As we prefer to run a concentrated portfolio, holding a small number of stocks for the long term, we need to have a good understanding of the companies’ managers and owners. We need to have confidence in them as stewards of our capital. In emerging markets, there are typically more family-owned companies than in the US, the EU or the UK, where owners are often institutions and pension funds. We seek to understand the owning family, its range of interests, and are alert to any potential conflicts of interest. We need to be sure that all shareholders’ interests are aligned and that minority shareholders are not treated as second-class citizens. Differential share classes or voting rights are obvious red flags.


We exclude fossil fuels, tobacco, and military spending from investment. Those are all ESG-sensitive sectors, and they fail to meet our financial criteria, especially fossil fuels. We are seeking to compound our investment over the long term, and the key metric we scrutinise is return on investment capital (ROIC), which measures the return a company makes on all its capital, including debt as well as equity. The problem we find with oil companies is that they are price-taking businesses: they are at the mercy of the market price of oil. The same applies to mining companies, which we do not explicitly exclude, but in which we are unlikely to invest – they are at the mercy of the price of cobalt, iron ore, or other minerals. Oil companies are highly profitable when the oil price is high but suffer losses when the oil price is low: they have no control over that cycle. Furthermore, most EM oil companies are majority-owned by governments. Engagement with the companies in our portfolio is essential to our process, and we doubt the feasibility of materially influencing the minds of large state-owned EM raw materials companies.

Engagement matters
About three years ago we divested from a company because its supply chains were exposed to risk of sourcing from Uyghur labour in the Xinjiang region of China. Despite divesting, we have maintained contact with the company and lately been encouraged by progress it has made in reporting and in its adoption of the UN Global Compact, which was one of our recommendations. The company has a wide shareholder base of domestic Chinese and international investors, and we believe it does listen to all stakeholders. Political volatility can be high in some emerging markets. We take care to invest in businesses run by management teams with experience of navigating challenging political conditions.

Finally, we believe emerging markets will greatly benefit from the growth in artificial intelligence (AI). They are vital to the infrastructure on which AI depends. Most of the world’s advanced AI computer chips come from Taiwan and Korea. The integration of digital with people’s lives in EM countries is impressive, and increasingly in advance of that in the West – app-based payment systems are an example. EM countries have often been able to leapfrog a technological generation, avoiding entirely the investment costs associated with legacy infrastructure.

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