2021

January

Our fund returned 8.5% in January, while the average emerging market index was flat. This strong performance is attributed to our stock selection: 14 of our 31 companies produced returns greater than 10% (only 3 were down more than 10%), while the stock index of Malaysia where half of those winners came from was down -2%.

 

In early January, after a stock price pullback that wasn’t caused by any changes in highly positive fundamentals, we increased our position in a Malaysian property development company which is a sister company to another portfolio holding, a renewable energy contractor. The company’s chairman had purchased the obscure publicly listed business in 2019 and brought on board an experienced management team with vast business networks in Asia and the Middle East. New leadership at the helm rebranded and fully revamped the business from the get-go, strongly expanding the order book, executing new projects in Malaysia, Oman, and Qatar, and growing earnings over 100% in the last several quarters. What happened to the stock after our additional investment can be described as “leapfrogging”: in just two weeks, its price rose 140%. Given that our investment has performed so well so fast and is now less misunderstood by the market, the risk-return profile became less favorable, so we already scaled the position back.

 

In January we witnessed a market-wide sell-off in Vietnam, which happened after nearly six months of consistent growth. The coincidence of several factors – market’s fears that the rally is overdone, uncertainty regarding the US trade policy as it pertains to China and consequentially to Vietnam, rumors that retail investors are over-stretched on their levered equity positions, and first-in-two-months locally transmitted Covid-19 cases – led to a short-lived panic. We were not concerned: our Vietnamese holdings are still cheap, high-quality, and growing strongly. For instance, our 14x PE IT distributor grew earnings over 60% in Q4, while the 10x P/E financial services firm grew theirs over 800%. Now the valuations have only gotten more attractive for further position increases.

February

In February, we began a new project which we are calling 11 Sectors in 11 Months. For the rest of 2021, we will be on a virtual roadshow meeting hundreds of emerging market companies grouped by industry. This will enable us to effectively compare peers across dozens of markets. Instead of using the traditional GICS industry definitions, we are following the SASB Materiality Map to better understand ESG issues at an industry level.

 

We started the project in the Technology & Communications sector, meeting 58 companies from 14 countries. Our biggest takeaway was that the global chip shortage is even more significant than what’s widely reported in the business media.

 

This month we added another gem to the portfolio: a $300m Malaysian technology hardware business which makes frequency converters for German deep freezers used in the UK Covid vaccination program, as well as control panels for high-end Swiss coffee machines which are seeing a sales jump of 30% due to a significant increase in at-home coffee consumption. This company’s net margin of 60% and dividend yield of 5% are the highest among all Malaysian peers, its balance sheet boasts a net cash position equal to nearly 2x EBITDA, and its earnings grew 64% in the most recent quarter. At a time when most technology stocks in Malaysia trade well above 40x P/E, this growing high-quality firm’s 17x P/E is a bargain to us. 


We also saw an investment thesis we made in October 2020 play out. Our $2b rubber company in Thailand whose stake in a medical glove subsidiary was valued 40% higher than the entire parent reported record-high earnings in February thanks to the continuous glove sales growth and the recovery in its natural rubber business boosted by the rebounding commodities cycle. Consequently, the stock nearly doubled in price in just two weeks, bridging the parent-subsidiary valuation gap and helping our fund achieve a 6.5% return for the month.

March

In March, we continued our 11 Sectors in 11 Months project, focusing on the Consumer sector and meeting with 143 companies from 25 countries. Our prevailing observation from meetings with retailers was that those at the forefront of digitization before the pandemic accelerated market share gains from traditional brick-and-mortar firms that couldn’t quickly transition to doing business online. For manufacturers, the common theme was significant margin pressure caused by increased raw material costs resulting from the ongoing commodity boom. 

 

This month, we increased our position in a $300m Indonesian wooden furniture and building materials manufacturer (with an appropriate ticker WOOD), making it the largest holding in our portfolio. This company, which derives 80% of its sales from exports to large American home retailers such as Costco and Home Depot, is benefitting from the exceptionally strong US demand for furniture and building materials thanks to the housing boom and new work-from-home culture. Together with this overwhelming demand, the severe shortage of lumber supply in the US due to the local production inefficiencies, US-China trade war tariffs, and manufacturing capacity constraints in Vietnam has driven the prices of building materials to historical highs, further benefiting the company's sales. At the same time, the firm is protected on the cost side: it sources wood from its own forests, and the global increase in shipping rates hasn't directly affected the business as it passes delivery costs on to customers. Additionally, the market is missing that the value of the company’s manufacturing land holdings has strongly appreciated due to urbanization of the surrounding area, and that the firm might also derive additional profits from using its vast forestry assets in carbon allowance trading – in an environment of rising carbon prices which are projected to triple in the next 10 years. Given such a perfect alignment of multiple tailwinds, the firm's current order book is record-high, and exceptional earnings growth is nearly certain this year.


We also witnessed yet another currency shock in Turkey as the president removed the third central bank governor in two years over his unconventional belief that higher interest rates are evil, manifesting his continued assault on central bank independence. Having studied in depth the previous currency crises in Turkey, we were prepared for such a scenario and quickly exited our modest Turkey position within a few days after the news. We plan to observe the aftermath from the sidelines.