Emerging markets
26 Mar 2020 | By Nick Payne

GEM portfolio update – March 2020

I wanted to give you an update on the Merian GEM portfolio in these unprecedented times.

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I wanted to give you an update on the Merian GEM portfolio in these unprecedented times. I will not add to the litany of words, written and spoken, on when the virus comes under control as the truth is we have no more idea than you. But I would like to update you on what our portfolio looks like and what the team has been doing.

Our sole observation – China is attributed as the source of the infection, and thus was first in to lockdown. Increasingly it looks like China and North Asia are the first out of the other side, as life begins returning to something resembling normal. At the time of writing, economic indicators suggest activity levels are back to around 80% of the pre-shutdown level and anecdotally we see and hear evidence of restaurant traffic picking up.

We went into early March having exited a number of smaller portfolio positions since late 2019. Most of these decisions were nothing to do with COVID 19, but were all to do with our feeling that long-term growth, or reinvestment opportunity for those of you familiar with our mantra, had deteriorated at these individual companies. Since the onset of the double whammy of virus and oil shock we have also reduced our exposure to financials in Brazil, Russia and Indonesia. This leaves the portfolio with c6% in cash, which we will redeploy into both existing holdings and new additions.

The dramatic fall in share prices across the globe has allowed us to buy one company on our watch list – Mercado Libre, Latin America’s leading online ecommerce portal. We also have five or six excellent companies under very close observation with a view to starting to build positions at the appropriate time. We know we will not “catch the bottom” but valuation upside has opened up to an extent to which we think will be very well rewarded if one can have the patience to look forward a year or two. All of the companies under consideration fit our quality and sustainable growth criteria of

  • High return on capital
  • A moat, or barrier to entry, to protect and sustain number 1
  • Growth via the opportunity to reinvest in the business.

In our growth criteria, the ideal combination is a business whose end market is growing and where it is also able to take market share. If the business is good and growing, the chances are over time that its intrinsic worth will increase and the share price will follow.

Risk in the portfolio

We define real risk in the portfolio as a large permanent loss of capital NOT share price volatility. We aim to mitigate this by buying high quality business franchises, run by honest and competent management and with low balance sheet risk. Over the years, we have seen good companies wrecked by over-expansion of the balance sheet. For that reason, most of the non-financial companies in the portfolio have very low leverage or even net cash balance sheets. For those companies with debt, we have re- examined liquidity, duration and maturity schedule. Our portfolio companies can live through some hard times.

Valuation

How do you value a retailer who has just closed their shops or an airline that’s not flying? Such is the near impossibility of trying to guesstimate 2020’s earnings. However, it’s worth remembering Benjamin Graham’s assertion that “in the short term the market is a voting machine, in the long run it’s a weighing machine”. We are interested in the “weight” of a business, or its long-term earnings and cash flows, and it is paramount to keep in perspective that a dramatic cut to quarterly/half-year or full-year earnings should not reduce the long-term value of a business by the 40%, 50%, 60% or 70%declines attributed by the stock market.

We are seeing the weighted average upside on our portfolio (the upside if all holdings reached our target prices) hitting levels not seen since 2008/09. Several stocks in our portfolio now have triple-digit upside in percentage terms. By way of example we highlight Bank of Georgia, a bank that together with its principal competitor has 70% market share of the banking market in Georgia, is well capitalised and has a large portion of its loan book in liquid assets. It’s very profitable, generating c24% return on equity, yet it’s trading in the market on 3x trailing PE ratio,2.5x forward PE and 0.5x book value. Even if we assume a 50% cut in profits, its multiple looks reasonable for a dominant company in a market with structural growth.

Long-term winners

As “social distancing” enters our lexicon we observe that the social and economic effects of the pandemic are only expediting growth in nascent trends. Chinese citizens in lockdown have become accustomed to using grocery delivery services and Alibaba has seen rapid growth in its service. Similarly, enforced remote working will expedite the adoption of cloud-based solutions by corporates, a trend that plays to the strength of Alibaba and Tencent. These holdings each make up c9% of the portfolio.

One of the enduring attributes of the companies in which we seek to invest is their ability to thrive and get stronger during a crisis at the expense of their competitors – they come out the other side with an even stronger moat. HDFC bank in India and BCA in Indonesia will still be among the best banking franchises in Asia when this crisis passes, but they will have likely gained further market share from their competitors by going into the crisis with surplus capital, ready to lend when others grapple with problems, and benefit from a flight to quality on the deposit side of their balance sheets.

All data sourced from MGI and Bloomberg, as at 25 March 2020.

Past performance is not a guide to future performance and may not be repeated. Investment involves risk. The value of investments and the income from them may go down as well as up and investors may not get back the amount originally invested. Because of this, an investor is not certain to make a profit on an investment and may lose money.  Exchange rates may cause the value of overseas investments to rise or fall.

IN AUSTRIA, FRANCE, ITALY, LUXEMBOURG, PORTUGAL AND SWEDEN: This communication is issued by Merian Global Investors (Europe) Limited (“Merian Global Investors Europe”), The Wilde-Suite G01, The Wilde, 53 Merrion Square South, Dublin 2, D02 PR63, Ireland. Merian Global Investors Europe is registered in Ireland (company number: 536049) and is authorised and regulated by the Central Bank of Ireland (number: C181816).

IN THE UNITED KINGDOM AND ALL OTHER EEA COUNTRIES: This communication is issued by Merian Global Investors (UK) Limited (“Merian Global Investors UK”), Millennium Bridge House, 2 Lambeth Hill, London, United Kingdom, EC4P 4WR. Merian Global Investors UK is registered in England and Wales (number: 02949554) and is authorised and regulated by the Financial Conduct Authority (FRN: 171847).

This communication provides information relating to Merian Global Emerging Markets Fund (the “Fund”), which is a sub-fund of Merian Global Investors Series plc. Merian Global Investors Series plc is an investment company with variable capital established as an umbrella fund with segregated liability between sub-funds which is authorised and regulated by the Central Bank of Ireland pursuant to the European Communities (Undertakings for Collective Investment in Transferable Securities) Regulations 2011, as amended. Registered in Ireland under registration number 271517. Registered office: 33 Sir John Rogerson’s Quay, Dublin 2, Ireland.

Merian Global Investors Europe and Merian Global Investors UK are collectively known as “Merian Global Investors”.

Merian Global Investors uses all reasonable skill and care in compiling the information in this communication which is accurate only on the date of this communication. You should not rely upon the information in this communication in making investment decisions. Nothing in this communication constitutes advice or personal recommendation. An investor should read the Key Investor Information Document(s) (“KIID”) before investing in any sub-fund of Merian Global Investors Series plc. The KIID and the prospectus can be obtained from www.merian.com in English and other required languages.
Certain paying and/or information agents have been appointed in connection with public distribution of the shares of Merian Global Investors Series plc in certain jurisdictions. Shares are sold by prospectus only. The prospectus, KIID and/or other relevant offering documentation is available free of charge at:
Austria: Erste Bank der oesterreichischen Sparkassen AG, Belvedere 1, 1010 Wien, Austria.
Belgium: CACEIS Belgium SA, B-1000 Brussels, Avenue du Port 86 C b320, Brussels.
Germany: GerFIS – German Fund Information Service UG (Haftungsbeschränkt), Zum Eichhagen 4, 21382 Brietlingen, Germany.
France: BNP Paribas Securities Services, Les Grands Moulins de Pantin, 9 rue du Debarcadère 93500  Pantin,  France.
Hong Kong: Merian Global Investors (Asia Pacific) Limited, Unit 2, 5/F Two Chinachem Central, 26 Des Voeux Road Central, Hong Kong.
Italy: Allfunds Bank S.A.U., Milan Branch, Via Bocchetto, 6, 20123 Milano, Italia; Societe Generale Securities  Services S.p.A, Via Benigno Crespi 19A – MAC2, Milan and BNP Paribas Securities Services, Piazza Lina Bo Bardi No.3, Milan.
Luxembourg: BNP Paribas Securities Services, Luxembourg Branch, 33 rue de Gasperich, L-5826, Grand Duchy of Luxembourg.
Sweden: Skandinaviska Enskilda Banken AB (“SEB”), Kungsträdgårdsgatan 8, SE-106 40, Stockholm, Sweden
Switzerland: First Independent Fund Services Ltd., Klausstrasse 33, CH-8008 Zurich is the Swiss representative and BNP Paribas Securities Services, Paris, succursale de Zurich, Selnaustrasse 16, CH-8002 Zurich is the Swiss paying agent.
Taiwan: Capital Gateway Securities Investment Consulting Enterprise, 9F/9F-1, No. 171, Songde Road, Xinyi District, Taipei City, Taiwan, R.O.C.
United Kingdom: Merian Global Investors (UK) Limited, Millennium Bridge House, 2 Lambeth Hill, London, United Kingdom, EC4P 4WR. The Fund is recognised by the FCA.
Other: Merian Global Investors Series plc, c/o Citibank Europe plc, 1 North Wall Quay, Dublin 1, Ireland.

In Denmark, this material is only intended for the exclusive use of Danish eligible counterparties or professional investors. Danish retail investors may not invest in the sub-funds mentioned in the material.
In Spain, Merian Global Investors Series plc is registered with the Comisión Nacional del Mercado de Valores (“CNMV”) under number 301. Merian Global Investors UK is registered under number 2479. The prospectus, KIID and the latest economic reports can be obtained at no cost from registered distributors as per the list available on the CNMV web page.
In the Republic of Finland, this communication is not intended to constitute a public offer or an advertisement of securities.
In Italy, this material is for the exclusive use of “professional clients or professional investors” (as defined in Legislative Decree no 58/1998 by reference to Annex 3 of CONSOB Regulation no. 20307 of 2018) and its dissemination to retail investors/clients is prohibited.
In Luxembourg, this information does not constitute, under any circumstances, an offer or an invitation to purchase or sell shares in Luxembourg and does not and is not intended to constitute an offer of shares in the Grand Duchy of Luxembourg. It does not constitute legal, accounting, or tax advice.

The Fund may be more than 35% invested in Government and public securities. These can be issued by other countries and Governments. Your attention is drawn to the stated investment policy which is set out in the Fund’s prospectus.

This communication provides information relating to Merian Global Emerging Markets Fund (the “Fund”), which is a sub-fund of Merian Global Investors Series plc. Merian Global Investors Series plc is an investment company with variable capital established as an umbrella fund with segregated liability between sub-funds which is authorised and regulated by the Central Bank of Ireland pursuant to the European Communities (Undertakings for Collective Investment in Transferable Securities) Regulations 2011, as amended. Registered in Ireland under registration number 271517. Registered office: 33 Sir John Rogerson’s Quay, Dublin 2, Ireland.

This communication has been prepared for general information only. It does not purport to be all-inclusive or contain all of the information which a proposed investor may require in order to make a decision as to whether to invest in the Fund. Nothing in this communication constitutes a recommendation suitable or appropriate to a recipient’s individual circumstances or otherwise constitutes a personal recommendation. No investment decisions should be made without first reviewing the offering document (including the risk factors) and the key fact statement of the Fund (if applicable) which can be obtained from www.merian.com. This communication has not been reviewed by the SFC.

This communication is issued by Merian Global Investors (Asia Pacific) Limited. Merian Global Investors (Asia Pacific) Limited is licensed to carry out Type 1 and Type 4 regulated activities in Hong Kong.

The Fund may be more than 35% invested in Government and public securities. These can be issued by other countries and Governments. Your attention is drawn to the stated investment policy which is set out in the Fund’s prospectus.

This communication provides information relating to a fund known as Merian Global Emerging Markets Fund (the “Fund”), which is a sub-fund of Merian Global Investors Series plc. This communication is issued by Merian Global Investors (Singapore) Pte Limited, which is not licensed or regulated by the Monetary Authority of Singapore (“MAS”). Merian Global Investors (Singapore) Pte Limited is affiliated to Merian Global Investors (UK) Limited.  Merian Global Investors (UK) Limited (“Merian Global Investors”), Millennium Bridge House, 2 Lambeth Hill, London, United Kingdom, EC4P 4WR.  Merian Global Investors is registered in England and Wales (number: 02949554) and is authorised and regulated by the Financial Conduct Authority (FRN: 171847) but is not licensed or regulated by MAS.

The Fund may be more than 35% invested in Government and public securities. These can be issued by other countries and Governments. Your attention is drawn to the stated investment policy which is set out in the Fund’s prospectus.

 

The Fund has been approved for distribution to non-qualified investors in or from Switzerland by the Swiss Financial Market Supervisory Authority FINMA (“FINMA”). First Independent Fund Services Ltd., Klausstrasse 33, CH-8008 Zurich is the Swiss representative and BNP Paribas Securities Services, Paris, succursale de Zurich, Selnaustrasse 16, CH-8002 Zurich is the Swiss paying agent in relation to the shares of the Fund (“Shares”) distributed in or from Switzerland. Accordingly, the Shares and the relevant fund documents and any offering material relating to the Fund and/or the Shares may be distributed in or from Switzerland to non-qualified investors. In respect of the Shares distributed in or from Switzerland, the place of jurisdiction is at the registered office of the Swiss representative.

Copies of the prospectus, the memorandum and articles of association, the key investor information documents as well as the annual and semi-annual reports of the Fund may be obtained free of charge from the Swiss representative, First Independent Fund Services Ltd., Klausstrasse 33, 8008 Zurich, Switzerland.

The Fund may be more than 35% invested in Government and public securities. These can be issued by other countries and Governments. Your attention is drawn to the stated investment policy which is set out in the Fund’s prospectus.

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