The Denker SCI Emerging Markets Feeder Fund will change it's name to Sanlam Global Emerging Markets Feeder Fund, effective from 01 November 2019

Review

The quarter ended March 2019 saw global markets recover strongly from the December selloff, with emerging and developed markets up 9.6% and 11.9% respectively.

Emerging markets were buoyed by the news that a resolution to the US-China trade negotiations may be around the corner as the US delayed the implementation of additional tariffs on $200 billion of Chinese goods, scheduled for March 1. The US Federal Reserve also turned more dovish during the quarter, due to slowing economic growth and the effects of the extended US government shutdown on the economy.

Changes to the portfolio

During the quarter we increased our positions in Swatch, the world’s largest watchmaker, and NetEase, the Chinese gaming company. We also initiated a new position in Regional, the fifth biggest Mexican bank which specialises in the SME segment.

We trimmed our positions in Bank Rakyat, a leading bank in Indonesia, and in Cia Hering, a Brazilian retailer, as their prices approached our estimate of intrinsic value. We also reduced our exposure to Matahari Department Stores, an Indonesian retailer.

Performance

Detractors

Matahari Department Stores: The company was the largest detractor to the performance of the portfolio. Our investment case centers around Matahari leveraging its strong brand equity, geographic presence across Indonesia and strategic locations in key malls to successfully transform into Indonesia's first omni-channel retailer. The Q4 2018 results highlighted that aggressive competition from ecommerce players and increased subsidies from the fintech players are slowing the company’s revenue growth more than anticipated. We have therefore reduced our position to mitigate the increased risk profile.

BIM Birlesik Magazalaar: BIM is the leader in the modern food retail space in Turkey, with a 16% market share. The company has been a strong performer since the start of the Turkish macro volatility in May 2018, however during this quarter the Turkish government effected a number of initiatives that have resulted in the company underperforming – 1) Proposed new retail legislation, which seeks to impose limits on the sale of private label products by organized food retailers in an effort to entice smaller producers; and 2) increasing minimum wage by 26% in January. While this has a short-term effect on the share price, we are confident that the long-term prospects of the company remain intact.

Arcos Dorados: The company is the largest McDonald's franchisee worldwide, and Latin America's leading quick service restaurant operator. The company reported Q4 2018 results that were weaker than expected by the market. The results did highlight that the Brazilian quick service restaurant market continues to be sluggish due to new competition and the growing availability of subsidized delivery for on-demand food. Arcos has implemented a number of promotional initiatives to drive traffic and are seeing positive sales growth in response.

Contributors

VipShop: The company reported a solid Q4 2018 set of results, with net profit significantly ahead of consensus but Revenue marginally below. The share price has not only benefited from the easing of trade war rhetoric between the US and China, but also from the company reaffirming its focus on the deep discount business model and achieving business efficiency, through 1) shifting low margin categories from 1P to 3P to ensure product variety and healthy margins; and 2) improving operating leverage by using more 3rd party express delivery couriers.

Yes Bank: The share price has rebounded strongly since the lows in November 2018. The company was affected by the system-wide liquidity crisis created by the default of India's leading infrastructure finance company, IL&FS. The company was furthermore negatively affected by several company specific issues – non-approval of the bank’s founder as CEO by the Reserve Bank of India (RBI); the fear of the RBI issuing large divergence report on recognition of non-performing loans by the bank; and loan exposure to the IL&FS default. During the quarter the bank has appointed a new CEO and received a clean divergence report from the RBI. India is benefiting strongly from an expanding middle class population, which is urbanising and has low home ownership. India’s financial services industry, particularly the private banks, are well placed to benefit from the low rates of financial services penetration and the fact that the state-run banks currently have weak capital positions.

AIA Group: The funds position in AIA contributed strongly to performance during the quarter. The company currently has five Chinese operating regions (Beijing, Shanghai, Guangdong, Shenzhen and Jiangsu), representing 16% of the group’s operating profits. During the quarter the company received regulatory approval to expand its Beijing licence area to include Tianjin and Hebei. This would enlarge AIA’s potential life insurance market from the existing 30% to 36%, in terms of gross premiums.

Outlook

We believe the only way to deliver sustainable outperformance over the long term is to invest in areas which reflect value and are often shunned by the market, and we do this using a bottom-up approach. This approach leads us to invest in companies that can continue to grow despite the prevailing macro climate, which can also entail the returns of the portfolio significantly deviating from the benchmark.

Investors should expect the volatility of 2018 to continue in the context of ongoing USChina trade negotiations, slowing US growth and global political volatility.

The turmoil creates investment opportunities in EM equities for patient investors. Valuations are very attractive and we are seeing substantial upside in our portfolio of companies. Predicting the catalyst that will turn the tide is an impossible thing to do, but history has shown that sentiment can turn very quickly

Review

The quarter ended December 2018 saw no respite for investors, with emerging and developed markets down 7.8% and 13.7% respectively. The main contributors to this performance revolves largely over a Fed who continues to signal for more US interest rate increases, be it at a slower pace; continued political uncertainty around the world and ultimately, the realisation that the impact of a trade war between the United States and China, will not be limited to affecting China only.

The fund outperformed during this period as global investors started allocating funds to EM on the back of the solid outlook that EM corporate earnings remains strong and that the growth differential between EM and DM (specifically with the US) will start widening again.

Changes to the portfolio

Market volatility during the quarter, created opportunities for us to initiate a number of new positions; HDFC Bank, a leading private bank in India; and Shriram Transport Finance, the market leader in India in commercial vehicle funding. We also bought Jeronimo Martins, a leading Portuguese retailer with significant operations in Poland; and Swatch, the world’s largest watchmaker. We also added to the Fund’s holdings in Tencent as we believe current valuation is overly pessimistic regarding their gaming revenues; Yes Bank, a leading Indian bank; and AIA Group, a leading Asian life insurer whose share price was affected by the US-China trade tensions.

We sold our position in the Indian financial company, Axis Bank as the company’s share price approached our estimate of its intrinsic value. We also trimmed our holdings in the Brazilian bank Bradesco, the Brazilian retailer, Cia Hering and the Taiwanese semi company, MediaTek.

Performance

Detractors

Brilliance China Automotive: Investors were spooked by the announced change to the BMW-Brilliance JV structure in 2022, with Brilliance’s stake being sold down from 50% to 25%. The company also announced earnings that were 24% down YoY, due to increased dealer compensation and the ramp up costs of the X3 SUV. While investors will sit back and watch, the company is still expected to produce 15% earnings growth for the year.

Alibaba Group:

Despite the company demonstrating the power of its ecosystem on Singles’ Day (11.11), recording US$30.8bn in merchandise sales and handling 1bn packages through its logistics platform, investors sold down all Chinese companies indiscriminately during the quarter.

Matahari Department Stores:

Investors sold down the company on the back of it no longer forming part of the MSCI Indonesia index. The company has initiated a buyback program and will likely be e beneficiary to the Government’s increase in social spending budget leading up to the 2019 Presidential elections. We think the company is set to continue growing through the rollout of more stores at regional malls, expansion of its own brand products and as it gains traction with its e-commerce platform.

Contributors

Brazil: With politics finally taking the backseat on the election of a new president, the fundamentals of many of our Brazilian company holdings started to be rewarded by the market and contributed to the fund’s outperformance in the quarter.

Matahari Department Stores: Since October, Indonesia has seen its macro environment improve as rate hikes finally brought stability to the weakening Rupiah. Rakyat, a leading Indonesian bank, reported strong loan growth despite a challenging quarter. In an environment of falling credit costs and management’s continued strategy to focus on the higher yielding retail loan market, growing fee income and improving efficiency through the use of technology, will see the company’s ROE improve and patient shareholders rewarded.

Outlook / a focus on quality

We believe the only way to deliver sustainable outperformance over the long term is to invest in areas which reflect value and are often shunned by the market, and we do this using a bottom-up approach. This approach leads us to invest in companies that can continue to grow despite the prevailing macro climate, which can also entail the returns of the portfolio significantly deviating from the benchmark.

Investors should expect the volatility of 2018 to continue in the context of ongoing USChina trade tensions, slowing US growth and global political volatility.

Amongst the turmoil we find long-term opportunities in EM equities for patient investors. Valuations are very attractive and we are seeing substantial upside in our portfolio of companies.

Predicting the catalyst that will turn the tide is an impossible thing to do, but history has shown that sentiment can turn very quickly.

Review

The quarter ended September 2018 has continued to be a difficult one for emerging markets, with developed markets outperforming by a strong 6.1%. This was largely driven by concerns over rising US interest rates, a stronger dollar, emerging market (EM) country specific political volatility and, ultimately, concerns about the impact of the trade war between the US and China.

Despite macro uncertainty, the outlook for corporate earnings remains strong with aggregate profits projected to grow by double-digits in 2019.

Changes to the portfolio

During the quarter, we took advantage of the volatility created by the market to initiate positions in Odontoprev (a leading Brazilian dental insurance business), Estacio (one of the top education company’s in Brazil) and Yes Bank (a prominent private bank in India). We added to the fund’s holdings in Matahari Department Stores, as we believe it has an attractive valuation; Vipshop, whose increased traffic from Tencent and JD.com are likely to be seen in Q4 2018; and Brilliance China Auto, on the back of much confusion created by the change to the Chinese JV rules with foreign car manufacturers.

We sold our positions in Credicorp and China Mobile - we believe that the rollout of 5G and pricing pressure on subscriber data packages will reduce the profitability of the company. We trimmed our holdings in MediaTek, Sberbank and TBC.

Performance

Detractors

China: While the markets were scared by the first $50 billion of tariffs imposed by the US, the imposition of a further $200 billion interestingly saw the markets calm as it brought certainty with the ability of the market to calculate the effects. China was the biggest detractor of performance.

Indonesia: Contagion fears caused by the self-caused economic problems in Argentina and Turkey saw investors sell down EM countries that have bigger current account deficits.

Turkey: A number of policy missteps scared investors into making a hasty sprint for the exit. The country has experienced a rapidly weakening currency and fast increasing inflation rate. The Turkish central bank stepped in and delivered a rate hike of 6.25%, above the market consensus, quelling some of the markets fears. There are many good companies in Turkey and valuations are compelling, but policy uncertainty requires continued care.

Vipshop: Investors continued to sell down the company in the uncertain climate of the trade war and their impatience of not seeing a drastic increase in the monthly active users from the Tencent and JD.com partnership. The company has been clear that they are in the testing phase of new user experience and expect positive contributions only to be seen from Q4 onwards. We are confident that our investors will be rewarded for the patience of holding this company.

Matahari Department Stores: Investors sold down companies considered to be at risk of a consumer slowdown. Despite its positioning in the retail market, we think the company is set to continue growing through the rollout of more stores at regional malls, expansion of its own brand products and as it gains traction with its e-commerce platform.

Garanti Bank: We have had the opportunity to discuss the bank’s funding with management, who are confident that they have sufficient funding to weather the current Turkish storm and come out of it stronger.

Contributors

Brazil: Despite headlines being largely dominated by politics, Kroton, the biggest private tertiary company in Brazil, was the biggest company contributor to performance.

Kasikornbank: Thailand has seen its macro environment improve significantly. Kasikornbank, a leading Thai bank, is well positioned towards the SME market (a segment getting government attention to help them grow and transform on the tech front). It has a solid liability franchise and has been a disciplined operator around its cost structure.

Outlook / a focus on quality

We believe the only way to deliver sustainable outperformance over the long term is to invest in areas which reflect value and are often shunned by the market, and we do this using a bottom-up approach. This approach leads us to invest in companies that can continue to grow despite the prevailing macro climate, which can also entail the returns of the portfolio significantly deviating from the benchmark.

Investors should expect continued volatility in EM as US rates rise, China trade tensions escalate, and political volatility continues. Amongst the turmoil we find long-term opportunities in EM equities for patient investors. Valuations are very attractive and we are seeing substantial upside in our portfolio of companies. Predicting the catalyst that will turn the tide is an impossible thing to do, but history has shown that sentiment can turn very quickly.