Transcript
JE:
Good morning everyone. Uh thank you for joining today and my thanks to the team at LGBR Capital for uh arranging this event which is which is much appreciated. I would like to begin with a brief overview of Aubry Capital the company based in Edinburgh and we were founded almost 20 years ago. We now manage over 1 billion dollars of assets for clients in the US, Europe, and in the Middle East. The the gem category uh represents the the majority of our assets. And as a company, our focus is very much on stock selection. Clearly, we’re very well aware of the dynamics within equity markets, within specific regions. Um but stock selection has been the key factor in generating the the long-term returns for our global emerging markets product as as I’ll come on to discuss.
The team itself is represented on this slide. The five individuals at the top are based in Edinburgh. Um I as Sean has highlighted there joined the company 2012 joining Andrew. We had worked previously at First State Investments in many years ago and Rob was known to Andrew when they both spent time in Hong Kong in the 1990s. Both Kaisa and Chameleia are very much international citizens um born in Asia, educated in Europe and and now working with us in uh in Edinburgh. And importantly, despite the the age differences, we’re all analysts. That is the the key competency that we’re looking to apply every day, finding good businesses and finding attractive investment opportunities. The three individuals below, John, Ben, and Tom are actually based in London and uh their primary role are on the the global funds and John and Ben in particular are responsible for a global convertible fund and um Tom’s involved in the global product which Andrew is also with CLIA responsible for.
The overlap is primarily at uh an a clearly a sector and at a country analytical level whilst the individuals in the the London team are looking for different opportunities convertible bonds for example um is very much a case that we’re looking at similar companies similar growth industries so there are a lot of synergies in terms of the discussions and the the meeting access that we have in London and in Edinburgh.
Why emerging markets and why active management and then ultimately why Aubry as a a steward of your your capital of your your client money and we have made the case for many years that emerging markets is an in an attractive investment category um and the the opportunity is significant and clearly as investors and anyone interested in world dynamics you’ll be aware of that the population uh difference with over half the world’s population now residing in Asia. Um, and clearly a very young population given the the number of individuals that fall under the millennial or the Gen Zed category. But we also have over 600 million in Latin America. So there are a significant number of people who have achieved opportunities in life through education, who are looking for better employment prospects, inevitably moving to cities and and who have a very strong work ethic. And that’s not something to be underestimated. It is a competitive world in Asia and a lot of the the young people um that we come across, entrepreneurs of businesses, senior management of companies are very ambitious, many with international educations, international experience um and looking to make a difference in the companies that they actually operate in.
And at the at the heart of our process is the fact that all these individuals are ultimately looking to have a better life, better opportunities, earn more money and spend that money. And if you look at the development of the so-called western world, those themes, those trends have been established for many decades. And we see them every day across the the emerging market universe that we are looking at.
So why active management? This slide is the important factor in highlighting why active management is key. If you look at the returns from emerging markets in isolation, the red line, it’s modest, especially in comparison to other areas of the world um over the last now approaching 15 years. But with the right strategy, looking at specific companies and actually backing your investment judgment in those companies, you can generate significant returns. And the performance of our fund represented with the blue line demonstrates that over 80% of the alpha that has been generated through our portfolio has come from the stock selection. That is the key. Country industry selection is important without a doubt, but finding the right company at the right valuation ultimately is how that makes a difference.
It won’t be a surprise to you when you look at this slide because essentially you’re seeing the outperformance of the US relative to emerging markets, but also the outperformance of the US is similar compared to other areas such as Europe or such as Japan over the last 10 years in particular. But this simply highlights that emerging markets now look as if they are trading at a level over now approaching the last 25 years where a the degree of underperformance actually appears to be quite dramatic and therefore there are grounds for reversal and that’s reflected in the valuations that we actually see within the the emerging market universe as well. Yes, the US trades at a premium, but that is entirely understandable because of the nature of the index. There are more technology companies, for example, that are companies that generate higher returns and typically those businesses will generate or rather will command a higher multiple from investors. Um, by contrast, emerging markets does have a lot of industries um where the returns are not particularly attractive and consequently it has traded at a lower multiple. But again, you can see that there has been a degree of a reversal and we actually think as emerging markets gains more recognition amongst the international audience that there is scope for this to continue to reverse and we’re certainly seeing evidence of that having come through last year and again the first few months of this year.
Now when we discuss the emerging market index, it’s not a static collection of companies or countries and this comparison between 2016 and 2026 illustrates that. Um you can see back in 2016, China was the largest component of the index whereas now Taiwan has recently overtaken China. Um you can also see countries such as Russia which are clearly no longer part of the index. But interestingly in recent years we’ve had the addition of Saudi Arabia and um the UAE to the index itself. The index is dominated by the la the large four Taiwan, China, South Korea and India. And even within India whilst it has been a disappointing market over the last 18 months, it has increased quite significantly from the 2016 waiting of just under 9% um to now uh over 13%. But the important consideration for this slide is also the number of members, the number of companies that are actually listed in the various markets across the EM universe. And if you look at China, 10 years ago, there were only over only over 100. We’re now over 500. In India, there were 73. We’ve now got 164. The reality is that there are many companies coming to the stock market through their public listing. And that for us is exciting because as investors we have the opportunity to uh meet these businesses to assess the outlook for these companies and to actually um invest our client capital in those businesses itself. So China and India have 1.4 population 1.4 billion population each and there are many companies which are actually providing goods and services for those companies for for those uh citizens on on a daily basis. So China and India will always be interesting to us because of the population size because of the number of companies that are available to invest. But that doesn’t mean that our focus is exclusively on China and India as we’ll come on to discuss.
If you look at the actual companies within the index itself, again, significant change between 2016 and and today, um, Taiwan Semiconductor or TSMC as it’s more widely known will be a name that you’re familiar with, but you can see within the index that it’s now over 13%. For many usage funds, they are limited to a 10% waiting investing in CSMC. And clearly there are other companies which are in the the broader uh semiconductor and technology space but TSMC is clearly been the the company that’s attracted a lot of the attention in in recent years. And the reality is that the technology industry in Asia in particular is home to worldclass leading edge companies. TSMC is the leading semi-manufacturer globally and both Samsung and SKH Highix in the last 18 months have demonstrated that they are significant players in the the chip design production and particularly in the memory chips and when we look at the current development of the memory chip industry SKH highinex is the leading player with approximately 60% share Samsung with approximately 30 and the US Micron with 10%. that mix of percentage does change but SKH highinex has proven to be very successful over the last 18 months in actually uh developing and and being the number one player in that area. I would also highlight that in 2016 there were more numbers of Chinese state-owned enterprise businesses within the index. China Construction Bank, China Mobile and the um Industrial Commercial Bank. Now, China Construction Bank is the only one that remains in that top 10. And you can see how we’ve had the emergence of other companies, worldleading technology businesses, I said, but also HDFC Bank, which is an Indian bank and an excellent example of a bank which has been managed very successfully and has benefited from the the economic development of of its domestic market, India.
The universe that we look at has over two and a half thousand companies, but we’re not looking to address, analyze, consider over two and a half thousand companies with a team of five sitting in Edinburgh. We are looking for companies that we think generate attractive financial metrics. They generate plenty of cash. They have good levels of profitability and they can fund their future expansion. Asia is the largest home to the segment of the the universe itself over 2,000 companies. You can see that within EMIA which includes South Africa, Eastern Europe, Saudi Arabia, etc. We now have over 250 and in Latin America is quite concentrated within the the various markets with Brazil being the largest market within Latin America uh and again over 150 companies on offer. But when we apply our basic financial analysis that brings the opportunity set down quite considerably and you can see that the numbers represented by the the yellow boxes offer significant opportunity and we have met many of these those companies over the years and we continue to see them regularly. Um the reality is that a good business rarely changes from being a good business. It may not be a good valuation um but many of these good businesses have continued to um have successful operations and have developed a franchise um within their their country of operation.
Now what makes us different?
The prospect of consumption is key for the growth of emerging market investment opportunities and this has served us well over the last and now approaching 15 years. Very simply, as I said at the outset, when people have the opportunity to have a better education, better form of employment, earn more money, they will spend that money differently. And what we see in countries such as China which is represented by the the yellow line will be repeated in India. And this comparison between the two highlights a correlation albeit that in China today the income per capita is closer to approximately uh $5,000 whereas in India is still less than uh $3,000. And clearly when you’re living and working in the larger cities that the prospects of earning and spending more are greater because of the the nature of employment itself. India is approximately 15 years behind China when we look at the data. But when we are considering the opportunities amongst companies many of the technologies that are being adopted by uh consumers in India and China are very similar and the key to that is really the adoption of the smartphone and all the various services that have come from that. But we are looking for opportunities from the broad spectrum of consumer behavior and consumer expenditure. From how people are changing their shopping habits in countries such as India um to the adoption of technology which is being applied across all countries and emerging markets to aging populations and what the implications are for for healthcare and wealth management services. This has been a theme which has been prevalent for decades in developed markets and this is a theme which we think will continue for decades to come in emerging markets.
What makes us different? Ambition.
The reality is that when people are educated, particularly when they’ve had international experience, they’ve had access to international media or content, which they do through their smartphones every day, that they realize that there are better opportunities for life and there are better ways and more attractive goods and services for them to actually spend their money on. And this graphic illustrates that in a country such as India with a lower income per capita, the needs of the majority of people who still live in rural areas of India are quite basic. What they eat, what they drink, clothing, education for their kids, access to good uh housing and living um uh environments. Whereas when you’re in a position where you have a comfortable income and you have an opportunity to actually spend your excess income capital and other ways then you have opportunities to embrace travel for example or plan for your wealth management for the next generation of your family. And clearly the adoption of uh technology uh is a is a big factor in uh in um executing that. Korea and Taiwan are not emerging markets as any of you who have visited those countries will know but they are included within the index and that’s the reality of the the MSCI um the the Morgan Stanley Capital International um body but whilst they are there we see we are clearly looking to identify good businesses um that are providing investment opportunities for for us as uh as investors.
So I’ve referred to good businesses and the concept of quality is one that you will have heard many investment managers refer to over the years. The key factor for us in terms of a good business which is generating a quality return is that return on equity and this is another differentiating factor of our process. uh the previous slide which highlighted the number of companies in the universe is significant in terms of numbers but clearly when we’re looking at that return on equity filter it brings the figure down to um to a much more manageable level and generating a return of 15% profit over the equity of the business is not easy and rarely has the emerging market index actually generated that return over the last 20 years. Um so businesses that are doing this year after year really are good companies and that excess cash which is coming from the business itself clearly supports the profit growth but similarly is providing the opportunity for these businesses to expand and it’s the the expansion of the business generating a return on that cash investment and which combines with the profit growth that really makes a powerful combination for the um the opportunity as as investors and within these businesses itself. We’re looking for established operators. We want to see management teams that have proven themselves through economic cycles. We want to have a degree of comfort in their predominantly domestic operations which is where we find a lot of our investment ideas very a limited number of our companies are international in scope. Excuse me. Many of them are actually operating at a domestic level and are very much seen as the the domestic champions of of their market. And to highlight again that stock selection is key with over 80% of the alpha um coming from the stock selection.
Now when we look at the emerging market opportunity we are always looking to identify the catalyst and as I’ve highlighted companies themselves are the key consideration for us as investors. But what makes a good business transpire to be a good investment opportunity and the the the impact of themes the impact of country or industry dynamics is important and it’s important for us to identify that the first graphic is that of uh Chinese consumers and they’re holding up smartphones displaying a WeChat app and the WeChat app is an app that was developed by the 10-centent group um many years ago and it is a genuine super app. Over 1 billion people are using that app every day and that the reality is that for investors using the app they’re accessing basic text and voice messages. They’re able to make financial payments, purchase e-commerce products, services, uh, and also then use digital services such as a medical appointment or use the services for air or hotel bookings, etc. Um, it really is an app that is capturing all elements of consumer behavior on a daily basis. And that is an example of the structural growth. the development of that app, that service has been embraced by a significant portion of the population. It creates a customer loyalty and every time 10 cent can come up with a different element to the WeChat app that generates another source of revenue. So, it really has captured the growth opportunity amongst the the Chinese consumers. Uh, and it’s one that we expect to continue. And Tencent is widely recognized as one of the the world’s leading um technology companies. uh albeit it happens to be located in in Asia.
The lady in the middle graphic is proudly holding a smartphone displaying a bank balance and sitting in the comfort of the developed world. We we may take for granted the fact that we have multitude of choice amongst the the various banks or financial services companies to to provide our um our ease of transfer and our ease of payment. But prior to the election of Prime Minister Modi in India in 2012, only 20 million people had a bank account. And following his election and the last 10 years, we’ve had over 500 million people open a bank account. And that is transformational for the consumer. And the adoption of the smartphone and of e-commerce services has been significant clearly in providing that opportunity. Even in poorer rural areas of India, cheap smartphones are available at some of the lowest priced data packages in the world. And the adoption of the smartphone and e-commerce services has been transformational for the population at large and has created significant opportunities for us as investors given the number of companies that have uh that have emerged in order to cater to that.
And the gentleman below is the current prime minister of South Korea. And he has been a significant force over the last 8 n months of his tenure as president actually not prime minister as president of South Korea. Um Lee Tayong became president in June 25 and he’s been very much an advocate of uh corporate reform. South Korea historically has been controlled by powerful family groups such as the family that’s been responsible for the Samsung group for example and many others and he has been pressing for the adoption of equal treatment for shareholders and encouraging companies to think more internationally in terms of their practices and this has been surprisingly beneficial surprisingly quickly. And consequently, Korea performed very well last year actually almost doubling over the course of the year and it’s had a very strong start to the year. The market rally is not entirely attributable to the president. Uh the reality is that companies such as Samsung, SKHax, which are dominant companies within the South Korean index have benefited from the the spectacular growth in their business areas and their share prices have risen accordingly. But the so-called value up program that he has embraced and he is encouraging has certainly been very helpful to changing investor perceptions towards South Korea and we as investors have increased our exposure to South Korea um partly to reflect that the changing mindset of um of many of those companies.
So this gives you illustration of our current portfolio. Um as you can see uh on the left the the geographic composition. We’ve mentioned various countries. You can see for yourself what those those waitings are. It has actually changed over the the course of the month primarily because um some countries such as South Korea have continued to perform very well and the South Korean waiting in the portfolio is now higher. China we’ve actually made some changes post the the Chinese new year. We remain optimistic that the Chinese consumer will get back into the groove of spending, but it’s simply not happening as quickly as everyone had been hoping. And the reality is China still has its concerns over, for example, the property market um as a significant asset within the the average Chinese household. Um but there are good businesses that are benefiting um from the the dynamics and the trends within China. And I’ll highlight one in and in the coming slides. But you can see on the right the sector composition. We are enthusiastic about technology but it is very much in those leading companies which are world leaders which are generating significant cash which trade on attractive valuations and I’ve mentioned TSMC, Samsung and highex as examples and we have those investments within within the portfolio and have done over the course of the the last um 15 18 months.
So these are some examples of companies which are within the portfolio at present and the the top graphic is a highlight of it which is one of the largest banks in Brazil and this was an early adopter of digital services for customers and Brazil as a country has an average income per capita of around $10,000 but clearly people living in Sa Paulo Rio other cities are earning sign significantly Um it is one of those countries which is quite polarized in terms of the the distribution of income, distribution of wealth and Isa has been the bank of the the middle to wealthier classes for many years. It has operated for over 100 years um within the country and has generated consistently excellent returns. It has been particularly strong in developing its franchise amongst the retail customer and also amongst the the small and medium segment of businesses and within the country. Um it’s a company we’ve owned for a number of years and it continues to deliver excellent growth and um has an attractive valuation and dividend yield.
The scooter in the middle is like most scooters you may expect. Uh it’s actually made by an Indian company called TVS. um they are the market leader and with a share of over 30% in the scooter segment in India and their market capitalization is uh over 20 billion US dollars and over 50% of Indian households own a two-wheel bike and even if you have a car in your family you’re likely to have a bike because it’s simply easier as a mode of transport around the the urban areas of of India but you will see these bikes throughout the country and this particular model sells for approximately £600. Um, so it is affordable for many people within the country and for many families this will be the first mode of transport within their family. Uh, you’ll see many photographs of a scooter with the mother, the father and a child um transporting around rural areas or transporting through urban areas. Uh, it is very much a a key mode of transport.
And the bottom graphic is from the hotel chain HWorld which is a Chinese listed company. Um it is one of the leading domestic hotel chains in China. U and it’s actually the fourth largest globally and is capitalized at 17 billion US. More consumers in China book their hotel accommodation direct with the hotel rather than through comparison platforms. And consequently, the customer loyalty is better. The loyalty program is quite entrenched amongst the customer base. And this ensures that as a a business, they’re seeing much more repeat business rather than having to um offer attractive discounts through the various platforms in order to entice customers. The reality of the the tougher environment amongst Chinese consumption has been that experiences and travel has still been an important factor for the consumer. Um consequently uh we have actually seen that the performance of H world quite encouraging through the Chinese new year and over the last year as evidence of that continued expenditure um has still materialized. And whilst that room may not look the most attractive place to take your partner in life, it sits about 500 yards from the Bund in Shanghai, it looks a perfectly pleasant room to spend the evening and it would cost you less than $50 for one evening in uh in a hotel and that close to the close to the Bundon Shanghai. So it is a it’s a a price competitive category and uh certainly as a business they’ve been successful in um creating their niche within that area.
And wrapping up in terms of a summary for the the case for Aubry and uh importantly addressing those areas of why active management, why GEM and why Aubry. Hopefully this slide gives you the um the the final points that actually make the impression to to remind um the back of all the graphics and the explanation. We have an excellent long-term record and that has been generated through stock selection primarily and we continue to expect the opportunity set for investors to be that case. There are many companies to invest in and it’s our role to identify businesses that we think are good companies, established management, excellent cash generation and actually seeing valuations which are enticing for us to invest as as investors and uh allocating our client capital. We have a strong alignment with our investors. uh the senior managers of the fund have significant investment of their own money within the fund itself and we are very much looking to to generate capital appreciation for investors within our products. Um the team itself has many years of experience. Uh we have collectively all either lived or worked in various areas of emerging markets and um we are approaching many decades of experience. So we’ve lived through economic political industry cycles. uh we see we read we hear the AI generated media headlines at the moment um but we have been here before through tech bubbles and crashes and uh we have we’ve learned lessons in the past and it’s something that we apply to very much our current portfolio structure and that domestic opportunity is important um yes there are leading worldclass players within our portfolios the technology companies I’ve mentioned but there are the majority of our companies are are domestically based and They’re tapping into that change in consumption behavior which we expect to continue for for many years to come. And the active share is crucial. You can buy the index. We’re well aware of that. ETFs look cheap, but if you’re looking at it over the longer term, having a good active manager with a track record of stock selection is the way to generate alpha for yourselves and for your clients. Thank you very much for your interest and for your attention and I would be delighted to take any questions.
Disclaimer
This is a marketing communication issued by Aubrey Capital Management Limited which is authorised and regulated in the UK by the Financial Conduct Authority and is registered as an Investment Adviser with the US Securities & Exchange Commission. You should be aware that the regulatory regime applicable in the UK may well be different in your home jurisdiction Aubrey Capital Management has taken reasonable care to ensure the accuracy of this information at the time of publication but it is subject to change without notice and it does not in any way constitute investment advice or an offer or invitation to deal in securities.
Past performance is not a guide to future returns and may not be repeated. All performance data for the SVS Aubrey Global Conviction Fund Retail A Accumulation share class. Fund Source: Aubrey Capital Management. Performance data is calculated on a net basis by deducting fees incurred at fund level (e.g. the management fee and other fund expenses), save that it does not take account of initial charges or switching fees (if any). Income reinvested is included on a net of tax basis. Index Source: MSCI, MSCI AC World Index Net GBP income reinvested net of tax.
Please refer to the prospectus and the KIID before making any final investment decisions and if you are still unsure, seek independent professional advice. Investors in the Fund are exposed to fluctuations in the Fund’s value, which can go down as well as up, and may be subject to significant volatility due to market conditions and changes in foreign exchange rates.
Aubrey Capital Management Limited accepts no liability or responsibility whatsoever for any consequential loss of any kind arising out of the use of this document or any part of its contents. This document does not in any way constitute investment advice or an offer or invitation to deal in securities. Recipients should always seek the advice of a qualified investment professional before making any investment decisions. The Fund is not registered for sale in the United States and is not available to, or for the benefit of, U.S. persons as defined by U.S. securities laws.
