23 Aug 2022
For the first time in over a decade I was fortunate enough to visit Edinburgh to meet fund managers during the summer which, with the long daylight hours, presents the opportunity to see some of Edinburgh’s iconic sights during the evening in a relatively compact city that is always a joy to explore. Edinburgh’s most iconic sight the castle - one of the oldest fortified places in Europe. The famous rock on which it stands was formed by volcanic activity millions of years ago. During its time the castle has served as a royal residence, military garrison, prison, and fortress. There has been a fortified presence on this site since the iron age and the castle, set upon its mighty rock, still dominates many views of the city.
During the wars of Scottish Independence, it changed hands many times. In 1314, the Scots re-took the castle from the English in a daring night raid led by Thomas Randolph, nephew of Robert the Bruce. The castle defences have evolved over hundreds of years and one of the greatest medieval cannons ever made (Mons Meg) given to King James II in 1457 resides there. The castle has also been home to kings and queens for many centuries. Queen Margaret died there in 1093 and the chapel built by her son in her honour, dating back to the early twelfth century, is Edinburgh’s oldest building. Perhaps its most famous monarch was Mary Queen of Scots. From the 1650’s it grew into a significant military base following the Union of the Crowns.
During the Second World War, the Crown of Scotland was hidden in the castle which has served as a royal treasury over its long history and still has some military use today. Edinburgh castle is one of the United Kingdom’s most visited tourist attractions with over 2.2 million visitors in 2019. It provides a stunning backdrop to the Royal Edinburgh Military Tattoo during the annual Edinburgh Festival and is a UNESCO World Heritage Site.
Edinburgh is the original base of one of the world’s most successful investors in Asia, Stewart Investors, although most of the team is now based in Australia and Asia. I had the opportunity to catch up with Doug Ledingham, who I’ve previously met in both Singapore and Sydney, on the Asia Pacific Leaders Sustainability Fund and the Asia Pacific Sustainability Fund. The investment philosophy has been unchanged for over 20 years with a belief that, high-quality companies well positioned for sustainable development and providing strong stewardship of shareholders’ funds, offer the highest quality and lowest risk stream of cash flow which will ultimately result both in growth and strong capital preservation in most market downturns. Both funds only invest in companies contributing to a more sustainable future with risk defined as the possibility of the permanent loss of capital.
An example is KingMed Diagnostics Group in China - a pioneering, independent diagnostics provider which has strong sustainability tailwinds as it contributes to higher quality healthcare with early detection and prevention of illness. There is good governance with a founder/owner manager. Within healthcare, businesses helping human development and quality of life are favoured with holdings having included hearing solutions company Cochlear and Fisher & Paykel which provides ventilation equipment in New Zealand. Both funds have historically had strong exposure to India with consumer business Mahindra & Mahindra in a prominent position after professional management was brought in. India has many high-quality private businesses, and this is true of the banking sector which is a play on the development of the middle-class in the country.
After the setback to markets this year, the managers are now more optimistic on prospects than at the start of 2022, with the companies held having resilient balance sheets, pricing power and strong long-term growth prospects.
The next day saw an opportunity to catch up with team member Rob Harley on the Worldwide Sustainability Fund. The fund would normally be expected to hold up well in down markets but had a difficult time in the first half of 2022. As a sustainability quality orientated portfolio, the fund has always been reluctant to invest in commodities. Oil is a difficult commodity for the team as fossil fuels have been avoided for several years. During the first half of the year, oil was the only major sector to deliver positive absolute returns and materials were a large relative winner, so market conditions did not suit the investment style. Furthermore, there was a selloff in the highest quality companies in the marketplace, even when corporate earnings prospects were not being downgraded. The team have reviewed the entire portfolio and, recognising that economic conditions are likely to worsen through the remainder of 2022, have looked to make the portfolio more resilient on the downside.
The fund continues to be very selective where it takes exposure holding only two banks which are both in India: HDFC and Kotak Mahindra.
One name expected to be resilient in tougher economic times is Portuguese listed Jeronimo Martins. The bulk of its business is based in Poland where they are experiencing increased demand after the flood of refugees from Ukraine. Overall exposure to consumer staples and telcos has been increased with the re-purchase of Finnish telco Elisa. Some of the IT names have suffered in the market rotation away from growth stocks in the early part of the year but are now delivering stronger performance with payment processing business Adyen rallying strongly in the past few months; the business is on course to continue to deliver very strong revenue growth over the next decade. Since our meeting, funds have benefitted from a return to favour of quality businesses in the stock market and have seen a significant pickup in relative performance.
Stewart Investors are situated in St. Andrew’s Square which was created during the first phase of building of a new town from the 1760s and was an integral part of James Craig’s design to have George Street flanked at each end with an impressive garden square. The square was named after the patron saint of Scotland and the monument in its centre is the statue of Henry Dundas, the first Viscount Melville and a man of considerable influence in Scotland in the latter half of the 18th Century, nicknamed ‘The Great Tyrant’. He was the United Kingdom’s first Secretary of State for war and the last member of British Parliament to be impeached for misappropriation of public money. Today, Dundas remains a controversial figure; as Home Secretary he was instrumental in deferring the abolition of the Atlantic slave trade and he curbed democratic dissent in Scotland, expanding the British Empire and imposing colonial rule on indigenous peoples. It is rumoured that the public money he misappropriated was used to construct this monument honouring himself. After its completion, the square was an incredibly desirable place to live with many well-off families and landowners purchasing properties there. Today the once desirable residences now provide prestigious corporate locations in this iconic thoroughfare which the public can enjoy as the square is open as a public garden.
I later caught up with one of the managers of the Baillie Gifford Emerging Markets Growth Fund, Andrew Stobart and, as with all Baillie Gifford portfolios, this is a growth orientated fund with the belief that the top quintile of earnings growers delivers the best returns. Within emerging markets, growth can come in many guises, and this can be companies with a long record of delivering profits growth such as TSMC, the world’s leading semiconductor business, or faster growing businesses such as Reliance Industries in India. There can also be cyclical growth companies such as Petrobras, the oil and energy business listed in Brazil. Whilst most investment teams at Baillie Gifford work purely on a bottom-up basis, macro is more important in emerging markets and serves as a risk control mechanism as currency movements can at times significantly detract from US$ returns.
The increased demand for commodities has resulted in the purchase of certain banks such as First Rand in South Africa and Banorte in Mexico. Within the tech sector, semiconductor names such as TSMC, Samsung Electronics, and SK Hynix are significant weightings with the fund still holding exposure to tech related consumer discretionary names including Alibaba, Meituan, JD.com, Tencent and SEA together with Mercado Libre in Latin America.
The portfolio is expected to deliver double digit earnings growth over the next three years but as the asset class remains out of favour, it trades at a significant discount compared to many developed markets. The fund has a strong long-term record and is suitable for investors looking for higher levels of growth but who can also live with volatility and at times potential drawdowns as this remains a more volatile asset class within equities.
Graham O’Neill, Senior Investment Consultant, RSMR
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The value of investments and the income from them may go down as well as up and investors may not get back the amounts originally invested.
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