October 2017

How We Approach Emerging Markets

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Well, I think there are funds out there that are probably not wildly different to our approach. But I think the mainstream is more focused on the benchmark and probably as a shorter-term time horizon, that would be my sense looking across the universe. We are truly benchmark unaware, we are only bottom up stock pickers, we are solely traveling around the developing world looking for well-run businesses run by people who have demonstrated integrity over many, many years. That approach leads to an outcome that is really very, very different to the bulk of the peer group and certainly the benchmark. There are a lot of things that we avoid because they don’t meet our adage of keeping it simple. There are things like the Chinese Internet stocks, which you can only invest in via a structure called VIE. We don’t know how to assess how risky that structure is. It is not ownership of the underlying assets. We like to invest in genuine equity in companies that are the same equity of the individuals we want to be aligned with. And you can’t do that in a VIE and therefore, we don’t. So we don’t own VIE and that means we don’t own any of these very large Internet businesses in China. In Brazil, we don’t own preference shares. We think the preference shares, well, preference shares are lower down the ranking in terms of the control of the company. You don’t have a vote, for example. The controlling families in Brazil who we want to be aligned with, they own the common shares that we want to own what they own. Again, that leads you away from looking like not much of our peer group or the benchmark. So I think it is this focus on the long term, carrying more of that capital preservation than short-term performance and just an unwillingness to compromise on quality. And there is an awful lot of low-quality businesses in the emerging world and in our view, they are best avoided. But they are obviously in the benchmark and we avoid them. So I think those are the things that would differentiate our approach.

Overly-complicated corporate structures are often a warning sign. Difficult to understand financial arrangements, whether it is debt to portfolios, derivative-type products you might see in banks, things like that are very, very difficult for us to get comfortable with. Ownership structures, where the owner is not someone identifiable, whose track record you are not able to assess. A historical abuse of minority shareholders, weak environmental and social performance is usually a warning sign that the individuals behind the company are riskier than perhaps a simple assessment that their financial track record might suggest. So there are a lot of reasons to steer clear of companies when we are all comfortable. We have got sort of a very high bar of quality for a company to be on our watch list and we are never prepared to make compromises. We are often asked, “Oh, if you are making an investment in Nigeria, surely you have to lower your…” “No.” You can’t lower it, you have to be consistently demanding of a sufficient level of protection of from the underlying quality of a business, whether it is the quality of the governance structure as the environmental social track record, it is balance sheet, it is finances, and all of those things have to be applied across the whole universe.