Denker SCI Emerging Markets FF - Mar 19
The quarter ended March 2019 saw global markets recover strongly from the December selloff, with emerging and developed markets up 9.6% and 11.9% respectively.
Emerging markets were buoyed by the news that a resolution to the US-China trade negotiations may be around the corner as the US delayed the implementation of additional tariffs on $200 billion of Chinese goods, scheduled for March 1. The US Federal Reserve also turned more dovish during the quarter, due to slowing economic growth and the effects of the extended US government shutdown on the economy.
Changes to the portfolio
During the quarter we increased our positions in Swatch, the world’s largest watchmaker, and NetEase, the Chinese gaming company. We also initiated a new position in Regional, the fifth biggest Mexican bank which specialises in the SME segment.
We trimmed our positions in Bank Rakyat, a leading bank in Indonesia, and in Cia Hering, a Brazilian retailer, as their prices approached our estimate of intrinsic value. We also reduced our exposure to Matahari Department Stores, an Indonesian retailer.
Matahari Department Stores: The company was the largest detractor to the performance of the portfolio. Our investment case centers around Matahari leveraging its strong brand equity, geographic presence across Indonesia and strategic locations in key malls to successfully transform into Indonesia's first omni-channel retailer. The Q4 2018 results highlighted that aggressive competition from ecommerce players and increased subsidies from the fintech players are slowing the company’s revenue growth more than anticipated. We have therefore reduced our position to mitigate the increased risk profile.
BIM Birlesik Magazalaar: BIM is the leader in the modern food retail space in Turkey, with a 16% market share. The company has been a strong performer since the start of the Turkish macro volatility in May 2018, however during this quarter the Turkish government effected a number of initiatives that have resulted in the company underperforming – 1) Proposed new retail legislation, which seeks to impose limits on the sale of private label products by organized food retailers in an effort to entice smaller producers; and 2) increasing minimum wage by 26% in January. While this has a short-term effect on the share price, we are confident that the long-term prospects of the company remain intact.
Arcos Dorados: The company is the largest McDonald's franchisee worldwide, and Latin America's leading quick service restaurant operator. The company reported Q4 2018 results that were weaker than expected by the market. The results did highlight that the Brazilian quick service restaurant market continues to be sluggish due to new competition and the growing availability of subsidized delivery for on-demand food. Arcos has implemented a number of promotional initiatives to drive traffic and are seeing positive sales growth in response.
VipShop: The company reported a solid Q4 2018 set of results, with net profit significantly ahead of consensus but Revenue marginally below. The share price has not only benefited from the easing of trade war rhetoric between the US and China, but also from the company reaffirming its focus on the deep discount business model and achieving business efficiency, through 1) shifting low margin categories from 1P to 3P to ensure product variety and healthy margins; and 2) improving operating leverage by using more 3rd party express delivery couriers.
Yes Bank: The share price has rebounded strongly since the lows in November 2018. The company was affected by the system-wide liquidity crisis created by the default of India's leading infrastructure finance company, IL&FS. The company was furthermore negatively affected by several company specific issues – non-approval of the bank’s founder as CEO by the Reserve Bank of India (RBI); the fear of the RBI issuing large divergence report on recognition of non-performing loans by the bank; and loan exposure to the IL&FS default. During the quarter the bank has appointed a new CEO and received a clean divergence report from the RBI. India is benefiting strongly from an expanding middle class population, which is urbanising and has low home ownership. India’s financial services industry, particularly the private banks, are well placed to benefit from the low rates of financial services penetration and the fact that the state-run banks currently have weak capital positions.
AIA Group: The funds position in AIA contributed strongly to performance during the quarter. The company currently has five Chinese operating regions (Beijing, Shanghai, Guangdong, Shenzhen and Jiangsu), representing 16% of the group’s operating profits. During the quarter the company received regulatory approval to expand its Beijing licence area to include Tianjin and Hebei. This would enlarge AIA’s potential life insurance market from the existing 30% to 36%, in terms of gross premiums.
We believe the only way to deliver sustainable outperformance over the long term is to invest in areas which reflect value and are often shunned by the market, and we do this using a bottom-up approach. This approach leads us to invest in companies that can continue to grow despite the prevailing macro climate, which can also entail the returns of the portfolio significantly deviating from the benchmark.
Investors should expect the volatility of 2018 to continue in the context of ongoing USChina trade negotiations, slowing US growth and global political volatility.
The turmoil creates investment opportunities in EM equities for patient investors. Valuations are very attractive and we are seeing substantial upside in our portfolio of companies. Predicting the catalyst that will turn the tide is an impossible thing to do, but history has shown that sentiment can turn very quickly
The portfolio will apart from assets in liquid form, invest in participatory interests of the SIM Global Emerging Markets Fund established under the Sanlam Universal Fund PLC approved by the Irish Regulator in June 2015. The Denker SCI Emerging Markets Feeder Fund will have foreign exposure of at least 85% at all times. Subject to the investment restrictions, the underlying portfolio will primarily invest in equity securities (including equity linked securities such as common stock and preference shares) of companies traded in or dealt on the stock exchanges or regulated markets as defined in the prospectus of the Sanlam Universal Fund plc. The underlying portfolio may, where the Manager considers it in the best interests of the portfolio, invest up to 100% of its net assets in securities traded in or dealt on the stock exchanges or regulated markets considered by the manager to be emerging and frontier markets. The portfolio may also invest in financial instruments for the exclusive purpose of hedging against exchange rate risk.
The Trustee shall ensure that the investment policy set out in the preceding clauses are adhered to; provided that nothing contained in this clause shall preclude the Manager from varying the proportions of securities in terms of changing economic factors or market conditions or from retaining cash in the portfolio and/or placing cash on deposit.
For the purpose of this portfolio, the manager shall reserve the right to close the portfolio to new investors on a date determined by the Manager. This will be done in order to be able to manage the portfolio in accordance with its mandate. The Manager may, once a portfolio has been closed, open that portfolio again to new investors on a date determined by the Manager.