Stewart Investors Global Emerging Markets Leaders - maintains bias to India

Kate Marshall | Tue 02 May 2017

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• Emerging stock markets staged a recovery over the past year
• A conservative investment approach and focus on consumer goods companies held back returns
• We continue to hold the team at Stewart Investors in high regard

Our view

Stewart Investors is home to one of the most experienced and longest-standing Asian and emerging markets equities teams. We like their prudent investment approach of seeking high-quality companies with strong balance sheets and robust cash flows, run by trustworthy management teams. They only invest when they feel share prices are lower than a company’s true worth and with the intention of becoming long-term shareholders.

The group have sought to restrict inflows into this fund in order to keep it a manageable size. As such it does not currently feature on the Wealth 150 list of our favourite funds across the major sectors. We continue to hold the team in high regard and would expect them to deliver long-term value for investors, although there are no guarantees. Our favoured funds for new investment in the higher-risk emerging markets region feature on the Wealth 150.

Performance review

Following a period in the doldrums, emerging stock markets staged a recovery last year as fears over an economic slowdown in China subsided; a rebound in commodity prices aided resource-rich economies such as Russia; and the prospect of political or economic reform improved investor sentiment towards countries such as Brazil and India.

A change in investor sentiment towards the region saw the share prices of companies in more economically-sensitive areas of the market, such as financials and resource-related sectors, outperform more defensive areas, including healthcare and consumer goods.

The team at Stewart Investors seek quality companies with more defensive characteristics, which they believe will prove resilient throughout a variety of market conditions. This tends to lead them away from some of the more economically-sensitive companies that performed strongly over the past year.

Greater exposure to the consumer goods sector, including investments in Taiwanese company Uni-President Enterprises, Brazilian firm Natura, and Unilever, also held back returns. A relatively high level of cash (currently 6.7%) has also weighed on returns over a period when stock markets on the whole have risen. While the fund delivered a positive return of 28.8%* over the past 12 months, it lagged the wider emerging stock market’s return of 35.6%. Please note that past performance is not a guide to the future and all investments can fall as well as rise in value so investors could get back less than invested.

Past performance is not a guide to the future. Source: *Lipper IM to 31/03/2017

The fund performed in a way we would expect, however. The team’s cautious approach means we anticipate the fund to hold up better during times of market weakness but underperform a rapidly rising market. The approach has delivered exceptional long-term returns, although this should not be seen as a guide to future performance.

Portfolio activity

The team have recently invested in a number of consumer companies including Colgate-Palmolive (India), Amorepacific (South Korea), and Kimberly-Clark de Mexico. Conversely, investments in Chilean telecoms company Entel and Nestlé India were sold as their shares no longer appear as attractively-valued. Overall the fund maintains a bias to India, where 25% of the fund is currently invested, as the team believe the country offers many well-managed companies that meet their quality criteria.

Company in focus: Colgate-Palmolive is a well-run consumer company focused on selling toothpaste. The company benefits from having a dominant share of the market and has greater ability than its peers to spend on marketing, which acts as a barrier to entry to competitors. The team believe the company should benefit from the significant growth of toothpaste consumption in India, where more than 300 million people do not currently use toothpaste and those that do consume half the amount of Chinese consumers. The company is focused on encouraging consumers in urban areas to brush their teeth more frequently, which could boost demand for their products.

Please read the key investor information document in addition to the information above.