Fundsmith Emerging Equities’S (FEET’s) annual results to 31 December 2020 saw it deliver a total NAV return of 20.7% and a total share price return of 29.1%. FEET’s benchmark, the MSCI Emerging and Frontier Markets Index, returned 14.4%.
Indian stocks feature heavily in top performers
Chairman, Martin Bralsford, said: “The investee company portfolio benefitted from its holdings in businesses that demonstrated a high level of resilience in the COVID-19 pandemic. In addition, the portfolio’s greater concentration, a reduced weighting in listed multinational subsidiaries, its underweight exposure to frontier markets and its higher weighting to healthcare and technology sectors were all key drivers of performance. Nevertheless the compound annual return of 6.1% since inception remains below our aspiration.”
The manager’s report noted: “In 2020, the top two performers, MercadoLibre and Foshan Haitian, were also in the top five in 2019. Both MercadoLibre and Foshan Haitian continue to execute well on their strategies. Although we touch on the Covid-19 situation later and its implications for the stocks in the portfolio, both MercadoLibre and Foshan Haitian are well placed to benefit from the three main trends we believe the pandemic will dramatically accelerate – digitalisation, formalisation and consolidation. MercadoLibre is an obvious beneficiary of the first of these whilst Foshan Haitian is likely to benefit from shifts towards formalisation and consolidation.
MercadoLibre’s management believe that the pandemic has accelerated growth by ‘maybe three to five years’. The Covid-19 outbreak led to a sharp increase in demand for home shopping, and Latin America remains an embryonic market for digital retailing. Even if the most optimistic estimates bear fruit and e-commerce doubles its penetration over the course of 2020, it would only account for around a tenth of retail sales, a significantly smaller percentage than either developed markets or China. MercadoLibre is well funded following both the recent PayPal investment and private placement issuance, and this will allow it not just to build its core payments and e-commerce platforms but to develop a broader, market leading offer to customers. We are already seeing signs of a significant increase in the penetration of digital payments.
Foshan Haitian continued the progress it has made since its IPO. The company has a simple business model, to take market share in the fragmented condiments market in China. Its advantages come from production efficiencies, increasing brand recognition, distribution and a fragmented competition, quite often operating on only a local or regional basis. In a country where food scandals are common. Foshan Haitian is benefiting from increasing awareness of the importance of food provenance. The business continues to introduce both new products with a premium focus but also new categories.
The next three largest positive contributors to performance were all Indian stocks.
Info Edge owns leading internet portals for jobs and property classified ads in India. The company’s operating performance struggled in the light of the impact of Covid-19 on its recruitment market and this was compounded by a slowdown in the real estate market. In spite of this, the group’s share price performed strongly in the latter stages of the year in anticipation of a strong recovery from the pandemic and the potential IPOs of Zomato (India’s leading food delivery platform) and PolicyBazaar.com (India’s largest marketplace for health and life insurance); Info Edge owns meaningful stakes in both the businesses.
Asian Paints has seen a very strong rebound in decorative paint consumption, with volume growth back to double digits, since the pandemic, and has also seen market share gains from informal players. The company is expanding its business beyond decorative paints into other areas of home improvement, including furniture and furnishings. The business retains a strong relationship with its distributors and contractor base helped by its industry leading supply chain.
Dr Lal Pathlabs performed strongly in the year. Branded players in India account for just 10-15% of the overall diagnostics market in the country. The ability of major labs to offer Covid-19 tests has led to a significant increase in brand awareness. Dr Lal (as with its larger peers) now have the opportunity to consolidate a fragmented market at a faster pace and benefit from economies of scale.”
Proposed amendment to FEET’s investment objective and policy announced
Alongside this morning’s results, FEET announced the following, with respect to its investment objective and policy (for the first time since its launch). “The economies of the countries in which the company can invest have shown significant development over the period of almost seven years since the Company was launched. This has created new investment opportunities in sectors which lie near the boundaries of our current investment remit. The Company’s investment management team has identified a modest, albeit increasing, number of businesses which have the superior financial characteristics shared by our current portfolio holdings but in which our existing Investment Objective and Policy do not formally allow us to invest.”
FEET is proposing the following: “To invest in shares issued by listed or traded companies which have the majority of their operations in, or revenue derived from, developing economies and which provide direct exposure to the rise of the consumer classes in those countries” is broadened by adding at the end “or to the broader social and/or economic development of those countries”.
The announcement goes on to say that “our manager believes that adopting this change will result in the short term in an increase in the company’s investable universe by only around half a dozen stocks given the rigorous additional qualitative criteria which it applies as part of its investment process; but importantly the amendment will provide our Investment Manager with a broader range of potential investments over time as countries and their economic infrastructures develop.
Alongside this we are proposing a change to the company’s investment policy to reduce the expected number of investments in the portfolio to a range of 25 to 40 stocks, from the current 35 to 55 stocks. This move towards a slightly more concentrated portfolio, with the company holding the stocks in which it has the highest level of conviction, will still allow for the investment and management of assets in a way which is consistent with the objective of spreading investment risk.”
FEET: Fundsmith Emerging Equities significantly outperforms its benchmark and proposes amendment to its investment objective and policy