Q 4Stewart Investors St Andrews Partners

Quarterly Client Update1 October - 31 December 2020

Contents03 St Andrews Partners Our approach to investing in

emerging markets

04 Stewardship

05 Updates - Views on China - Global Emerging Markets update - Latin America update

13 Stock profiles

14 Significant portfolio updates

16 Proxy voting

This document is a financial promotion for the Stewart Investors Global Emerging Markets Strategy, the Stewart Investors Global Emerging Markets Leaders Strategy and the Stewart Investors Latin America Strategy intended for retail and professional clients in the UK, professional clients in Switzerland and professional clients elsewhere where lawful.

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 strategies invest in assets which are denominated in other currencies; changes in exchange rates will affect the value of the strategies and could create losses. Currency control decisions made by governments could affect the value of the strategies’ investments and could cause the strategies to defer or suspend redemptions of shares.

• Specific region risk: investing in a specific region may be riskier than investing in a number of different countries or regions. Investing in a larger number of countries or regions helps spread risk.

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.

All information included in this document has been sourced by Stewart Investors and is displayed as at 31 December 2020 unless otherwise specified and to the best of our knowledge is an accurate reflection as at this date.

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

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

Our approach to investing in emerging marketsOur core investment philosophy has not changed since 1988.

Our focus is simply on owning the best companies we can find, where we believe a business is governed effectively and in the interests of all stakeholders, and where valuations are acceptable.

We obsess about the people who own and manage the companies we invest in. Backing the wrong people is a far quicker, and certainly more permanent way, of losing money than paying the wrong price (although we don’t like paying too much either).

Emerging market indices have never been our starting point for portfolio construction. By their very nature, they are collections of big companies and popular companies, not necessarily of what we believe are high quality companies.

ESG is not a screen added to an investment process, it is a core part of our philosophy. We spend a huge amount of time looking at a company’s treatment of employees, the environment and suppliers. We do this not only because strikes, environmental shut-downs and bankrupt supply-chains hurt profits, but also because a company mistreating one stakeholder is likely another day to mistreat others – and, eventually, us as minority shareholders.

Risk to us is losing our clients’ money not underperforming a benchmark.

Globalisation means there are more and more companies listed outside emerging markets that make the majority of their money in emerging markets. We have always been happy owning companies listed outside GEM if we think they are good investments for our clients.

The companies that we invest in do not divide their activities according to market indices categories and nor should we as long-term investors. We know we cannot predict economic futures but we can try not to be on the wrong side of stock market history.

Our investment teamAlex Summers

Chris Grey

Dominic St George

James Fearon

Joanna Terrett

Laura Fyfe

Matthew Gill

Millar Mathieson

Tom Prew

St Andrews Partners Q4 Update 2020

04

Good stewards are more than good managers. They are more than good leaders. They are custodians who understand and carry out their responsibilities with integrity and respect for the people who rely on them and on whom they rely, and for the society and environment around them.

Good stewardship is about looking after our clients’ savings as much as we’d look after our own – with good judgement and extreme care and consideration. It’s also about understanding our rights and responsibilities in respect of the companies we have a share in.

In the companies we invest in, good stewardship relates to owners and managers with both the competence and desire to make good long-term decisions on behalf of the businesses they run.

In our view, management transparency, a diversity of views – such as a range of social, cognitive and ethnic backgrounds and good gender representation – a willingness to learn from mistakes, and a keen consideration for customers, their workforce, suppliers, the wider community and the environment, are all good omens with regard to the question of stewardship.

We rule out the majority of companies Poor governance, a lack of integrity, a willingness to take shortcuts, a failure to take responsibility for social or environmental impacts and a company culture which reflects this are reasons we rule out many companies.

We are all prisoners of recent history, which often has very dangerous consequences, both for companies and for investment managers. As stewards of capital, we aim to extend our historical perspective as far as we can to prevent us becoming too enthusiastic or depressed.

Our approach to ESG For us, ESG is not a screen added to an investment process, it has always been a core part of our philosophy. Measuring environmental and sometimes social impact has come a long way in the past ten years; measuring ‘integrity’, (i.e. what the ‘G’ of ESG should truly mean) is just as challenging today as ever. We do not and shall not own businesses whose major source of income is tobacco, arms/defence or gambling.

Stewardship

05

Q4 Update 2020 St Andrews Partners

Can you please remind us why your portfolios have such little direct exposure to China? It is difficult for us to allocate substantial client capital to the Chinese stock market because we struggle to identify companies with acceptable corporate governance. Where we do find companies of acceptable quality, valuations are often prohibitively optimistic. The result of this is that we have extremely low direct exposure in the global emerging markets (GEM) portfolios to China, although many portfolio companies have large and successful businesses in China that have been significant drivers of growth over recent years. We have substantial economic exposure to China through companies listed in Taiwan and Japan, as well as a number of multinational businesses.

Can you elaborate on your governance concerns please?We have never enjoyed investing in companies close to the commanding heights of any economy, especially in autocratic regimes where the dominance of the state often puts national interests first, ahead of that of minority shareholders.

In China, the role of the state and the Communist Party looms large in every company’s life. For us to decipher whether it is a headwind or a tailwind might be accomplished but establishing complete confidence that the direction of the weather doesn’t change is far harder. The recent debacle of Ant Group’s abandoned Initial Public Offering is an excellent example of this – it was billed as the world’s largest IPO and was cancelled with less than forty-eight hours’ notice.

Given the political history of China, there are very few businesses with transparent histories showing how family owners have behaved over extended periods. Companies and families often show their true colours only under economic stress which China has not, officially, faced for two decades. Even the pandemic did not interfere with official year on year GDP growth.1 This means there has still not been a tight spot where controlling shareholders get to choose between saving their own skin at the potential expense of minority shareholders and other stakeholders, or looking after all constituencies equally at the potential cost to their own net wealth. The Asian

Financial Crisis of the late 1990s remains a watershed moment for the integrity of families across South East Asia and Korea in particular; China has yet to have this litmus test under its mixed-capitalist model.

Most investors say they don’t believe Chinese economic statistics but the prevailing market valuations may give the lie to this claim. The economy’s apparent rude health also means too much capital is chasing too few consumers and too few ideas – the long term consequence, in our opinion, is that returns on capital will, on average, be unacceptably low.

Have there been any specific examples of where these governance risks have played out?The largest company by market capitalisation in China and GEM is a good place to start. China’s largest online retailer and ‘fintech’ behemoth, Alibaba, has a market capitalisation nearing US$1trn2 but as recently as 2011 may have demonstrated an imperfect approach to minority shareholders by lifting its online payments business out of the company into a structure controlled by the founder. There are several interpretations available for this corporate restructure – ours is the sceptical one. It is worth remembering that the largest minority shareholder at the time, described the transfer as having “occurred without the knowledge or approval of the board of directors or shareholders.”3 This very business is now called Ant Group. As referenced above, its IPO was pulled at the last minute shortly after the controlling shareholder was summoned to the regulator to explain public comments he made describing the Chinese banking system’s “pawnshop mentality”.

This isn’t the only reason we don’t invest in Alibaba. Its accounts are radically complex and much of the cash apparently generated by the core online retail business is reinvested in an ever more diverse range of investments – a stake in a Chinese electric vehicle maker for example.

In an effort to challenge our view towards some of these Chinese tech companies we recently commissioned a team of third-party forensic accountants to run their rule over the accounts. Their conclusion on Alibaba amongst other concerns is that the company’s “highly complex

Views on China

St Andrews Partners Q4 Update 2020

06

group structure comprising multiple variable interest entities (VIEs)”4 and significant related party transactions “would require to have an experienced analyst more or less full time on the stock if a deep and comprehensive understanding of the business and its financial representation were required.”4

We have always been wary of highly opaque corporate structures, be it in China or anywhere in emerging markets for that matter.5

What about social factors are they a risk too?In our view, the more embedded the likes of Alibaba and Tencent become within the Chinese economy, the more difficult it is for these companies to remain plausibly independent from the State. This isn’t necessarily unusual in emerging markets but when coupled with China’s surveillance state be it the monitoring of online data or the use of social credit ratings, there is clear reason for caution.

We are particularly uncomfortable with the involvement of listed companies in the well-documented curtailment of human rights, not least of the Uighur population of Xinjiang province. The data-gathering capabilities of several companies popular with foreign investors are crucial in this exertion of state control and we see it as a clear ethical risk. Ethical risks often become investment risks as and when conflicts emerge between government desires and a company’s narrower profit-seeking motives. It is an old-fashioned maxim of emerging markets investment to be wary of listed media companies because of the inevitability of eventual conflict with the powers that be. We would contend that the rule may be worth extending to those businesses for whom the personal data of a billion souls is their most valuable intangible asset.

Do you envision the underweight to China narrowing in the future?Although the present China allocation of our funds is low, we are very keen to own more Chinese companies if we can do so whilst maintaining our quality and in particular governance focussed investment philosophy. There are at least a dozen Chinese companies that at the right price we would like to own on behalf of clients, and we continue to work to find more.

Although difficult to contemplate at this stage of the Chinese bull market, it is of course possible that China’s weight in the index does not continue to rise uninterrupted forevermore. We well remember the apparently persuasive logic of how

a growing world could only ever lead to higher commodity prices – a view which imploded in 2008. Prior to this, a range of countries or sectors have had their moments in the sun. We consider it part of our job to avoid exuberance as much as it is to spot opportunities. We are not denying that China is and will continue to be a great economic power, we are simply saying that all opportunities have their price, and that the price has also to relate to the quality of the investment.

Can you please tell us about a couple of the Chinese companies you’re looking at and what is holding you back from buying them today?There is a soya sauce company (Foshan Haitian) that enjoys a track-record of steady growth and stable margins translating into healthy free cash flow. The business is genuinely privately run by a team of eight managers whose lives’ work this is and who have a substantial portion of their personal wealth invested in the company. Consistent profitability and an aligned owner, or as we often refer to them, a ‘steward’ are two key characteristics we look for in companies. Unfortunately, in our view the valuation leaves very little room for error – it is, approximately, 80x predicted profits for 2021, leading to a market capitalisation of US$80bn.6 We might compare that multiple to perhaps Unilever which trades at approximately 20x predicted earnings. Although, Unilever will likely have a more modest short term growth rate, it benefits from a far more diversified suite of products and a more diversified geographic range including plenty of fast growing emerging markets.6

Also on the list is Shenzhen Inovance, an engineering company. Amongst other things, it makes integral parts for elevators. It appears to have a clean history, when its nineteen founders left global engineering company Emerson to set up this business in 2003.7 Whilst we can understand the generous government subsidies the company receives, it is harder to enjoy the nearly 200 days it takes for customers to pay their bills, a period twice that of typical non-Chinese industrial businesses.7 These two considerations – both of which we file under ‘quality’ make it challenging to pay approximately 80x profits for the business. Valuation has to be cross-referenced with quality, not only estimations of potential short term earnings growth.

07

Q4 Update 2020 St Andrews Partners

Can you tell us about a company in the portfolio that has a particularly strong China business?A more recent addition to some of the portfolios is Groupe SEB, a French listed cookware and small kitchen appliances company best known for the Tefal brand. The company is controlled by a long-term and competent French family dating back well prior to the company’s listing nearly 50 years ago.

The key reason for investing in the company is SEB’s 80% ownership of Zhejiang Supor, China’s market leader in cookware, easily their largest single country exposure, enjoying strong growth. The Chinese business also serves as a key manufacturing hub for the rest of the group, providing an additional income stream.

The valuation differentiation of Supor relative to the French parent means we are effectively paying for the Chinese business and getting the rest of the businesses for free, an added benefit given these are decent and profitable businesses in their own right. We also get to own the same shares as the controlling family – we always prefer a seat at the same table where possible.

In general terms how would you comment on the portfolio positioning?We enjoy owning companies which grow but we prefer paying a price we consider to be reasonable on a quality-adjusted basis. We don’t consider ourselves purist “value” investors by any stretch of the imagination, but do concede that maintaining discipline around valuation may be increasingly uncommon in the current environment of high valuations for conceptual business models and a belief that interest rates will be low not only for longer but perhaps for ever.

We also believe in a degree of diversification, both by sector and by country. We believe that the current index positioning is extreme in terms of country concentration (China) and probably sector concentration (technology related) too.

As a final and deliberately unscientific anecdote – we would ask the question: “do you believe, on a ten year or more view, that Alibaba is worth more than the entirety of the Indian stock market?” We don’t, and I doubt many people would. But the wonders of index construction do currently value the emerging world in this way.

Tom Prew & James Fearon

November 2020

1 Source: World Bank

2 Market and company data. Nov 2020

3 Source: FT. To access the FT links you need to be a subscriber to the FT Online.

4 Forensic Accounting Review, July 2020

5 Relevant articles:

https://www.ft.com/content/159a1c10-7cf2-11e0-a7c7-00144feabdc0

https://bits.blogs.nytimes.com/2011/05/12/yahoo-squabbles-with-alibaba/?mtrref=undefined&assetType=REGIWALL

6 Market and company data. Nov 2020

7 Company data as of Nov 2020

Source for company information: Stewart Investors investment team and company data.

St Andrews Partners Q4 Update 2020

08

For a moment towards the end of Edinburgh’s summer in 2020, a single Chinese internet stock was ‘worth’ more than the entirety of corporate India to the compilers of the MSCI Emerging Markets (GEM) index.1* At this stage of a narrowing bull market, large index weights become a reliable guide to the top ten holdings of many funds and by definition the endless billions of dollars held in ETFs and other passive vehicles which have no other source of ideas. This index is merely a comparator benchmark for us, and not something we need to mirror. This is clearly demonstrated across all our portfolios, which have active shares well in excess of 90%.

Although the point above is highly unscientific, it feels like a good illustration of the level of mania affecting a subset of companies. This update intends to spend more time discussing our Indian investments, but for those interested, the Chinese stock in question is Alibaba. The excessive internet stock valuation was associated with the initial public offering (IPO) of Alibaba’s financial associate, ‘ANT’, a business we have written about in the past - in our opinion, it was the subject of at best a questionable transaction and at worst a heist orchestrated by management that no follower of the lesser-spotted ‘G for Governance’ in ESG would easily forgive. This was as recent as 2011. It was known as ‘Alipay’ at the time and the contemporaneous opinions of shareholders Yahoo and Softbank are easily found online. In the final telling, the IPO of ANT was cancelled with less notice than a British Christmas. One version of the tale suggests there was a regulatory issue that legions of investment bankers and their lawyers failed to spot. The other pins it on a personality clash between the powers that be and the founder of the company, a gentleman who on paper relinquished any formal management or governance roles more than a year earlier.

An investor can of course own both a diversified group of Indian companies and a handful of hot Chinese internet stocks. We happen to invest a lot of client money in the former and nothing in the latter. Client portfolios have roughly 30% invested in Indian companies. Across all strategies, we hold shares in twenty different Indian companies. Given our bottom-up investment philosophy this

means there are twenty stories behind the individual investments, many going back through decades of contact with the owners and managers of the businesses. Leaving the stories aside for a moment, here are three qualities we think our Indian holdings and the country’s equity market possess.

Ownership – ‘we know who you are’ Of our clients’ twenty holdings, not a single one is state-owned, nor were any a material consequence of privatised state assets. Fifteen have an identifiable controlling shareholder located in India. This might be an established family and their third-generation business, a first-generation entrepreneur, or a charitable foundation with a century of history. We have been privileged enough to meet all fifteen of them regularly over the years. It is transparent how many shares they own, through what vehicles, and whether any shares are pledged to banks as collateral. India, on the whole, is pretty good at this.

‘Certainty of ownership’ sounds like it should be a given for any listed company in GEM, but this is frequently not the case. The controller of a state-owned company changes with every election (or politburo reshuffle). Russia has large companies owned by proxies, and much of the Middle East has yet to delineate government vs royal family vs private individual ownership. There are dozens of multi-billion dollar businesses in GEM owned offshore, Indonesian and Chinese billionaires running their empires with a light touch from lightly-taxed Singapore being a case in point. South Korea continues to improve its ownership rules but the snail pace progress means corporate structures of large business groups remain complex with cross or even circular holdings common. China, as usual, is its own story – aside from the Variable Interest Entity (VIE) structures in which control of entire businesses rests on a handshake, there is sometimes an odd desire to avoid named ownership. The Financial Times, still full of investigative beans after their Wirecard exposé2, recently suggested that a hot Chinese internet stock (this one worth merely US$200bn after trebling in market value this year*) was in part owned by a 69-year-old lady from a region of China known for its goji berries,

Global Emerging Markets update

09

Q4 Update 2020 St Andrews Partners

a state of affairs related to the founder signing over his entire holding prior to IPO.3 Whether this is true of the company in question isn’t especially important to us, but certainty as regards what we do own for clients definitely is. Of the five Indian companies without an identifiable controlling domestic shareholder, three are subsidiaries of multinationals (one of which has a family controlling it, another a peculiarly Swiss golden share arrangement). Of the remaining two, one has a cabal of founders owning an influential but not controlling stake of just under 10%, the other is the only company with a 100% free float, albeit with as strong a culture and as longstanding a management team as we’ve seen anywhere.

Diversity and some great export businessesWe would find it unduly risky allocating the full 30% of client funds to rupee-earning domestic businesses – indeed, having exposure to only the Indian economy would place clients at great risk of local wobbles and crises. Our allocation is fairly evenly split between domestic and export focused businesses. India is not a manufactured goods exporter in the tradition of the fast-growing Asian economies of the 1990s or China and Vietnam today, yet there are amazing businesses to own which take advantage of India’s strengths in ‘human capital’ (a ghastly term) without too much exposure to the occasional domestic weaknesses. The pharmaceutical businesses India has developed are hugely impressive but it is the IT export sector which accounts for nearly half our portfolio allocations. Indian IT companies reliably turn hard-currency revenue, not only into accounting profit, but into free cash flow readily returned to owners of businesses. Their capital expenditure is miniscule as their assets are the brainpower of their workforce and clients’ trust that they can get a job done without blowing up systems or leaking data. As a result, the accounts are as simple as any business we could imagine, which we see as an enormous positive. The companies have evolved – at the close of the 20th century they were making their name fixing the ‘millennium bug’ on the cheap; our largest holding now runs a substantial portion of the UK’s life insurance industry from behind the scenes on multi-year contracts. One reason the companies leave a high margin for distribution to shareholders is the quality and time horizon of their owners, preventing capture of profits by senior and middle management. We smile when we imagine the CEO of a well-known Western IT and consultancy business offering to save a client money when his pay is well documented as closing in on US$20m per year, almost ten times what an Indian company of broadly equivalent market value pays its CEO.

The other half of our Indian allocation is more domestically focused. Again, there are many high-quality companies. We own locally-owned companies and multinational subsidiaries operating in the consumer sector, selling noodles, tea, hair oil, soap and beer. The brewer is run by a family-controlled multinational having been wrestled, thanks to a bankruptcy code enlivened under Prime Minister Modi, from an Indian tycoon exiled in London after his foray into airlines turned a large fortune into a small one. Under improved management, we are backing the brewer to follow the example of the beer industry in China and elsewhere in GEM through ‘premiumisation’ (an horrendous industry word), i.e. selling high volumes of branded beer for branded margins while transferring substantial sums to the state and federal coffers.

A less risky political economy than many (which is not to say it is perfect)We are not top-down investors, but do believe that India’s moderately functioning democracy, via the shock absorbers of elections and the sloth of the democratic process, is less risky to investors than autocratic regimes. Being caught in the crossfire of an autocrat determining how tall a poppy needs to be before the scythe cuts it was irrecoverably destructive for shareholders of Yukos4 in the early 2000s and is likely to be risky elsewhere in GEM in the future. It may (or may not) have accounted for the ANT debacle at Alibaba already. Market commentators often have a heart-warming faith that autocrats don’t wish to scare foreign investors or harm the wealth of their own stock market investors and, typically, they don’t. But when the choice is of regime survival or keeping bull markets going, the decision is very easy for the powers that be. Aside from the autocracy vs. democracy conundrum, we note that the Indian government has loosened its grip on ownership of the economy. State-owned banks are losing market share (not the case in China or Russia), airports were privatised long ago (unlike a good deal of GEM), the oil and gas industry has opened up, including actual hydrocarbon production (Mexico is miles behind, others haven’t even started), and telecoms is a private sector dominated free for all (unlike Singapore for instance, or China, whose listed but state-controlled telecoms are now on a US sanctions list). India has, to date, resisted the temptation to ‘reimagine’ its state-owned companies through a private-sector lens, something Singapore uniquely accomplished through Temasek5 but which has by and large failed everywhere else (notably Malaysia).

St Andrews Partners Q4 Update 2020

10

And finally… for the sake of balanceIndia is far from perfect as are its companies. There are, as in most of GEM, political and economic risks. A particular area where these combine with global climate risks is water – India shares water and unsettled land borders with two nuclear-armed neighbours, and skirmishes have been fought with both recently.

There are also questions of stock market valuation – Indian equities are, in many cases, very fully valued. Full values mean future returns ought not to be stellar but should focus an investor’s mind on what exactly they are paying up for. Returning to the somewhat forced ‘diversified India vs hot Chinese internet’ choice suggested above, an investor can decide whether the ‘who’ of an investment is what helps them sleep at night (our choice), or is a risk factor all of its own voluntarily entered into (with a little persuasion from the index).

Tom Prew

January 2021

*These results refer to the past. Past performance is not a reliable indicator of future results.

Source for company information: Stewart Investors investment team and company data.

1 Source: MSCI.

2 Source: https://www.ft.com/content/745e34a1-0ca7-432c-b062-950c20e41f03. Wirecard is an insolvent German tech company where executives are accused of criminal irregularities.

3 Source: Financial Times.

4 Yukos was a Russian oil and gas company acquired by an oligarch in the 1990s.

5 Temasek is an investment holding company of the Singapore government.

11

Q4 Update 2020 St Andrews Partners

By the end of 2020, Latin American markets (as measured by the MSCI Latin America index) had fallen by just under 20% in US$ over the year.1 Brasil, by far the largest market, fell a little more than 20%, even after a rapid last minute bounce.1 At one point, the Brasilian market (and many non-Brasilian companies too) had fallen by more than 50% in US$ since the beginning of the year.1

Our portfolio has preserved capital acceptably in the earlier part of 2020, although some of those relative gains have been given back more recently. We don’t expect to outperform rapidly rising markets and the rebound has been sharp, probably too sharp in many areas. Covid-19 made for a poor year for some companies we have long owned and which probably would have been defensive in every other scenario other than a lockdown pandemic (most obviously our large position in a Chilean brewer). It has also catalysed extraordinary gains in market value for some companies we find difficult or nearly impossible to own – some online retailers which despite huge market capitalisations have business models we consider either unproven or based more on quick-fire subprime lending than a genuine technological, logistical or retailing edge.

Our primary concern over the sharpness of the rebound stems from the significant deterioration in government finances in much of Latin America in 2020. Although the little table of numbers at the back of the Economist shows not one of forty-two countries running a balanced national budget in 2020, belief is everything when borrowing money, and we live in a time of suspended disbelief.2 We are amazed that in 2020 ‘only’ three countries had some form or other of default - Argentina, Lebanon and Zambia.3 We say some form or other as the term is not only emotive but almost always disputed, sometimes for years, by lenders and borrowers, and sometimes both.

Those in glass houses ought not to throw stones (the UK government deficit is a ‘world-beating’ 19.6% of GDP deficit according to the Economist) but, when we’re not worrying about matters closer to home, we worry about Brasil.4 Debt to GDP isn’t quite 100% at the time of writing but could be by the time of reading, given a deficit of roughly 15% of GDP.5 Regardless of whether Modern Monetary Theory (also known less officially as the ‘Magic Money Tree’) works for the complacent West and its belief in the powers of

their ‘reserve currencies’, there are few commentators seriously suggesting that Brasil can print money indefinitely.

Dry economic statistics aside, we have been watching – as ever – the behaviour of individuals and corporates we admire. Amidst the market bounce and accompanying wave of initial public offerings (IPOs), there is a growing dash for the exit. One of the larger and more credible IPOs this year was a September offer for, of all things, a pet shop business. The valuation was too rich for us but more interesting was the fact that the offer was 89% secondary (existing shares), with a well-reputed private equity firm the seller.6 We believe there is nothing wrong with companies selling old shares rather than issuing new ones at IPO, and nothing wrong with private equity taking profits – it is just unusual seeing such a large leap for the exit so soon.

Another group with a reputation for good timing are the families behind what is now called Itaú Unibanco, a huge private sector lender in Brasil. Some time ago, it made an investment in a wealth advisor seeking a route to gain control. The business it invested in has been managed extremely well and its market capitalisation exceeds US$20bn, a little more than Hargreaves Lansdown and St James Place combined (two UK businesses which have similarities and operate in a far larger, albeit more competitive, market).7

Whether because of valuation or one or two regulatory bumps on a possible route to control or both, Itaú Unibanco is now exploring ways of selling or spinning off its stake in the fund manager, indeed, so keen was it to realise some value that it sold nearly US$1bn worth of shares in December, prior to working out a longer term future. Clearly we are not in the boardroom of the bank making decisions about the wealth advisor, nor of the private equity firm selling its pet food shop – but after spending years doing our best to work out who is credible in Latin America, it would be odd to ignore them.

We expect life will be less tricky in some other parts of Latin America and are reminded of the motto shared by the Scouts and football team Aston Villa – ‘Be Prepared’. Prior to the pandemic, Chile had the 4th lowest debt to GDP of any OECD country, a figure just below 40% and ‘clean’ of some of the complexities of other emerging market countries (e.g. the roughly US$100bn debt

Latin America update

St Andrews Partners Q4 Update 2020

of Mexico’s 100% state-owned oil company Pemex).8 Entering the crisis with a low level of debt not only gives a country such as Chile more flexibility of action, but also reduces the medium-term risk of sudden changes of policy – for example taxes. Many companies operating in Turkey have been paying what was intended to be an emergency ‘Special Consumption Tax’ since a severe earthquake in 1999, and we expect many Latin American and emerging market countries (not to mention Western nations) will have to raise taxes as soon as is practicable. Those countries with the shakiest finances and lowest credibility will need to find the most money – large corporates, and the foreign portfolio investors often holding shares in them, are clear targets.

The portfolio is positioned defensively and is geographically far more diversified than the Brasil-dominated MSCI Latin America comparator index. We have nearly 30% of client funds invested in Chile and about the same again in Mexican corporates, if we allocate a large portion of the value of Spanish-listed bank BBVA to our Mexican holdings There is a significant allocation to consumer sector businesses, such as convenience retailers, and we retain a large position in Chile’s dominant brewer – it had a miserable year but is a net cash business, so is likely to have been as relaxed about the crisis as a severely affected business could be (many other brewers have been highly geared by their management teams, most notoriously the global brewer ABI which carries tens of billions of hard currency debt, backed by both soft and hard currencies). We have holdings in high quality businesses outside the most researched countries of Brasil, Mexico and Chile – we own two Colombian businesses for clients, a Costa Rican holding company, and have increased our holdings in Peru in the last year. On the surface, Peru is politically unstable, judged by the various sagas affecting presidents past and present, but beneath this is a country with low levels of debt and a desire to emulate many of the private-sector initiatives which helped Chile rise above the lower-middle income trap which appears to have held back Mexico and Brasil.

Tom Prew

January 2021

Past performance is not a reliable indicator of future results.

Source for company information: Stewart Investors investment team and company data. This stock information does not constitute any offer or inducement to enter into any investment activity nor is it a recommendation to purchase or sell any security.

1 Source: MSCI.

2 Source: the Economist.

3 Source: https://www.ft.com/content/35c58b5f-f890-4390-967a-28c0a0a1fb50

4 Source: www.imf.org

5 Source: https://www.fitchratings.com/research/sovereigns/fitch-affirms-brazil-at-bb-outlook-negative-18-11-2020

6 Source: Santander who were an investment bank on the deal.

7 Source: company website.

8 Source: https://www.ft.com/content/5cd98a4a-a83e-11e9-b6ee-3cdf3174eb89

12

13

Q4 Update 2020 St Andrews Partners

Stock profilesSamsung C&TCountry South Korea

DescriptionHolding company of the Samsung Group, controlled by the Lee family

Market cap US$21.0bn

Investment rationale• The company’s value is derived from its stake in

Samsung Electronics, a world-class franchise with an especially good memory chips business, which pays a sizable dividend back to Samsung C&T each year.

• They also own 43% of Samsung Biologics, a drug contract manufacturer for global pharma companies which requires a large amount of capital investment. The size of the capital investment over many years provides strong barriers to entry from competition.

• The company is trading at a significant discount to the listed businesses in which it owns stakes and is backed by a robust balance sheet with no debt, as well as a substantial amount of cash at Samsung Electronics.

Steward• The governance of the Samsung Group has always

been a concern for the team and a frequent topic of debate dating back many years.

• We take comfort from recent improvements, including the appointment of some genuinely independent board members, replacing family members, the cancellation of treasury shares and an increased dividend pay-out ratio from 2017.

• Although there is still room for improvement, by owning C&T, we are aligned with the Lee’s family shareholding, which should partly mitigate governance risks.

Franchise Owns stakes in a number of high quality businesses including Samsung Electronics, Samsung Biologics and Samsung Life.

Financials Robust balance sheet with no debt.

Risks• Corporate governance – despite promising signs

there are still risks associated with corporate governance in South Korea.

• High valuation of Samsung Biologics – a significant fall of the share price could be negative for the asset value and share price of Samsung C&T.

ItaúsaCountry Brasil

DescriptionConglomerate and holding company for the Setubal/Villela family

Market cap US$18.7bn

Risks• Holding company discount continues to be applied

to the valuation. • The company makes a poor investment which

dilutes the quality of the conglomerate.• Asset quality at the bank deteriorates.

Investment rationale• The company holds a 37% stake in Itaú Unibanco, an

attractively valued and well-run bank. Despite other modest-sized investments in consumer goods and infrastructure businesses, the stake in Itaú Unibanco is by far the company’s dominant asset, representing just over 90% of net asset value as of the end of 2020.

• The holding company currently trades at a modest discount to the market value of its listed assets.

Steward• We have admired the conservatism of the Setubal/

Villela family for a long time, primarily evidenced in their ability to grow the bank profitably without compromising on asset quality through booms and busts in Brasil.

• The merger with Unibanco (completed in 2008)—which saw the family partner with the Moreira-Salles family in a newly-established, jointly-controlled holding company—has been excellently managed, with the two families collaborating on two other of Itaúsa’s investments.

• The family has not been aggressive in diversifying outside the vehicle, but have consistently returned profits to shareholders in the form of dividends.

FranchiseItaúsa is a holding company with a collection of quality investments: • Itaú Unibanco (37% stake) – a high quality

Brasilian bank.• Alpargatas (29% stake) - a footwear brand best known

for its Havaianas flip-flops, which was acquired in 2017 jointly by Itaúsa and the Moreira-Salles family.

• Duratex (37% stake) - a manufacturer of wooden MDF panels for domestic and export. It also owns brands making metal fittings and ceramics and has been held in Itaúsa since 1975.

• Nova Transportadora do Sudeste (8% stake) - a collection of pipelines sold by Petrobras to a Brookfield-led consortium as part of its ongoing privatization programme. This modest stake has been held since 2017.

Financials• Strong balance sheet with a low level of debt.

St Andrews Partners Q4 Update 2020

14

Significant portfolio updatesGlobal Emerging Markets Leaders

During the quarter we bought South Korean holding company Samsung C&T. The company’s value is derived from ownership stakes in Samsung Electronics, a world-class memory chip franchise and Samsung Biologics, a drug manufacturing business with high barriers to entry. The governance of the Samsung Group has been a frequent topic of debate amongst the team, dating back many years. We have, however, been encouraged by recent improvements, and in owning the de-facto family control vehicle, our interests should be aligned with the Lee family.

We bought banking group Komerční banka which provides banking services in the Czech Republic. Komerční is an attractively valued, well-capitalised bank that has paid a reasonable dividend historically and operates in a country which has been a relatively stable banking environment. Société Général is the bank’s major shareholder which provides an increased level of oversight.

We also bought South African gold miner AngloGold Ashanti which is principally focused on sub-Saharan Africa. The company has developed a positive safety record at its mines and sold assets, exiting some difficult jurisdictions (Mali) and some permanently challenging assets (South Africa). The two largest contributors to the company are now in Tanzania and the Democratic Republic of the Congo, with other assets in Ghana, Australia, Brasil and Argentina.

There were no complete sales over the quarter.

Global Emerging Markets All Cap

During the quarter we bought Taiwanese technology company Accton Technology which provides network switches and other equipment to the giants of cloud computing - Amazon, Google and Facebook. The company has been conservatively and competently managed historically, with a record of cash generation and a consistently sturdy balance sheet. It has substantial opportunities ahead in cloud storage and edge computing.

Edgar Masri, an industry veteran, was hired as an adviser to the board a couple of years ago before joining as CEO at the start of 2020. It is the first time the founders of the company, who are all engineers rather than business people, have handed over responsibility to a proven manager. We expect that the new CEO will successfully reinvest cash flows from the existing business to grasp new opportunities.

We also bought Philippine industrial company Concepcion Industrial Corporation which manufactures heating, ventilating and air conditioning products. We are positive about the solid ownership structure and long-term family commitment. The company is cash generative, has a conservative balance sheet and operates in a market where it can earn healthy margins. We believe there is a significant growth opportunity for the company due to the low usage of air conditioners and refrigerators in the Philippines. Concepcion also trades on an attractive valuation.

We sold Indian consumer group Godrej Consumer Products on valuation concerns. We believe the company remains a high quality consumer franchise.

Latin America

Over the quarter we bought Chilean banking group Banco de Crédito, the country’s largest bank by assets, which is majority owned by the Yarur family. It is the most geographically-diversified Chilean bank in terms of asset base. The bank has a strong culture of conservatism and long-termism, coupled with consistently strong asset quality.

We bought Brasilian dental insurer, OdontoPrev, which is a low capital intensity, high-return business with a strong balance sheet. The company is 50% owned by Banco Bradesco, a well-managed, high quality Brasilian bank, with the board dominated by directors associated with Bradesco. As of 2019, Odontoprev had 5m corporate customers, 1.1m small and medium enterprise customers and 1m individuals.

15

Q4 Update 2020 St Andrews Partners

We also bought Peruvian banking group Banco BBVA Perú which is the Peruvian subsidiary of Spanish parent BBVA. The bank is the result of a merger of Banco Continental with Banco Bilbao Vizcaya and Grupo Breca in 1995 and is now the second largest in the Peruvian market. We believe this is a well-managed bank backed by a high quality parent company in BBVA which we also own for clients.

There were no significant complete sales over the quarter.

Looking back on 2020

• The disconnect between the health of the global economy, in particular of national balance sheets, and stock markets, continued to widen during 2020 as the impact of the pandemic unfolded.

• Governments globally accelerated borrowing to support consumption, although there are signs much of the stimulus has bought stocks and shares rather than food and essentials – stock markets in many countries are at or near record highs.

• Regardless of whether or not governments of the Western world can borrow and print their way out of this recession, we are sure that very few global emerging markets (GEM) governments have this level of credibility. We are extremely worried about several GEM economies and are as keen as ever to look for harder currency revenues (e.g. higher-quality exporters) and businesses with pricing power (e.g. brands, genuine intellectual property), while avoiding businesses which may be asked to play a role in controlling the effects of devaluations or help balance budgets (e.g. regulated businesses, financial sector companies, lightly-taxed tech companies).

• Our conservative investment style has been out of kilter with the prevailing winds of the market. This is, perhaps, one of the first recessions where traditionally defensive businesses (e.g. convenience stores, brewers) have underperformed, and one of the first recessions where conceptual businesses struggling to turn modest, if any, revenue into cash flows, have outperformed (e.g. electric vehicles, online retail). By and large, we are sticking to our guns, believing that ultra-low interest rates and government stimulus can delay but not avoid the eventual reconnection of share prices with the actual profits and cash flows generated by businesses.

• As ever we place a huge premium on the integrity of those owning and managing the businesses which we hold for clients. Meanwhile, the world claims to have awoken to ESG – in our opinion, much of what is happening is merely a scoring process for a self-serving narrow definition of ‘E’ (Environment) and very little if any progress on ‘G’ (Governance). The clearest GEM examples are seen in China where a governance issue clear to those interested in corporate histories played a part in the cancellation of what would have been the world’s largest initial public offering.

• We make no prediction for 2021 but note three things: first, that many valuations are at record highs; second, that the debt of many GEM governments, not usually trusted to borrow, is at or approaching record highs; third, that the GEM universe, as defined by its most popular index, offers investors dangerously little diversification, given its capture by large and in many cases unproven Chinese businesses, as well as some high quality but extremely generously-valued technology sector businesses.

Source for company information: Stewart Investors investment team and company data. Data shown is for a representative Stewart Investors account in each strategy shown above. 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.

St Andrews Partners Q4 Update 2020

16

If you would like a full list of all proxy voting for the companies held in the strategies please contact us directly.

Further information on our Stewardship and Corporate Engagement policy is available online

https://www.stewartinvestors.com/content/dam/stewartinvestors/pdf/global/si-corporate-engagement-policy-sep-2020-final.pdf

During the quarter there were 183 company resolutions to vote on. On behalf of clients, St Andrews Partners voted with management on all resolutions.

Proxy voting by country of origin

20% South Africa 19% India 15% United Kingdom 10% Brazil 9% Bermuda 9% Nigeria 7% Australia

2% Bangladesh 2% Jersey 2% Pakistan 2% United Arab Emirates 1% Mexico 1% Philippines 1% Virgin Islands

Proxy voting by proposal categories

32% Board related 25% Compensation 13% Mergers & aquisitions 10% Capital management 8% Audit/financials 5% Changes to company statutes

Proxy voting

Important information This document 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 in this document 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 document.

The distribution or purchase of shares in the funds, or entering into an investment agreement with Stewart Investors may be restricted in certain jurisdictions.

This document 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 document 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 document.

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 document 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 document 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 KingdomThis document is a financial promotion. In the United Kingdom, this document 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.

Other jurisdictionsIn other jurisdictions where this document may lawfully be issued, this document is issued by First Sentier Investors International IM Limited which is authorised and regulated in the UK by the Financial Conduct Authority (registration number 122512). Registered office 23 St. Andrew Square, Edinburgh, EH2 1BB number SC079063.

StAP-QIR-Q420-UKCH

Contact details

info@stewartinvestors.com stewartinvestors.com

Edinburgh23 St Andrew Square Edinburgh EH2 1BB United Kingdom t. +44 (0) 131 473 2900

LondonFinsbury Circus House 15 Finsbury Circus London EC2M 7EB United Kingdom t. +44 (0) 207 332 6500

Singapore58 Duxton Road 2nd & 3rd Floor Singapore 089522 t. +65 680 59670

SydneySuite 10, Level 3 13 Hickson Road Dawes Point Sydney NSW Australia 2000 t. +61 2 8274 8000

Copyright © (2021) Stewart Investors. All rights reserved.