ScotGems (SGEM), the global emerging markets sector trust, reported annual results to 31 December 2020. During 2020, the share price rose by 2.1% and the NAV fell by 1.3%. This compares to a rise in the MSCI emerging markets small cap index of 8.5% and a fall in the MSCI emerging markets ex Asia index of 15.3%. SGEM’s discount narrowed from 18.4% to 15.6%.
Lower exposure to strong 2020 markets than the MSCI indices
SGEM noted that the aggregate MSCI emerging markets small cap index weightings in the North Asian markets of China, South Korea and Taiwan now amounts to approximately 50%. The corresponding trust exposure to these markets is a much lower figure of near ten per cent. These three markets performed extremely well over the period — partly as they have high exposure to the information technology sector and partly because of their earlier recovery from COVID-19.
SGEM’s manager said that “our conservative investment style has been out of kilter with prevailing market winds. This has been a rare recession where traditionally defensive, cash-generating and dividend-paying companies have underperformed. Meanwhile more conceptual and speculative businesses, particularly those linked to electric vehicles and online retail, have achieved ever higher valuations. The market’s apparent conviction that ultra-low interest rates are permanent has placed a huge premium on ‘jam tomorrow’ stock market sectors. The real risk for many of these expensive, cash-absorbing companies is not their valuations, it is whether they will ever become profitable and pay dividends at all. We often come across market niches where a multitude of companies are priced on a ‘winner takes all’ rating, but where there can only be one winner. Backing each horse in a ten-horse race is not a money-making strategy if every horse is already priced as the odds on favourite. While we are certainly not oblivious to the internet’s power, both in terms of growth acceleration and business model destruction, we continue to focus on running a ‘jam today and more jam tomorrow’ portfolio of well-run, soundly-financed and steady growth companies.”
SGEM: ScotGems’s disappointing performance over 2020 reflects low exposure to China, South Korea and Taiwan
I’d add that poor stock selection must be a factor too