2020 but which seem unlikely to grow quickly as the global economy recovers. Pigeon (a Japanese babycare company deriving the vast majority of its cash flows from China), OdontoPrev (a Brazilian insurance company) and Selamat Sempurna (an Indonesian auto components company) were all small positions which we exited after changing our minds on quality and in order to invest in better ideas.

As we hopefully move beyond COVID-19 throughout 2021 and beyond, we are optimistic about the opportunities for long-term returns through owning high-quality companies in emerging markets.

1. Past performance is not a reliable indicator of future results. Source: FactSet.

Source for company information: Stewart Investors investment team and company data. Portfolio data shown is from representative strategy accounts. 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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Proxy voting

1 July - 30 September 2021

Global Emerging Markets Sustainability

During the quarter there were 162 resolutions from 22 companies to vote on. On behalf of clients, we voted against four resolutions.

We voted against Kasikornbank and Philippine Seven’s request for management to approve all other business matters before the annual general meeting (AGM) of shareholders. We consider ourselves active shareholders and prefer to vote on such matters at the AGM. (two resolutions)

We voted against the election of two directors at Dabur as we do not believe they are truly independent. (two resolutions)

Source for company information: Stewart Investors investment team and company data. Numbers may not add to 100 due to rounding

1 April - 30 June 2021

Global Emerging Markets Sustainability

During the quarter there were 403 resolutions from 31 companies to vote on. On behalf of clients, we voted against 11 resolutions.

We voted against Vinda International and AK Medical Holdings’ request to repurchase issued shares, and issue shares without pre-emptive rights, as the share discount rate had not been disclosed and the share issuance was excessive. (four resolutions)

We voted against Shenzhen Inovance Tech’s issuance request to adopt a long-term stock ownership request incentive plan as there was a lack of disclosure and transparency on the plan. We also voted of against their request to elect an individual to their Supervisory Council as we do not believe they are truly independent. (four resolutions)

We voted against Natura’s request to establish a Supervisory Council as we do not believe it necessary given they are a one share, one vote company and we are comfortable with management. (one resolution)

We voted against Tencent’s request to issue without pre-emptive rights as the share discount rate had not been disclosed and the share was excessive. We also voted against their to adopt the share option plan of a subsidiary as there was a lack of detail provided on the terms the plan. (two resolutions)

Source for company information: Stewart Investors investment team and company data. Numbers may not add to 100 due to rounding

1 January - 31 March 2021

Global Emerging Markets Sustainability

During the quarter there were 96 company resolutions to vote on. On behalf of clients, we voted against one resolution and abstained on one resolution.

We abstained on voting on the election of Banco Bradesco’s Supervisory Council candidates as we were happy to support the candidates presented by the minority and preferred shareholders. As a result of this vote, we voted against the recasting of votes for the Amended Supervisory Council Slate. (two resolutions) 

Source for company information: Stewart Investors investment team and company data. Numbers may not add to 100 due to rounding

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Latest webcast

Jack Nelson gives an update on the Global Emerging Markets Sustainability Fund.

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Fund data and information

Click on the links below to access key facts, literature, performance and portfolio information for the funds and share classes available in this jurisdiction:

Global Emerging Markets Sustainability Fund Class A Acc GBP Global Emerging Markets Sustainability Fund Class B Acc GBP Global Emerging Markets Sustainability Fund Class A Acc EUR Global Emerging Markets Sustainability Fund Class B Acc EUR Global Emerging Markets Sustainability Fund Class VI Acc EUR Global Emerging Markets Sustainability Fund Class VI Acc USD Global Emerging Markets Sustainability Fund Class VI Dist EUR

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Investment terms 

View our list of investment terms to help you understand the terminology within this document.

Important information

This material has been prepared for general information purposes only and is intended to provide a summary of the subject matter covered. It does not purport to be comprehensive or to give advice. The views expressed are the views of the writer at the time of issue and may change over time.

Some of the information has been compiled using data from representative strategy accounts. This information relates to existing Stewart Investors strategies and has been provided to illustrate Stewart Investors’ expertise in the strategies This material is provided for information purposes only and does not constitute a recommendation, a solicitation, an offer, an advice or an invitation to purchase or sell any fund and should in no case be interpreted as such.

This is not an offer document, and does not constitute an offer, invitation, investment recommendation or inducement to distribute or purchase securities, shares, units or other interests or to enter into an investment agreement. No person should rely on the content and/or act on the basis of any matter contained in this material. The distribution or purchase of shares in any funds, or entering into an investment agreement with

Stewart Investors may be restricted in certain jurisdictions.

This material is confidential and must not be copied, reproduced, circulated or transmitted, in whole or in part, and in any form or by any means without our prior written consent. The information contained within this material has been obtained from sources that we believe to be reliable and accurate at the time of issue but no representation or warranty, express or implied, is made as to the fairness, accuracy or completeness of the information. We do not accept any liability for any loss arising whether directly or indirectly from any use of this material.

References to “we” or “us” are references to Stewart Investors. Stewart Investors is a trading name of First Sentier Investors (UK) Funds Limited, First Sentier Investors International IM Limited and First Sentier Investors (Ireland) Limited. First Sentier Investors entities referred to in this material are part of First Sentier Investors, a member of MUFG, a global financial group. First Sentier Investors includes a number of entities in different jurisdictions. MUFG and its subsidiaries do not guarantee the performance of any investment or entity referred to in this material or the repayment of capital. Any investments referred to are not deposits or other liabilities of MUFG or its subsidiaries, and are subject to investment risk including loss of income and capital invested.

Past performance is not a reliable indicator of future results.

Reference to specific securities (if any) is included for the purpose of illustration only and should not be construed as a recommendation to buy or sell. Reference to the names of any company is merely to explain the investment strategy and should not be construed as investment advice or a recommendation to invest in any of those companies.

United Kingdom

In the United Kingdom this material is a financial promotion and is issued by First Sentier Investors (UK) Funds Limited which is authorised and regulated in the UK by the Financial Conduct Authority (registration number 143359). Registered office: Finsbury Circus House, 15 Finsbury Circus, London, EC2M 7EB, number 2294743.