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Quality in Emerging Markets

by | Oct 16, 2021

Our Working List is our “inventory” of roughly 400 companies, fully vetted as quality names that we would be keen to own, provided valuations are attractive. With respect to Emerging Market (“EM”) names on our Working List, this has increased from 39 companies five years ago to 61 names today. When investing in EM, we are looking for individual companies that offer a unique advantage and merit being in the portfolio when compared to Developed Market (“DM”) opportunities, rather than investing simply to gain exposure to EM. Current EM holdings within our portfolios are:

These diversified holdings provide the portfolio, we believe, with enhanced quality and valuation characteristics evidenced by higher average projected ROE, lower financial leverage and a lower valuation (i.e. normalized price-earnings) than the portfolio in total. A brief description of our EM holdings’ competitive advantages is provided below.

In India, Adani Ports is the largest private port operator with 10 strategically located ports resulting in leading market share of 25% of India’s cargo market. The location of its ports, modern and efficient infrastructure, and end-to-end service from ports to warehousing contribute to it being one of the most profitable port operators globally. Ambuja Cements is India’s second largest cement company with a national market share of 16%. Cost leadership is achieved by locating efficient plants near the mines that provide raw materials, captive power plants and transportation infrastructure. Long-term growth prospects are attractive given India’s need to improve infrastructure and other factors. GAIL transports and markets almost two-thirds of the country’s natural gas. It possesses a nationwide pipeline network that has unrivaled scale advantage. Demand for natural gas is expected to expand in the years ahead and GAIL is positioned to be a key beneficiary of this secular growth. Housing Development Finance Corp Ltd (“HDFC”) is the country’s largest housing finance company providing mortgages to consumers where it has a strong, multi-decade underwriting track record in an underpenetrated loan category. Other key strengths are its wide distribution network and its reputation for excellent customer service. Maruti Suzuki is India’s dominant auto manufacturer with a market share of approximately 50%. Maruti stands out for their scale, dominance in mini to small-sized vehicles, trusted brand, a high degree of localization and the most expansive distribution network in the country. Growth is expected to come as incomes rise in India and vehicle penetration rates grow. UPL is one of the world’s largest manufacturers of crop protection chemicals (e.g., herbicides, fungicides and insecticides) focusing on off-patent products. It has built a broad product portfolio with 13,600 product registrations and an extensive global distribution network. Long-term growth is supported by both its large exposure to Latin America (a growing market for crop protection) and its leading position in the new biological segment. Zee Entertainment is one of India’s largest content creators and TV broadcasters, standing out as the only pan-Indian operator with 41 channels broadcasting movies, television series and music across 10 Indian languages. Its sustained leadership ratings across several regions attracts advertisers allowing it to better monetize content by adapting it across languages. Growth opportunities stem from the low penetration of cable-TV and internet within India.

In China, Alibaba is one of the largest e-commerce companies in the world generating over $1 trillion of gross merchandise volume with over one billion active users. The company operates platforms that connect merchants and consumers globally and has a wide range of internet platforms and infrastructure businesses including cloud computing, payments, logistics, media and entertainment. Our Chinese holdings are Hong Kong listed given the enhanced financial and regulatory disclosures and we still do not have any direct Chinese holdings.

In Brazil, Ambev is one of the world’s largest brewers, with market share of 60% in Brazil and strong market positions throughout Latin America and Canada with scale in distribution and shrewd cost control. An impressive portfolio of brands includes domestic beers Skol, Brahma and Antarctica; marketing rights for global brands Budweiser, Stella Artois and Corona; and exclusive bottling and distribution rights for PepsiCo in Brazil and a few regional countries. Banco Bradesco is one of Brazil’s leading private-sector banks with an 11% market share in loans, 13% in deposits and is the largest insurer in Brazil with 24% market share (focused on retirement savings products). The bank is the only private-sector bank with a presence in all the municipalities and with its broad range of products and services, meaningful cross-selling opportunities serve to strengthen already deep customer loyalty.

In Panama, Copa Holdings is a full-service airline that consistently achieves the highest level of profitability among its Latin American peers due to its hub-and-spoke business model that allows it to offer reliable, connected flights focusing on low-frequency city-pairs where competition is limited. Copa maintains disciplined cost-control and fleet management (average age of its aircraft is six years compared to 10 for its peers), resulting in better fuel efficiency and lower maintenance costs.

In South Korea, Samsung Electronics is the world’s largest electronics company with leadership positions in semiconductors, digital displays, home electronics & appliances and mobile devices. Its steadfast commitment to research and development (8% of sales) drives product innovation. New market opportunities are being pursued in battery materials, energy storage, biosimilars development, 5G telecommunications equipment, semiconductor foundry production and medical equipment.

In South Africa, Tiger Brands is the largest fast-moving consumer goods and personal care company. Domestic food accounts for the majority of group sales and profits and possesses a well-diversified portfolio of leading brands, many of which have existed for decades and several spanning more than a century, with many products ranking first or second in market share.

It’s worth revisiting that our investment philosophy is purely bottom-up and, as such, our investing in EM names is the direct result of our finding quality companies that happen to be domiciled in an EM country. Each name, whether DM or EM, is added to the portfolio when we believe a specific name demonstrates superior prospects for long-term profitability at attractive valuations.

This information is intended to provide insight into our disciplined investment process, consistently applied across all portfolios. Holdings examples may not apply across all accounts. Data is “as of” the date indicated and should not be relied upon as a complete or current listing of holdings (or top holdings) of the Representative Account. Holdings are subject to change without notice, and may not represent current or future portfolio composition.

The opinions, estimates and views expressed are on behalf of Sprucegrove, constitute Sprucegrove’s best judgement as of the date of this document and are subject to change at any time based on market or other conditions. Sprucegrove does not guarantee the accuracy, adequacy or completeness of any third party data. Any predictions, opinions, and other information contained in this report are subject to change and without notice of any kind and may no longer be true and accurate after the date this report was first completed and disseminated. Any forecasts contained herein are for illustrative purposes only and are not to be relied upon as advice or interpreted as a recommendation. In addition, any forecasts are based upon subjective estimates and assumptions about circumstances and events that may not yet have taken place or may never do so. While the information set out in this document has been prepared in good faith, no representation or warranty is given, and no responsibility is accepted, by Sprucegrove in relation to its accuracy or completeness.

The information provided herein should not be considered a recommendation to purchase or sell any particular security. The securities discussed herein are examples of Sprucegrove’s investment approach but do not represent an entire portfolio or the performance of a fund or strategy and in the aggregate may represent only a small percentage of portfolio holdings. It should not be assumed that any of the securities discussed herein were or will prove to be profitable, or that the investment recommendations or decisions made by Sprucegrove in the future will be profitable.

Any index information provided is for illustrative purposes only and is not intended to imply past or future performance. Please note an investor cannot invest directly in an index. Unless otherwise noted, index returns reflect the reinvestment of income and dividends, if any, but do not reflect fees, brokerage commissions or other expenses of investing.

The MSCI data is comprised of a custom index calculated by MSCI for, and as requested by, Sprucegrove. The MSCI data is for internal use only and may not be redistributed or used in connection with creating or offering and securities, financial products or indices. Neither MSCI nor any other third party involved in or related to compiling, computing or creating the MSCI data (the “MSCI Parties”) makes any express or implied warranties or representations with respect to such data (or the results to be obtained by the use thereof), and the MSCI Parties hereby expressly disclaim all warranties of originality, accuracy, completeness, merchantability or fitness for a particular purpose with respect to such data. Without limiting any of the foregoing, in no event shall any of the MSCI Parties have any liability for any direct, indirect, special, punitive, consequential or any other damages (including lost profits) even if notified of the possibility of such damages. [www.msci.com)

This material is for informational purposes only to provide general information and is not meant to be legal or tax advice for any particular investor, which can only be provided by qualified tax and legal counsel. Please read the constating documents carefully prior to investing. Parties should independently investigate any investment strategy or manager, and should consult with qualified investment, legal, and tax professionals before making any investments.

All data is in U.S. dollars, unless otherwise noted. Past performance is no guarantee of future results.

This Portfolio Perspective focuses on Sprucegrove’s International CIT (“the Fund”) as a representative example of our common investment philosophy and process across all portfolios. Actual weightings of holdings mentioned above differ by mandate and account, including certain holdings featured above being excluded entirely.

Source: Sprucegrove, MSCI

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