Fundsmith Emerging Equities Trust plc (FEET) 2020年年度報告「LSE」.pdf

1、Fundsmith Emerging Equities Trust plc Annual Report for the year ended 31 December 2020 A member of the Association of Investment Companies Perivan 260382Fundsmith Emer ging Equities Tr ust plc 33 Cavendish Squar e,London W1G 0PW www.feetplc.co.ukc l pt sur Tse i t i uqg Engiremh EitmsdnuFAnnual Rep

2、ortfor the year ended 31 December 20201Fu n ds mi t h Emer g i n g Eq u i t i es Tr u s t p l c An n u al Rep o r t f o r t h e year en ded 31 December 2020Co n t en t s1 Strategic Report 2Co mp an y Su mmar y 3Fi n an ci al Hi g h l i g h t s 5Ch ai r man s St at emen t 9In ves t men t Obj ect i ve

3、 an d Po l i cy 10In ves t men t Po r t f o l i o 12In ves t men t Man ag er s Revi ew 27In ves t men t Ph i l o s o p h y 30Bu s i n es s Revi ew2 Governance 36Bo ar d o f Di r ect o r s 38Co r p o r at e Go ver n an ce Rep o r t 47Rep o r t o f t h e Di r ect o r s 51St at emen t o f Di r ect o r

4、s Res p o n s i bi l i t i es 52Au di t Co mmi t t ee Rep o r t 56Di r ect o r s Remu n er at i o n Rep o r t 58Di r ect o r s Remu n er at i o n Po l i cy Rep o r t3 Financial Statements 59In dep en den t Au di t o r s Rep o r t 67St at emen t o f Co mp r eh en s i ve In co me 68St at emen t o f Fi

5、 n an ci al Po s i t i o n 69St at emen t o f Ch an g es i n Eq u i t y 70St at emen t o f Cas h Fl o ws 71No t es t o t h e Fi n an ci al St at emen t s4 Further Information 88Sh ar eh o l der In f o r mat i o n 89Al t er n at i ve In ves t men t Fu n d Man ag er s Di r ect i ve Di s cl o s u r es

6、92Gl o s s ar y o f Ter ms 95Ho w t o In ves t 97No t i ce o f An n u al Gen er al Meet i n g 103Exp l an at o r y No t es t o t h e Res o l u t i o n s 106Co mp an y In f o r mat i o n 108Ap p en di xC ompany Summary Th e C ompany Th e C ompany i s an i nvestment trust and i ts sh ares are li sted

7、on th e premi um segment of th e Offi ci al Li st and traded on th e mai n mark et of th e London Stock E xch ange.Th e C ompany i s a member of th e A ssoci ati on of I nvestment C ompani es.Total assets less current li abi li ti es as at 3 1 D ecember 2 0 2 0 were 3 8 8.5 mi lli on(2 0 1 9:3 2 3.1

8、 mi lli on)and th e mark et capi tali sati on was 3 7 6.5 mi lli on(2 0 1 9:2 9 3.0 mi lli on).Management Th e C ompany employs Fundsmi th LLP(Fundsmi th)as I nvestment Manager and A lternati ve I nvestment Fund Manager(A I FM).Furth er detai ls of th e terms of th ese appoi ntments are provi ded on

9、 page3 0.Performance i s measured agai nst th e MSC I E mergi ng and Fronti er Mark ets I ndex measured on a net sterli ng adj usted basi s.C api tal Structure Th e C ompanys capi tal structure i s composed of Ordi nary Sh ares.Furth er detai ls are gi ven i n note 1 3 to th e fi nanci al statements

10、 on page 8 2.I SA Status Th e C ompanys sh ares are eli gi ble for I ndi vi dual Savi ngs A ccounts(I SA s)and for Juni or I SA s.Retai l I nvestors advi sed by I FA s Th e C ompany currently conducts i ts affai rs so th at i ts sh ares can be recommended by I ndependent Fi nanci al A dvi sers(I FA

11、s)i n th e UK to ordi nary retai l i nvestors i n accordance wi th th e Fi nanci al C onduct A uth ori ty(FC A)rules i n relati on to non-mai nstream i nvestment products and i ntends to conti nue to do so.Th e sh ares are excluded from th e FC A s restri cti ons wh i ch apply to non-mai nstream i n

12、vestment products because th ey are sh ares i n an i nvestment trust.Furth er detai ls of th e C ompanys i nvestment poli cy are set out i n th e Strategi c Report on page 9.2Fundsmi th E mergi ng E qui ti es Trust plc A nnual Report for th e year ended 3 1 D ecember 2 0 2 0C ompany SummaryStrategi

13、c ReportFundsmi th E mergi ng E qui ti es Trust plc(“FE E T”or th e“C ompany”)ai ms to provi de sh areh olders wi th an attracti ve return by i nvesti ng i n a portfoli o of sh ares i ssued by li sted or traded compani es wh i ch h ave th e maj ori ty of th ei r operati ons i n,or revenue deri ved f

14、rom,D evelopi ng E conomi es*and wh i ch provi de di rect exposure to th e ri se of th e consumer classes i n th ose countri es.*See Fundsmi th s I nvestment Ph i losoph y begi nni ng on page 2 7 for furth er i nformati on3Fundsmi th E mergi ng E qui ti es Trust plc A nnual Report for th e year ende

15、d 3 1 D ecember 2 0 2 0Fi nanci al H i gh li gh tsPerformance Summary *A lternati ve Performance Measure(see G lossary begi nni ng on page 9 2)1MSC I E mergi ng and Fronti er Mark ets I ndex(measured on a net sterli ng adj usted basi s)Please refer to th e G lossary on pages 9 2 to 9 4 for defi ni t

16、i ons of th ese terms and th e basi s of th ei r calculati on.Performance over one yearA s atA s at 3 1 D ecember 2 0 2 03 1 D ecember 2 0 1 9 Net asset value per share-basic 1,460.2p 1,213.0p Net asset value per share-diluted 1,460.1p 1,213.0p Share price 1,415.0p 1,100.0p Discount of the share pri

17、ce to the net asset value per share*3.1%9.3%Ongoing charges ratio*1.3%1.4%For th e year endedFor th e year ended 3 1 D ecember 2 0 2 03 1 D ecember 2 0 1 9 Net asset value per share(total return)*+20.7%-0.5%Share price(total return)*+29.1%-7.4%Index(total return)+14.4%+13.9%Share PriceNAV MSCI Emerg

18、ing+Frontier Markets Index70080090010001100120013001400Jan-20Feb-20Mar-20Apr-20May-20Jun-20Jul-20Aug-20Sep-20Oct-20Nov-20Dec-20(p)Source:MSC I/B loomberg Fi gures rebased to 1,0 0 0 as at 3 1 D ecember 2 0 1 94Fundsmi th E mergi ng E qui ti es Trust plc A nnual Report for th e year ended 3 1 D ecemb

19、er 2 0 2 0Strategi c Report Premi um/(di scount)of th e Net asset sh are pri ce Sh areh olders value to th e net funds per sh are Sh are asset valueD i vi dendOngoi ng 3 1 D ecember 0 0 0 basi c pri ce per sh areper sh arech arges 2015 179,344 927.4p 955.0p 3.0%N/A1.7%2016 238,583 1039.0p 1055.5p 1.

20、6%N/A1.7%2017 310,673 1259.7p 1314.0p 4.3%N/A1.7%2018 322,486 1222.0p 1190.0p (2.6)%2.0p1.5%2019 323,143 1213.0p 1100.0p (9.3)%3.2p1.4%2020 388,468 1460.2p 1415.0p (3.1)%2.0p1.3%Share PriceNAV 8009001000110012001300140015001600LaunchDec-14Dec-15Dec-16Dec-17Dec-18Dec-19Dec-20(p)Performance si nce lau

21、nchFi ve Year RecordSource:MSC I/B loomberg Fi nanci al H i gh li gh ts5Fundsmi th E mergi ng E qui ti es Trust plc A nnual Report for th e year ended 3 1 D ecember 2 0 2 0C h ai rmans Statement“D emand for th e C ompanys sh ares led to th e i ssue of a total of 1,7 2 7,5 0 0 new sh ares duri ng th

22、e year,rai si ng 2 1.5 mi lli on”Performance I am pleased to report both strong absolute and relati ve performance for th e Year.Th e C ompanys net asset value(NA V)per sh are total return*for th e Year was+2 0.7%(2 0 1 9:-0.5%)and th e sh are pri ce total return*was+2 9.1%(2 0 1 9:-7.4%),both si gn

23、i fi cantly outperformi ng th e E mergi ng and Fronti er Mark ets I ndex,measured on a total return,net sterli ng adj usted basi s,wh i ch rose by 1 4.4%over th e same peri od(2 0 1 9:+1 3.9%).I am also pleased th at partly as a result of th e strong sh are pri ce performance,th e di scount*of th e

24、C ompanys sh are pri ce to th e NA V per sh are narrowed to end th e Year at 3.1%(2 0 1 9:9.3%)*A lternati ve Performance Measure Th e i nvestee company portfoli o benefi tted from i ts h oldi ngs i n busi nesses th at demonstrated a h i gh level of resi li ence i n th e C OVI D-1 9 pandemi c.I n ad

25、di ti on,th e portfoli os greater concentrati on,a reduced wei gh ti ng i n li sted multi nati onal subsi di ari es,i ts underwei gh t exposure to fronti er mark ets and i ts h i gh er wei gh ti ng to h ealth care and tech nology sectors were all k ey dri vers of performance.Neverth eless th e compo

26、und annual return of 6.1%si nce i ncepti on remai ns below our aspi rati on.Fundsmi th LLP(Fundsmi th),our I nvestment Manager,provi des a compreh ensi ve analysi s of th e performance of th e C ompanys portfoli o duri ng th e year,i n th ei r report wh i ch begi ns on page 1 2.C api tal Structure I

27、 menti oned i n my statement last year,th e B oards desi re th at th e C ompanys sh ares would not trade at a pri ce wh i ch,on average,represented a di scount th at was out of li ne wi th th e C ompanys peer group(th e A I C G lobal E mergi ng Mark ets Sector).Th e B oard moni tored th e posi ti on

28、 very closely and took note of th e varyi ng vi ews of th e C ompanys long-term sh areh olders duri ng th e year.A s part of th e B oards di scount management strategy,th e C ompany repurch ased a total of 3 5,6 8 4 sh ares to be h eld i n treasury at a total cost of 4 5 5,0 0 0.Th e B oard and i ts

29、 advi sers conti nue to moni tor th e di scount closely and th e C ompany wi ll mak e furth er purch ases of sh ares i f th e B oard deems i t to be appropri ate.No new sh ares were i ssued duri ng th e year.A s at 3 1 D ecember 2 0 2 0,th e C ompany h ad 2 6,6 0 4,3 7 2 sh ares of 1 p each i n i ss

30、ue excludi ng th e sh ares h eld i n treasury(2 0 1 9:2 6,6 4 0,0 5 6 no sh ares h eld i n treasury).A t th e last A nnual G eneral Meeti ng i n May 2 0 2 0,sh areh olders granted th e B oard auth ori ty to repurch ase up to 1 4.9 9%of th e C ompanys i ssued sh are capi tal.Th e B oard wi ll ask for

31、 th e same auth ori ty agai n at th e forth comi ng A nnual G eneral Meeti ng.D i vi dend Th e C ompany made a small revenue profi t duri ng th e year and,as a result,th e B oard recommends to sh areh olders th e payment of a di vi dend wh i ch both allows th e C ompany to comply wi th th e i nvestm

32、ent trust rules regardi ng di stri butable i ncome and i s also of a meani ngful si ze for sh areh olders.Subj ect to sh areh older approval at th e forth comi ng A nnual G eneral Meeti ng,a fi nal di vi dend of 2.0 p per sh are(2 0 1 9:3.2 p)wi ll be pai d on 3 June 2 0 2 1 to sh areh olders on th

33、e regi ster on 1 6 A pri l 2 0 2 1 I ntroducti on Th i s i s our seventh A nnual Report wh i ch covers th e year ended 3 1 D ecember 2 0 2 0 and also th e C ompanys si xth full year.“Th e previ ous year was a turbulent one i n many respects i n many parts of th e world and your B oard beli eves th a

34、t th i s volati li ty wi ll conti nue i n 2 0 1 9.H owever,th e B oard beli eves your C ompany i s well di versi fied to protect and sustai n value wi th i n th e i nternati onal constrai nts of i ts I nvestment Poli cy.”6Fundsmi th E mergi ng E qui ti es Trust plc A nnual Report for th e year ended

35、 3 1 D ecember 2 0 2 0Strategi c ReportC h ai rmans Statement(2 0 1 9:3.2 p per sh are).Th e associ ated ex-di vi dend date wi ll be 1 5 A pri l 2 0 2 1.Th e C ompanys pri nci pal obj ecti ve remai ns to provi de sh areh older returns th rough capi tal growth i n i ts i nvestments rath er th an i nc

36、ome and th e B oard i s mai ntai ni ng i ts current poli cy to pay only th ose di vi dends requi red to mai ntai n UK i nvestment trust status.Subj ect to th e i nvestment trust rules,any di vi dends and di stri buti ons wi ll conti nue to be at th e di screti on of th e B oard from ti me to ti me.B

37、 oard Renewal Th e B oard conti nues to be consci ous of th e need to refresh i ts own membersh i p over th e medi um term.I am deli gh ted th at Professor H eath er McG regor,C B E,wi ll be j oi ni ng th e B oard at th e conclusi on of th i s years A nnual G eneral Meeti ng.Professor McG regor,a sh

38、 areh older si nce th e C ompanys launch,i s a fi nanci al communi cati ons speci ali st,and h as been E xecuti ve D ean of E di nburgh B usi ness Sch ool,H eri ot Watt Uni versi ty si nce 2 0 1 6.Th e B oard beli eves th at h er experi ence i n j ournali sm wi ll offer a di fferent and uni que pers

39、pecti ve to th e B oard and wi ll provi de an i mportant contri buti on to th e ch allenge needed to support good deci si on mak i ng.Professor McG regors appoi ntment wi ll be proposed to sh areh olders for electi on at th e A nnual G eneral Meeti ng of th e C ompany to be h eld i n May 2 0 2 2.I n

40、 accordance wi th th e B oards poli cy and th e A I C C ode of C orporate G overnance,all current D i rectors wi ll be standi ng for re-electi on at th e forth comi ng A nnual G eneral Meeti ng.You wi ll fi nd th e appropri ate resoluti ons i n th e Noti ce of th e A nnual G eneral Meeti ng and a su

41、mmary of th e contri buti on each D i rector mak es to th e B oard and th e C ompany i n th e explanatory notes.C onti nuati on Vote Sh areh olders may be aware of th e requi rement th at th e D i rectors may,but are not requi red by th e C ompanys consti tuti onal documents to,call a conti nuati on

42、 vote i n th e event th at,after th e end of th e fourth fi nanci al year of th e C ompanys exi stence(bei ng 3 1 D ecember 2 0 1 8),th e C ompanys sh ares h ave traded at an average di scount i n excess of 1 0%of th e Net A sset Value per sh are i n a relevant year.Th e B oard h as consi dered th i

43、 s matter at length and,wh i le th e C ompanys sh ares traded at an average di scount of 1 2.3%duri ng th e Year,i t beli eves th at such a vote sh ould not be put before sh areh olders th i s year.Th i s i s due to th e recent narrower level of di scount of 6.5%(as at 3 0 March 2 0 2 1),recent stro

44、ng NA V performance togeth er wi th th e posi ti ve outlook for th e sector.Th e B oard wi ll conti nue to k eep th i s under close revi ew on an annualbasi s.Proposed A mendments to th e C ompanys I nvestment Obj ecti ve and Poli cy Th e economi es of th e countri es i n wh i ch th e C ompany can i

45、 nvest h ave sh own si gni fi cant development over th e peri od of almost sevenyears si nce th e C ompany was launch ed.Th i s h as created new i nvestment opportuni ti es i n sectors wh i ch li e near th e boundari es of our current i nvestment remi t.Th e C ompanys i nvestment management team h a

46、s i denti fi ed a modest,albei t i ncreasi ng,number of busi nesses wh i ch h ave th e superi or fi nanci al ch aracteri sti cs sh ared by our current portfoli o h oldi ngs but i n wh i ch our exi sti ng I nvestment Obj ecti ve and Poli cy do not formally allow us to i nvest.7Fundsmi th E mergi ng E

47、 qui ti es Trust plc A nnual Report for th e year ended 3 1 D ecember 2 0 2 0We are th erefore proposi ng to sh areh olders a ch ange i n th e C ompanys I nvestment Obj ecti ve,for th e fi rst ti me si nce launch,to allow our I nvestment Manager to act on th ese opportuni ti es.We propose th at th e

48、 C ompanys current I nvestment Obj ecti ve:“To i nvest i n sh ares i ssued by li sted or traded compani es wh i ch h ave th e maj ori ty of th ei r operati ons i n,or revenue deri ved from,D evelopi ng E conomi es and wh i ch provi de di rect exposure to th e ri se of th e consumer classes i n th os

49、e countri es”i s broadened by addi ng at th e end“or to th e broader soci al and/or economi c development of th ose countri es”.Our I nvestment Manager beli eves th at adopti ng th i s ch ange wi ll result i n th e sh ort term i n an i ncrease i n th e C ompanys i nvestable uni verse by only around

50、h alf a dozen stock s gi ven th e addi ti onal ri gorous quali tati ve cri teri a wh i ch i t appli es as part of i ts i nvestment process;but i mportantly th e amendment wi ll provi de our I nvestment Manager wi th a broader range of potenti al i nvestments over ti me as countri es and th ei r econ

51、omi c i nfrastructures develop.A longsi de th i s we are proposi ng a ch ange to th e C ompanys I nvestment Poli cy to reduce th e expected number of i nvestments i n th e portfoli o to a range of 2 5 to 4 0 stock s,from th e current 3 5 to 5 5 stock s.Th i s move towards a sli gh tly more concentra

52、ted portfoli o,wi th th e C ompany h oldi ng th e stock s i n wh i ch i t h as th e h i gh est level of convi cti on,wi ll sti ll allow for th e i nvestment and management of assets i n a way wh i ch i s consi stent wi th th e obj ecti ve of spreadi ng i nvestment ri sk.Th e amended I nvestment Obj

53、ecti ve and Poli cy wi ll apply,subj ect to sh areh older approval(wh i ch i s requi red by th e Li sti ng Rules as th ese ch anges are consi dered materi al),wi th effect from th e C ompanys A nnual G eneral Meeti ng to be h eld on Wednesday,2 6 May 2 0 2 1;th e FC A h as already approved th ese pr

54、oposed ch anges.Full detai ls of th e proposed amendments are set out i n th e appendi x on page 1 0 8 of th i s A nnual Report.Th e B oard unani mously recommends th at sh areh olders vote i n favour of th i sresoluti on.Outlook Th e outlook for E mergi ng Mark ets look s to be posi ti ve albei t w

55、i th consi derable uncertai nty;th ere h as been a strong recovery si nce th e lows i n March and th e roll-out of an effecti ve vacci ne agai nst C ovi d-1 9 sh ould h elp restore th e sectors posi ti ve consumer and export ch aracteri sti cs.Wh i lst th e pace of th e recovery wi ll vary across th

56、 e mark ets,our I nvestment Manager beli eves th at sectors such as tech nology and h ealth care wi ll conti nue to be benefi ci ari es of th e ch anged consumer beh avi our i n th e wak e of th e pandemi c.We conti nue to remai n opti mi sti c on th e longer-term outlook for E mergi ng Mark ets and

57、 beli eve th at th e C ompany conti nues to offer i nvestors exposure to some of th e best compani es avai lable i n th e sector.Th e B oard furth er beli eves th at th e long-term i nvestor wi ll be well rewarded.A nnual G eneral Meeti ng(A G M)Th e C ompanys A G M wi ll be h eld at noon on Wednesd

58、ay,2 6 May 2 0 2 1 at 3 3 C avendi sh Square,London W1 G 0 PW.I n vi ew of th e conti nui ng C ovi d-1 9 related restri cti ons attendance wi ll be k ept to th e mi ni mum permi tted by th e C ompanys A rti cles of A ssoci ati on and sh areh olders wi ll not be able to attend.I would remi nd sh areh

59、 olders th at th ey are able to submi t proxy voti ng forms before th e appli cable deadli ne and also to di rect any questi ons or comments for th e B oard i n advance of th e meeti ng th rough our C ompany Secretary,Frostrow C api tal at i nfo .Sh areh olders wh o h old th ei r sh ares di rectly c

60、an vote onli ne by vi si ti ng www.myfeetsh ares.co.uk and followi ng i nstructi ons.A ny sh areh olders wh o requi re a h ard copy form of proxy may request one from th e Regi strar,Li nk G roup.Sh areh olders wh o h old th ei r sh ares th rough an i nvestment platform or a nomi nee wi ll need to c

61、ontact th em to enqui re about voti ng arrangements.G i ven sh areh olders and th i rd parti es wi ll be unable to attend th e A G M i n person,I strongly encourage sh areh olders to appoi nt th e C h ai rman of th e A G M as th ei r proxy to vote on th ei r beh alf.8Fundsmi th E mergi ng E qui ti e

62、s Trust plc A nnual Report for th e year ended 3 1 D ecember 2 0 2 0Strategi c ReportTh e votes on th e resoluti ons to be proposed at th e A G M wi ll be conducted on a poll.Th e results of th e proxy votes wi ll be publi sh ed i mmedi ately followi ng th e conclusi on of th e A G M by way of a sto

63、ck exch ange announcement and on th e C ompanys websi te at www.feetplc.co.uk.Wh i lst th ere wi ll be no li ve presentati on from our I nvestment Manager on th e day of th e A G M,th ey wi ll record a presentati on wh i ch wi ll be avai lable on th e C ompanys websi te(www.feetplc.co.uk)sh ortly af

64、ter th e event.Th e B oard i s commi tted to h oldi ng i n person meeti ngs i n future wh en restri cti ons are not i n place and th ey can be h eld safely.Th e C ompany i s also proposi ng a resoluti on to sh areh olders at th e C ompanys A G M to amend th e C ompanys A rti cles of A ssoci ati on t

65、o enable a combi nati on of vi rtual and i n person sh areh older meeti ngs to be h eld.Th e proposed ch anges wi ll provi de th e B oard wi th th e flexi bi li ty to h old vi rtual sh areh older meeti ngs i n th e future sh ould th e need ari se.Martin Bralsford C h ai rman 3 1 March 2 0 2 1 “Th e

66、previ ous year was a turbulent one i n many respects i n many parts of th e world and your B oard beli eves th at th i s volati li ty wi ll conti nue i n 2 0 1 9.H owever,th e B oard beli eves your C ompany i s well di versi fied to protect and sustai n value wi th i n th e i nternati onal constrai

67、nts of i ts I nvestment Poli cy.”C h ai rmans Statement9Fundsmi th E mergi ng E qui ti es Trust plc A nnual Report for th e year ended 3 1 D ecember 2 0 2 0I nvestment Obj ecti ve To provi de sh areh olders wi th an attracti ve return by i nvesti ng i n a portfoli o of sh ares i ssued by li sted or

68、traded compani es wh i ch h ave th e maj ori ty of th ei r operati ons i n,or revenue deri ved from,D evelopi ng E conomi es*and wh i ch provi de di rect exposure to th e ri se of th e consumer classes i n th ose countri es.I nvestment Poli cy Th e C ompany mai ntai ns a portfoli o di versi fi ed by

69、 i ssuer concentrati on and th e C ompanys portfoli o wi ll normally compri se 3 5 to 5 5 i nvestments.Th e C ompany compli es wi th th e followi ng restri cti ons at th e ti me each i nvestment i s made:(i)not more th an 5%of th e C ompanys gross assets can be i nvested i n sh ares i ssued by any s

70、i ngle company.Th i s li mi t ri ses to 1 0%i n respect of up to 4 0%of gross assets;(i i)not more th an 4 0%of th e C ompanys gross assets can be i nvested i n sh ares i ssued by compani es domi ci led i n any si ngle j uri sdi cti on.Wh ere,as a result of i nvestment performance,th e total value o

71、f th e compani es i n a parti cular j uri sdi cti on exceeds 4 0%of gross assets,th i s restri cti on sh all not apply to a portfoli o rebalanci ng transacti on(an i nvestment funded from th e proceeds of a di sposal of sh ares i n a company domi ci led i n th e same j uri sdi cti on,executed at th

72、e same ti me);(i i i)not more th an 2 0%of th e C ompanys gross assets can be i n deposi ts h eld wi th a si ngle bank or fi nanci al i nsti tuti on.I n applyi ng th i s li mi t all uni nvested cash (except cash representi ng di stri butable i ncome or credi ted to a di stri buti on account th at th

73、 e D eposi tary h olds)sh ould be i ncluded;(i v)not more th an 2 0%of th e C ompanys gross assets can consi st of sh ares and approved money mark et i nstruments i ssued by th e same group.Wh en applyi ng th e li mi ts set out i n(i)th i s provi si on would allow th e C ompany to i nvest not more t

74、h an 5%i n th e sh ares of each of four group member compani es,or 1 0%i n two of th em(i f applyi ng th e 4 0%li mi t);(v)th e C ompanys h oldi ngs i n any combi nati on of sh ares or deposi ts i ssued by a si ngle company or fund must not exceed 2 0%of th e C ompanys gross assets overall;(vi)th e

75、C ompany must not acqui re sh ares i ssued by a company and carryi ng ri gh ts to vote at a general meeti ng of th at company i f th e C ompany h as th e power to i nfluence si gni fi cantly th e conduct of busi ness of th at company(or would be able to do so after th e acqui si ti on of th e sh are

76、s).Th e C ompany i s to be tak en to h ave power to i nfluence si gni fi cantly i f i t exerci ses or controls th e exerci se of 2 0%or more of th e voti ng ri gh ts i n th at company;and(vi i)th e C ompany must not acqui re sh ares wh i ch do not carry a ri gh t to vote on any matter at a general m

77、eeti ng of th e company th at i ssued th em and represent more th an 1 0%of th ese securi ti es i ssued by th at company.Uni nvested cash or surplus capi tal or assets may be i nvested on a temporary basi s i n:cash or cash equi valents,money mark et i nstruments,bonds,commerci al paper or oth er de

78、bt obli gati ons wi th bank s or oth er counterparti es h avi ng a si ngle-A (or equi valent)or h i gh er credi t rati ng as determi ned by an i nternati onally recogni sed rati ng agency;or any“government and publi c securi ti es”as defi ned for th e purposes of th e FC A rules.I n general,th e C o

79、mpany wi ll not use portfoli o management tech ni ques such as i nterest rate h edgi ng and credi t default swaps.H owever,th e C ompany may use currency h edgi ng,th rough deri vati ves i f necessary,as a portfoli o management tech ni que.Wh i lst th e C ompany,generally,wi ll not h edge i ts curre

80、ncy exposure,i t does reserve th e ri gh t to do so i n th e ci rcumstances wh ere,i n th e opi ni on of th e I nvestment Manager,a si gni fi cant depreci ati on of a currency h as become li k ely but th e I nvestment Manager wi sh es to conti nue owni ng th e compani es i n th e portfoli o denomi n

81、ated i n th at currency and wh ere th e cost of h edgi ng th at currency i s unli k ely,i n th e opi ni on of th e I nvestment Manager,to exti ngui sh any gai ns from h edgi ng.Proposed A mendments to th e C ompanys I nvestment Obj ecti ve and Poli cy A s noted i n th e C h ai rmans Statement,a prop

82、osal i s bei ng put forward at th e C ompanys A nnual G eneral Meeti ng to seek approval from sh areh olders to mak e amendments to th e I nvestment Obj ecti ve and Poli cy of th e C ompany.Th e proposed amendments,i f approved,sh all come i nto effect from 2 6 May 2 0 2 1.Th e proposed amendments a

83、re also descri bed i n th e appendi x on page 1 0 8.I nvestment Obj ecti ve and Poli cy*See Fundsmi th s I nvestment Ph i losoph y begi nni ng on page 2 7 for furth er i nformati on10Fundsmi th E mergi ng E qui ti es Trust plc A nnual Report for th e year ended 3 1 D ecember 2 0 2 0Strategi c Report

84、Investments held as at 31 December 2020 Security Country of incorporation Fair value 000%of investments MercadoLi bre I nc USA1 3 4,8 6 09.1 Fosh an H ai ti an Flavouri ng C h i na 3 1,0 0 28.1 A si an Pai nts Ltd I ndi a 1 9,1 6 45.0 I nfo E dge(I ndi a)Ltd I ndi a 1 8,3 2 54.8 Vi tasoy I nternati

85、onal H oldi ngs Ltd H ong Kong 1 7,0 9 04.5 H avells I ndi a Ltd I ndi a 1 4,7 1 43.8 Nestl I ndi a Ltd I ndi a 1 4,2 9 23.7 A venue Supermarts I ndi a 1 2,7 8 83.3 H i ndustan Uni lever Ltd I ndi a 1 2,6 6 03.3 Metropoli s H ealth care Ltd I ndi a 1 2,2 5 13.2 Top 1 0 I nvestments 1 8 7,1 4 64 8.8

86、Mari co Ltd I ndi a 1 1,9 8 23.1 D r Lal Path labs Ltd I ndi a 1 0,5 3 42.8 Vi etnam D ai ry Products JSC Vi etnam 1 0,1 5 32.7 Ph i li ppi ne Seven C orp Ph i li ppi nes 9,4 8 42.5 G odrej C onsumer Products Ltd I ndi a 9,4 3 52.5 Tai wan Semi conductor Manufacturi ng Tai wan 9,4 1 02.5 Tencent H o

87、ldi ngs C ayman I slands2 8,8 0 72.3 E ri s Li fesci ences Ltd I ndi a 8,5 7 02.2 I ntegrated D i agnosti cs H oldi ngs Plc Jersey3 8,5 6 32.2 H ypera SA B razi l 8,4 1 22.2 Top 2 0 I nvestments 2 8 2,4 9 67 3.8 E astern C ompany S.A.E E gypt 7,8 2 92.0 Th yrocare Tech nologi es Ltd I ndi a 7,6 6 92

88、.0 XP I nc B razi l 7,3 4 41.9 Walmart D e Mexi co SA B de C V Mexi co 7,1 5 31.9 B I M B i rlesi k Magazalar A S Turk ey 6,9 3 91.8 Procter+G amble H ygi ene I ndi a 6,7 8 81.8 D abur I ndi a Ltd I ndi a 6,7 8 01.8 B ri tanni a I ndustri es Ltd I ndi a 6,7 2 11.8 C li ck s G roup Ltd South A fri ca

89、 6,6 4 21.7 D ali Foods G roup C o Ltd C ayman I slands4 6,1 2 01.6 Top 3 0 I nvestments 3 5 2,4 8 19 2.1 Nestl Ni geri a Plc Ni geri a 5,3 1 81.4 B ri ti sh A meri can Tobacco B angladesh 4,7 4 01.2 C eylon Tobacco C o Plc Sri Lank a 4,3 8 81.1 E ast A fri can B reweri es Ltd Kenya 4,0 3 71.1 PT Pr

90、odi a Wi dyah usada Tbk I ndonesi a 3,7 6 21.0 Loj as Renner B razi l 3,0 1 00.8 D P E urasi a NV Neth erlands5 2,7 3 20.7 E di ta Food I ndustri es SA E E gypt 2,0 6 70.6 Total I nvestments(3 8)3 8 2,5 3 51 0 0.0 1 Pri nci pal place of busi ness B razi l 2 Pri nci pal place of busi ness C h i na 3

91、Pri nci pal place of busi ness E gypt 4 Pri nci pal place of busi ness C h i na 5 Pri nci pal place of busi ness Turk eyI nvestment Portfoli o11Fundsmi th E mergi ng E qui ti es Trust plc A nnual Report for th e year ended 3 1 D ecember 2 0 2 021.1%26.3%39.4%13.2%By Geography(by Country of Incorpora

92、tion)India Asia(ex India)Eastern Europe,Middle East and Africa Latin Americaas at 3 1 D ecember 2 0 1 9 4%11%11%7%4%16%15%TobaccoBy Sector(based on net asset value)1%28%3%Food&Beverage Decorative Paint Fast Moving Consumer Goods IT Household Electronics Retail Fast food Industrials Auto Healthcare C

93、ash18.4%27.3%43.4%10.9%By Geography(by Country of Incorporation)India Asia(ex India)Eastern Europe,Middle East and Africa Latin AmericaTop Purchases and Sales in 2020 Top PurchasesTop Sales SecurityCountry of incorporationSecurityCountry of incorporation 1 Tai wan Semi conductor Manufacturi ngTai wa

94、n1 Travelsk y Tech nology LtdC h i na 2 Tencent H oldi ngsC ayman I slands12 E astern C ompany S.A.EE gypt 3 XP I ncB razi l3 MercadoLi bre I ncUSA2 4 A venue SupermartsI ndi a4 B ri tanni a I ndustri es LtdI ndi a 5 Loj as RennerB razi l5 Ti ger B rands LtdSouth A fri ca 6 C li ck s G roup LtdSouth

95、 A fri ca6 Fosh an H ai ti an Flavouri ng&FoodC h i na 7 Metropoli s H ealth care LtdI ndi a7 G odrej C onsumer Products LtdI ndi a 8 H avells I ndi a LtdI ndi a8 Ph i li ppi ne Seven C orpPh i li ppi nes 9 Th yrocare Tech nologi es LtdI ndi a 1 0 E ri s Li fesci ences LtdI ndi a 1 Pri nci pal place

96、 of busi ness C h i na 2 Pri nci pal place of busi ness B razi lPortfoli o D i stri buti on as at 3 1 D ecember 2 0 2 0 TobaccoBy Sector(based on net asset value)28%12%16%18%7%5%4%4%4%2%Food&Beverage Decorative Paint Fast Moving Consumer Goods Healthcare Household Electronics Retail Financials IT Ca

97、sh12Fundsmi th E mergi ng E qui ti es Trust plc A nnual Report for th e year ended 3 1 D ecember 2 0 2 0Strategi c ReportI nvestment Managers Revi ewFundsmi th E mergi ng E qui ti es Trust“FE E T”or th e“C ompany”h ad a strong 2 0 2 0,both i n terms of absolute and relati ve performance.Total return

98、1 January 3 1 D ecember 2 0 2 0%FE E T Net A sset Value Per Sh are +2 0.7 FE E T Sh are Pri ce +2 9.1 MSC I E mergi ng and Fronti er Mark ets I ndex +1 4.4 Table 1:Source:MSC I/B loomberg Th e net asset value(NA V)i ncrease of 2 0.7%compared to an i ncrease i n th e MSC I E mergi ng&Fronti er Mark e

99、ts I ndex(th e I ndex)of 1 4.4%.Th e sh are pri ce i ncrease was greater th an th e i ncrease i n th e NA V as a result of th e di scount narrowi ng substanti ally i n th e year.Si nce launch to th e end of 2 0 2 0,th e C ompany h as(after fees)produced a cumulati ve NA V return of 4 7.3%,or a retur

100、n of 6.1%on an annuali sed basi s.2 0 2 0 was a year wh en global mark ets were i mpacted by a global pandemi c,th e i mpact of wh i ch I wi ll touch on later,both i n terms of overall mark et performance and th e performance of th e C ompany.Wh ereas i n 2 0 1 9 performance was poor i n a year wh e

101、re th e i ndex rose and th e C ompanys NA V fell margi nally,2 0 2 0 was a strong year for emergi ng mark ets and we tak e great h eart th at th e C ompany,wh i ch h ad previ ously lagged i n strong peri ods of emergi ng mark et performance,comfortably outperformed on a relati ve basi s.Performance

102、i n more detai l can be seen below:%Since incep-Annual-2020 2019 2018 2017 2016 2015 2014 tion ised FE E T NA V +2 0.7 -0.5 -3.0+2 1.2 +1 2.0 -7.0 +0.1 +4 7.3 +6.1 FE E T Sh are Pri ce +2 9.1 -7.4 -9.4+2 4.5+1 0.5 -1 0.9 +7.2 +4 2.2 +5.5 E mergi ng Mark ets +1 4.4 +1 3.9 -9.3 +2 5.3 +3 2.4 -1 0.0 +0

103、.5 +7 7.3 +9.2 UK bonds +4.6 +3.8 +1.2 +1.4 +6.5 +1.0 +7.4 +2 8.7 +3.9 UK cash +0.3 +0.8 +0.7 +0.4 +0.5 +0.6 +0.3 +3.6 +0.5 Table 2:1 Net of fees,pri ced at UK mark et close(source:Fundsmi th)2 A t LSE close(source:Fundsmi th)3 MSC I E mergi ng&Fronti er Mark ets I ndex(Net)pri ced at close of busi

104、ness USE ST(source:)4 B loomberg/E FFA S B ond I ndi ces UK G ovt 5-1 0 yr(source:B loomberg)5 3 m LI B OR I nterest Rate(source:B loomberg)*From 2 5 June 2 0 1 4 A s we h ave previ ously stated,th e composi ti on of th e I ndex i s very di fferent to our portfoli o and we h ave regularly opi ned on

105、 th e i mpact of flows i nto emergi ng mark et i ndex funds.I n 2 0 1 9,net i nflows i nto E TF funds i nto emergi ng mark ets were almost US$1 4 bi lli on.I n2 0 2 0,emergi ng mark ets experi enced net outflows of$1.9 bi lli on,wi th US$1 1.5 bi lli on of outflows from E TFs and US$9.6 bi lli on of

106、 i nflows i n acti ve funds.13Fundsmi th E mergi ng E qui ti es Trust plc A nnual Report for th e year ended 3 1 D ecember 2 0 2 0Th e consti tuents of th e i ndex are sh own below:Top 1 0 MSC I E+FM I ndex consti tuentsWei gh t%ROC E%Tai wan Semi conductor Manufacturi ng C orporati on5.82 7 A li ba

107、ba5.59 Tencent5.31 8 Samsung E lectroni cs4.51 1 Mei tuan D i anpi ng1.78 Naspers1.1-2 Reli ance1.01 0 JD.com1.08 C h i na C onstructi on B ank0.95 Pi ng A n I nsurance0.93 Total A verage 2 81 0 Table 3:Source:MSC I 1 See G lossary begi nni ng on page 9 2.A t th e end of 2 0 2 0 th e top ten consti

108、tuents of th e I ndex accounted for 2 8%of th e i ndex,and th us are ongoi ng benefi ci ari es of any sustai ned E TF fund flows,yet th e average return on capi tal employed(ROC E)of th ose 1 0 h oldi ngs i s j ust 1 0%.I n th e FE E T portfoli o,th e top ten h oldi ngs accounted for 4 8%of th e por

109、tfoli o and h ad an average ROC E of 4 3%.Th e C ompany currently h as i nvestments i n two of th e top 1 0 I ndex consti tuents.Our acti ve sh are(th e proporti on of our h oldi ngs wh i ch do not overlap wi th th e i ndex)at th e end of D ecember 2 0 2 0 was 9 3.7%.Th e two top-ten i ndex consti t

110、uents we own are Tencent and Tai wan Semi conductor,both of wh i ch were new i nvestments made duri ng th e course of 2 0 2 0,and we comment later on wh y we own both.A s at th e end of 2 0 2 0,th ese two i nvestments accounted for 4.7%of th e C ompanys NA V.We h ave previ ously commented on th e h

111、i gh level of concentrati on at th e top end of th e I ndex(to put th i s i nto context,th e top fi ve consti tuents of th e I ndex accounted for almost 2 3%,wh i lst for th e MSC I World I ndex,wh i ch covers global developed mark ets,th e respecti ve percentage was 1 2.6%).Performance i s also see

112、mi ngly more concentrated.Th e top 5 consti tuents i n th e MSC I E mergi ng and Fronti er Mark et I ndex accounted for 6 1%of i ts performance,wh i lst th e top 5 h oldi ngs i n th e MSC I World I ndex accounted for 4 3%of th at I ndexs performance.I n 2 0 2 0,two stock s,Tencent and Tai wan Semi c

113、onductor,accounted for a th i rd of th e i ncrease i n th e I ndex.A t present th ese are th e only two stock s i n th e top ten i ndex consti tuents wh i ch are currently of th e appropri ate quali ty for our portfoli o.We do of course conti nue to analyse some of th e stock s wh i ch domi nate th

114、e I ndex to see i f th ey are developi ng i nto busi nesses we would be comfortable i nvesti ng i n but,as yet,we h ave not found th i s to be case.Our C ompany remai ns underwei gh t i n C h i na.B efore we go on to explai n wh y we are under-represented agai nst C h i na,I would li k e to remi nd

115、readers th at(as we sai d last year)th e C h i na element of th e i ndex i s not predomi nantly,as you mi gh t th i nk,made up of C h i nese compani es li sted on C h i nese mark ets.I nstead i t compri ses,C h i nese compani es li sted i n th e US,C h i nese compani es li sted i n H ong Kong,and H

116、ong Kong compani es.Th e smallest element of th e i ndex categori sed as C h i na i s C h i nese compani es li sted i n mai nland C h i na.Th ere h as been an i nordi nate percentage of C h i nese compani es we h ave analysed th at h ave h ad i ssues around corporate governance,accounti ng standards

117、,sh areh older structures and voti ng ri gh ts,legal ownersh i p and regulati on.Th e latter poi nt i s i nteresti ng as recent month s h ave sh own,parti cularly i n relati on to fi ntech busi nesses a mark ed i ncrease i n regulati on by th e auth ori ti es,wi th li ttle opti on for busi nesses su

118、bj ect to th i s regulati on to do anyth i ng oth er th an comply.Th i s was most mark ed by th e A nt Fi nanci al I PO getti ng pulled from th e mark et at th e last mi nute.Th e regulatory ri sk i nh erent i n some C h i nese compani es also i ncreased“Th e composi ti on of th e MSC I E mergi ng a

119、nd Fronti er Mark ets I ndex i s very di fferent to our C ompany,so th ese E TF flows are mostly goi ng i nto stock s and sectors wh i ch we do not and wi ll not own”14Fundsmi th E mergi ng E qui ti es Trust plc A nnual Report for th e year ended 3 1 D ecember 2 0 2 0Strategi c ReportI nvestment Man

120、agers Revi ewdue to th e Trump admi ni strati on i mposi ng i nvestment sancti ons on a number of th ese busi nesses.We wi ll not i nvest i n a C h i nese company j ust because i t i s a good busi ness by C h i nese standards,as th ose standards are not repli cable across th e range of emergi ng mar

121、k ets i n wh i ch th e C ompany h as th e abi li ty to i nvest.G i ven th ei r wei gh t i n th e i ndex,C h i nese compani es conti nue(to us at least)to be sk ewed by th e tendency of i nvestors to h ug th e i ndex and,i ncreasi ngly,capi tal flows i nto H ong Kong li sted compani es from C h i nes

122、e mai nland i nvestors,wh ere quali ty and ri sk are not a pri mary concern.I nstead our focus conti nues to be buyi ng good compani es and th i s wi ll conti nue to be our one and only pri ori ty.A s a result of th i s focus,FE E T owns stak es i n compani es wh i ch,as a wh ole,h ave superi or fi

123、nanci al ch aracteri sti cs to th e I ndex.Th e C ompany offers emergi ng mark et i nvestors th e abi li ty to i nvest i n compani es wi th h i gh er returns and margi ns,stronger cash conversi on and,typi cally,faster rates of cash flow growth th an found i n th e I ndex.Our i nvestments wi ll typi

124、 cally h ave no debt,and i f not,a conservati ve level of fi nanci al leverage.We beli eve th at th ese ch aracteri sti cs wi ll be reflected i n th e sh are pri ces of th e compani es th at th e C ompany owns.Th e ch aracteri sti cs of th e FE E T portfoli o as of th e 3 1 D ecember 2 0 2 0 compare

125、d wi th th e i ndex were:MSC I E+FM I ndex FE E T(ex-fi nanci als)%LTM ROC E4 01 1 LTM G ross margi n5 23 3 LTM Operati ng Margi n1 81 1 LTM NFC F conversi on9 38 2 LFY NFC FE growth2 18 Table 4:Source:Fundsmi th,MSC I,B loomberg A bbrevi ati ons:LTM:last twelve month s,LFY:last full year,ROC E:retu

126、rn on capi tal employed,NFC F:neutral free cash flow.See G lossary begi nni ng on page 9 2.Unsurpri si ngly,our stock s are si gni fi cantly more h i gh ly rated th an th e i ndex based upon ei th er th e measures of PE rati o or Neutral Free C ash Flow Yi eld(Neutral bei ng i s wh en capi tal expen

127、di ture i s above th e level of depreci ati on and i s expansi onary and can th erefore be di sregarded i n th i s calculati on).MSC I E M&FM FE E T(ex-fi nanci als)LTM NFC F yi eld2.53.6 LTM portfoli o di vi dend yi eld1.41.8 Table 5:Source:Fundsmi th,MSC I,B loomberg Valuati on i s,we beli eve,unl

128、i k ely to be th e mai n determi nant of th e performance of our strategy i n th e long term.I nstead,we beli eve quali ty,wi th conti nued rei nvestment of earni ngs at h i gh rates of return,wi ll be th e mai n determi nant i n th e long term.Portfoli o turnover i n th e year was 2 1%,compared to

129、2 7%i n 2 0 1 9.Th e ongoi ng ch arges fee(OC F)was 1.3%of net asset value,wh i lst deali ng ch arges were 3 basi s poi nts.Tak i ng i nto account th e esti mated spread on deali ng pri ces,deali ng costs were 1 4 basi s poi nts.D uri ng th e year we acqui red four new h oldi ngs and exi ted two,tak

130、 i ng us up from 3 6 h oldi ngs at th e start of 2 0 2 0 to 3 8 at th e yearend.We made four new i nvestments i n th e year;Loj as Renner,XP I nc,Tai wan Semi conductor Manufacturi ng C orporati on and Tencent.Th e former two are busi nesses based i n B razi l,wh i lst th e latter two are based i n

131、A si a.Wi th th e excepti on of XP wh i ch only I PO-ed i n late 2 0 1 9,th e oth er busi nesses are ones we h ave been followi ng for a consi derable peri od of ti me.Loj as Renner i s th e largest fash i on retai ler i n B razi l,wi th over 6 0 0 stores.Th e group i s at th e end of a seven-year i

132、 nvestment programme th at began i n 2 0 1 2 and saw th e remodelli ng of th e“FE E T owns sh ares i n good compani es compani es wh i ch h ave returns on capi tal,profit margi ns and growth wh i ch are superi or to th e compani es i n th e bench mark I ndex and wh i ch convert far more of th ei r p

133、rofits i nto cash”15Fundsmi th E mergi ng E qui ti es Trust plc A nnual Report for th e year ended 3 1 D ecember 2 0 2 0store network,a new logi sti cs platform put i n place and th e development of th e supply ch ai n to reduce lead ti mes.Th e group i s now i mplementi ng an omni-ch annel strategy

134、 encompassi ng both onli ne and offli ne retai l,i n order to i ncrease revenues and i mprove effi ci ency.Th e onli ne busi ness i s performi ng strongly i n th e C OVI D-1 9 envi ronment,and gi ven Renners brand recogni ti on i n th e local mark et could become a meani ngful part of th e busi ness

135、 over ti me,h elped by local sourci ng to reduce th e ti me i t tak es to get new li nes to mark et.B arri ers to entry are provi ded by a combi nati on of consi stent executi on and i nvestment i n ph ysi cal and di gi tal i nfrastructure,all of wh i ch di scourage i nternati onal entrants i nto a

136、country wi th substanti al logi sti cal ch allenges.E ffi ci ency,parti cularly speed to mark et i s h elped by h avi ng most of i ts supply ch ai n wi th i n B razi l.Th e average customer spend per transacti on i s c 2 0.XP I nc i s th e largest onli ne i nvestment platform for retai l i nvestors

137、i n B razi l and h as a 5%sh are of th e$2.1 tri lli on i nvestment mark et i n th e country.Th e busi ness li sted i n late 2 0 1 9 and we took advantage of maj or sh are pri ce weak ness i n th e early part of 2 0 2 0 to i ni ti ate a new h oldi ng i n th e busi ness.XP i s 1 0 ti mes larger th an

138、 i ts nearest i ndependent competi tor i n a mark et th at i s controlled by bank s and h as si gni fi cant mark et sh are growth opportuni ti es.Only 1 0%of retai l i nvestment assets i n B razi l are i n equi ti es,gi vi ng th e group scope for growth,and th e penetrati on level of brok erage acco

139、unts(c 1.0%)i s well below th at of th e developed world.XP h as more th an 1.5 mi lli on retai l cli ents on i ts platform wh o,by usi ng XP,can i nvest i n equi ty,fi xed i ncome and mutual funds.Only 1 0%of retai l i nvestment assets i n B razi l are i n equi ti es(th e vast maj ori ty are i n fi

140、 xed i ncome products),gi vi ng th e group scope for growth.XPalso h as a strong culture of employee sh are ownersh i p wh i ch allows th e busi ness to attract and retai n talent,wh i lst i t also provi des fi nanci al educati on to retai l cli ents wh i ch h elps grow i ts cli ent base.We also bui

141、 lt a sh areh oldi ng i n Tencent,wh i ch i s C h i nas largest soci al network i ng,gami ng and musi c streami ng company.I ts soci al medi a platform(WeC h at)h as over 1.2 bi lli on users,wh i le i ts QQmessagi ng servi ce h as over 6 0 0 mi lli on users.A round th e WeC h at i nfrastructure are

142、a number of oth er servi ces such as payments,uti li ti es,gami ng,i nformati on and news.A bove all,we beli eve adverti si ng i s a maj or opportuni ty for th e G roup.Some 9 8%of C h i nese i nternet users access th e i nternet th rough smartph ones,supporti ng Tencents busi ness model,wh i ch h a

143、s focused on bui ldi ng a large user base wi th relati vely low transacti on values and a h i gh proporti on of revenues deri ved from subscri pti ons.Forei gn entrants i nto th e mark et are h i gh ly restri cted by C h i nese law.Tencent also h as a si gni fi cant tech nology i nvestment portfoli

144、o wh i ch we beli eve wi ll produce meani ngful value creati on for i nvestors over comi ng years,parti cularly wh en th ey allow th e group to enter new geograph i es or new acti vi ti es.I t i s i ncreasi ngly clear to us th at some of th e tech nologi cal i nnovati on comi ng out of C h i na i s

145、world-class.A busi ness such as Tencent wi th a si zable commerci al ventures arm and access to capi tal i s well placed to capi tali se on th i s,especi ally as i t typi cally acts i n collaborati on wi th oth er partners wh i ch reduces regulatory ri sk (someth i ng we beli eve i s i ncreasi ng i

146、n C h i na)and allows busi nesses i n wh i ch Tencent i s i nvested to strength en th ei r competi ti ve posi ti on th rough bei ng able to call on th e experti se of several strategi c i nvestors.We also acqui red a stak e i n Tai wan Semi conductor Manufacturi ng C orporati on(TSMC),our fi rst i n

147、vestment i n Tai wan and to us,one of th e best busi nesses we h ave seen.“Valuati on i s not li k ely to be th e mai n determi nant of th e outcome of our strategy.Th e quali ty of th e compani es i n our portfoli o i s,at least over th e long-term”16Fundsmi th E mergi ng E qui ti es Trust plc A nn

148、ual Report for th e year ended 3 1 D ecember 2 0 2 0Strategi c Report“Weak ness i n emergi ng mark et currenci es adversely affected our performance”TSMC i s th e worlds largest semi conductor contract manufacturer wi th a mark et sh are of over 5 0%(and growi ng).I t i s a busi ness th at we beli e

149、ve h as bui lt an unsurmountable lead i n i ts i ndustry wh i ch i s now an effecti ve duopoly wi th Samsung.TSMC does not desi gn or mark et any semi conductor products under i ts own name,ensuri ng th at i t does not compete wi th any of i ts customers.I t h as focused on developi ng i ts own tech

150、 nologi es i n both products and manufacturi ng processes and ai ms to be th e foundry of ch oi ce.A meri can and Japanese ri vals h ave ceased developi ng th e smaller ch i p si zes TSMC i s bri ngi ng to mark et as th ey lack th e capi tal and tech nologi cal sk i lls to do so,wh i lst C h i na i

151、s several years beh i nd TSMC i n tech nology terms.A s well as th e ph ysi cal cost of catch i ng up wi th TSMC,i t h as consi derable engi neeri ng and R&D strength s wh i ch money i tself cant repli cate.I n addi ti on,i f i ts customers leave th ey ri sk product launch delays of month s,and more

152、 li k ely years.TSMC also h as a strong balance sh eet and publi cly descri bes i ts fi nanci al posi ti on as bei ng i ts fortress allowi ng i t to develop mark et posi ti ons i n th e more tech ni cally advanced 7 nm,5 nm and 3 nm segments,back ed by conti nui ng research and development experti s

153、e to back i t up.TSMC tri es to ensure th at return on i nvestment i n each si ze of ch i p development i s above th at ach i eved i n th e previ ous one.We made outri gh t sales of two h oldi ngs,Ti ger B rands and TravelSk y.We i ni ti ally bough t TravelSk y because of i ts exposure to th e growt

154、h of ai r passenger traffi c i n C h i na because of i ts government-enforced monopoly posi ti on.A s th e C h i nese mi ddle class grows,i ncomes ri se and consumpti on i ncreases,th ere i s an i ncreasi ng propensi ty to travel,both domesti cally and i nternati onally.We k new th at TravelSk y at

155、th e ti me of i nvestment was a state-controlled enterpri se,wi th a combi nati on of C h i nas central government and state-controlled ai rli nes h avi ng maj ori ty control.A lth ough as i nvestors we could tolerate TravelSk ys work i ng capi tal cycle wi th i ts ai rli ne customers,we became i nc

156、reasi ngly concerned about h ow th e group allocated capi tal outsi de of th e busi ness,most notably setti ng up j oi nt ventures i n th e i nsurance and telecom sectors.Ti ger B rands i s an i nvestment wh ere we exh i bi ted pati ence,but i n h i ndsi gh t,probably too much.We owned th e busi nes

157、s due to i ts strong mark et posi ti ons i n a number of South A fri can food segments,alongsi de i ts exposure to a number of oth er fast-growi ng A fri can mark ets.Unfortunately,th e busi ness di d not sh ow th e level of resi li ence we would h ave li k ed i n a weak South A fri can consumer mar

158、k et wi th h i gh levels of competi ti on and pri ce deflati on and,as wi tnessed by th e Li steri a i nci dent we h ave previ ously talk ed about,we i ncreasi ngly took th e vi ew th at management h ad lost control of th e busi ness and any recovery would be long and di ffi cult.B y sector,th e bre

159、ak down of FE E T as at 3 1 D ecember i s as below:FE E T G I C S Sector Spli t%C onsumer Staples5 2.0 H ealth care1 5.1 C onsumer D i screti onary1 0.5 C ommuni cati on Servi ces6.8 Materi als4.7 I ndustri als3.7 C ash3.1 Tech nology2.4 Fi nanci als1.9 1 0 0 Table 6:Source:Fundsmi th,B loomberg I n

160、vestment Managers Revi ew17Fundsmi th E mergi ng E qui ti es Trust plc A nnual Report for th e year ended 3 1 D ecember 2 0 2 0C ompared wi th th e I ndex:MSC I G I C S Sector Spli t%I nformati on Tech nology2 0.3 C onsumer D i screti onary1 8.2 I nformati on Tech nology Fi nanci als1 8.1 C ommuni c

161、ati on Servi ces1 1.7 Materi als7.8 C onsumer Staples5.9 E nergy5.0 H ealth C are4.7 I ndustri als4.3 Real E state2.2 Uti li ti es2.0 1 0 0 Table 7:Source:Fundsmi th,B loomberg B y sector,th e break down of FE E T at 3 1 D ecember 2 0 2 0 as we would descri be th e sectors rath er th an th ose used

162、by th e i ndex(wh i ch are rath er generi c)was:Sector(%)2 0 2 02 0 1 9 Food&B everage2 42 8 I nformati on Tech nology2 01 1 H ealth care 1 51 6 Retai l 1 21 1 Fast Movi ng C onsumer G oods1 21 5 D ecorati ve Pai nt54 Tobacco 47 H ouseh old E lectri cals43 Fast Food11 A uto00 I ndustri als00 C ash34

163、 1 0 01 0 0 Table 8:Source:Fundsmi th A s well as th e consti tuent compani es of th e I ndex bei ng di sti nctly di fferent to th ose we would be wi lli ng to i nvest i n,th e geograph i cal wei gh ti ngs of th e I ndex remai n very di fferent to wh ere th e C ompanys portfoli o i s i nvested.Th e

164、best performi ng emergi ng mark ets i n 2 0 2 0 were South Korea and Tai wan,mark ets wh ere th e C ompany h as not h i stori cally i nvested due to h i gh G D P levels and unattracti ve demograph i cs li mi ti ng th e opportuni ti es avai lable to th e C ompany.Our geograph i cal wei gh ti ngs and

165、th ose of th e i ndex are sh own below:FE E T C ountry B reak down Wei gh t(%)I ndi a4 2.9 C h i na(i ncl.H ong Kong)1 6.2 A rgenti na9.0 B razi l4.8 E gypt4.7 Oth er E mergi ng Mark ets1 1.9 Fronti er Mark ets7.4 C ash3.1 TOTA L1 0 0 Table 9:Source:Fundsmi th MSC I E M+FM I ndex C ountry B reak dow

166、nWei gh t(%)C h i na(i ncl.H ong Kong)3 8.7 South Korea1 3.3 Tai wan1 2.6 I ndi a9.2 B razi l5.1 Oth er Fronti er&E mergi ng Mark ets2 1.1 1 0 0 Table 1 0:Source:MSC I,B loomberg“I n I ndi a we are now experi enci ng strong company results as th e di srupti ve effects of th e G ST i mplementati on h

167、 ave waned and i ts benefits h ave become apparent”18Fundsmi th E mergi ng E qui ti es Trust plc A nnual Report for th e year ended 3 1 D ecember 2 0 2 0Strategi c Report“We h ope and expect th at th e combi nati on of th ese reforms wi ll h elp to transform I ndi as economy to th e benefit of our i

168、 nvestee compani es as well as ordi nary I ndi ans”I n terms of contri butors to performance,th e tables below sh ow th e top fi ve contri butors and detractors from th e C ompanys performance:Top 5 C ontri butorsC ountry%MercadoLi breA rgenti na7.9 Fosh an H ai ti anC h i na6.3 I nfo E dgeI ndi a2.

169、4 A si an Pai ntsI ndi a1.7 D r Lal Path labsI ndi a1.0 Table 1 1:Source:Fundsmi th I n 2 0 2 0,th e top two performers,MercadoLi bre and Fosh an H ai ti an,were also i n th e top fi ve i n 2 0 1 9.B oth MercadoLi bre and Fosh an H ai ti an conti nue to execute well on th ei r strategi es.A lth ough

170、 we touch on th e C ovi d-1 9 si tuati on later and i ts i mpli cati ons for th e stock s i n th e portfoli o,both MercadoLi bre and Fosh an H ai ti an are well placed to benefi t from th e th ree mai n trends we beli eve th e pandemi c wi ll dramati cally accelerate di gi tali sati on,formali sati

171、on and consoli dati on.MercadoLi bre i s an obvi ous benefi ci ary of th e fi rst of th ese wh i lst Fosh an H ai ti an i s li k ely to benefi t from sh i fts towards formali sati on and consoli dati on.MercadoLi bres management beli eve th at th e pandemi c h as accelerated growth by maybe th ree t

172、o fi ve years.Th e C ovi d-1 9 outbreak led to a sh arp i ncrease i n demand for h ome sh oppi ng,and Lati n A meri ca remai ns an embryoni c mark et for di gi tal retai li ng.E ven i f th e most opti mi sti c esti mates bear frui t and e-commerce doubles i ts penetrati on over th e course of 2 0 2

173、0,i t would only account for around a tenth of retai l sales,a si gni fi cantly smaller percentage th an ei th er developed mark ets or C h i na.MercadoLi bre i s well funded followi ng both th e recent PayPal i nvestment and pri vate placement i ssuance,and th i s wi ll allow i t not j ust to bui l

174、d i ts core payments and e-commerce platforms but to develop a broader,mark et leadi ng offer to customers.We are already seei ng si gns of a si gni fi cant i ncrease i n th e penetrati on of di gi tal payments.Fosh an H ai ti an conti nued th e progress i t h as made si nce i ts I PO.Th e company h

175、 as a si mple busi ness model,to tak e mark et sh are i n th e fragmented condi ments mark et i n C h i na.I ts advantages come from producti on effi ci enci es,i ncreasi ng brand recogni ti on,di stri buti on and a fragmented competi ti on,qui te often operati ng on only a local or regi onal basi s

176、.I n a country wh ere food scandals are common.Fosh an H ai ti an i s benefi ti ng from i ncreasi ng awareness of th e i mportance of food provenance.Th e busi ness conti nues to i ntroduce both new products wi th a premi um focus but also new categori es.Th e next th ree largest posi ti ve contri b

177、utors to performance were all I ndi an stock s.I nfo E dge owns leadi ng i nternet portals for j obs and property classi fi ed ads i n I ndi a.Th e companys operati ng performance struggled i n th e li gh t of th e i mpact of C ovi d-1 9 on i ts recrui tment mark et and th i s was compounded by a sl

178、owdown i n th e real estate mark et.I n spi te of th i s,th e groups sh are pri ce performed strongly i n th e latter stages of th e year i n anti ci pati on of a strong recovery from th e pandemi c and th e potenti al I POs of Zomato(I ndi as leadi ng food deli very platform)and Poli cyB (I ndi as

179、largest mark etplace for h ealth and li fe i nsurance);I nfo E dge owns meani ngful stak es i n both th e busi nesses.A si an Pai nts h as seen a very strong rebound i n decorati ve pai nt consumpti on,wi th volume growth back to double di gi ts,si nce th e pandemi c,and h as also seen mark et sh ar

180、e gai ns from i nformal players.Th e company i s expandi ng i ts busi ness beyond decorati ve pai nts i nto oth er areas of h ome i mprovement,i ncludi ng furni ture I nvestment Managers Revi ew19Fundsmi th E mergi ng E qui ti es Trust plc A nnual Report for th e year ended 3 1 D ecember 2 0 2 0and

181、furni sh i ngs.Th e busi ness retai ns a strong relati onsh i p wi th i ts di stri butors and contractor base h elped by i ts i ndustry leadi ng supply ch ai n.D r Lal Path labs performed strongly i n th e year.B randed players i n I ndi a account for j ust 1 0-1 5%of th e overall di agnosti cs mark

182、 et i n th e country.Th e abi li ty of maj or labs to offer C ovi d-1 9 tests h as led to a si gni fi cant i ncrease i n brand awareness.D r Lal(as wi th i ts larger peers)now h ave th e opportuni ty to consoli date a fragmented mark et at a faster pace and benefi t from economi es of scale.Th e top

183、 5 detractors to performance are sh own below:B ottom 5 C ontri butorsC ountry%H yperaB razi l-1.1%Ph i li ppi ne SevenPh i li ppi nes-0.6%D ali FoodsC h i na(H K-li sted)-0.6%E ast A fri can B reweri es LtdKenya-0.5%E di taE gypt-0.5%Table 1 2:Source:Fundsmi th H ypera was th e worst performer,alth

184、 ough th e maj ori ty of th e contri buti on of i ts underperformance to th e portfoli o came from currency rath er th an i ts stock pri ce.Th e ongoi ng regulatory i nvesti gati on made only li mi ted progress duri ng th e year and oversh adowed wh at to us appear to be two good acqui si ti ons of

185、products from maj or multi nati onal ph armaceuti cal brands duri ng 2 0 2 0.Later on i n th e year th e group,th rough i ts ventures arm,acqui red a range of natural organi c and vegan cosmeti cs.I n spi te of a sale of some smaller brands i n th e year,th e acqui si ti ons h ave dri ven debt up an

186、d we look forward to th e group deleveragi ng.D ali Foods was agai n a di sappoi nti ng performer i n th e year and i ts sh are pri ce fai led to benefi t from th e rally a number of i ts li sted peers enj oyed as C h i na emerged from C ovi d.D ali s dri nk s busi nesses,i n parti cularly i ts H i-

187、Ti ger energy dri nk,suffered from reduced on th e go consumpti on,wh i lst lock-down measures i n C h i na slowed th e growth of i ts soy mi lk category.Th e executi on of th e roll-out of th e bread busi ness conti nues and th e busi ness conti nues to develop th e all-i mportant e-commerce catego

188、ry i n th e PRC.Th e G roups balance sh eet remai ns strong and our forecasts i ndi cate th at by th e mi ddle of th e decade,th e group wi ll h ave over h alf of i ts current mark et capi tali sati on i n cash.Th e Ph i li ppi nes h as been one of th e h ardest h i t countri es globally i n economi

189、 c terms from th e C ovi d-1 9 pandemi c.A combi nati on of an elongated lock down,lack of government sti mulus and delays to vacci ne procurement h ave all contri buted to a decli ne i n G D P of around 9%i n 2 0 2 0,wi th a more li mi ted rebound i n 2 0 2 1.Our only h oldi ng i n th e Ph i li ppi

190、 nes,Ph i li ppi ne Seven wi ll be a net benefi ci ary of C ovi d-1 9.A lready li mi ted store roll-out programmes from i ts less-well capi tali sed ri vals h ave been severely di srupted i n lock down and th ere i s strong evi dence th at th ere h as been a mark ed i ncrease i n mark et sh are duri

191、 ng th e pandemi c wh i ch we do not fully expect to reverse once th e i mpact of th e pandemi c ends.E A B L h as been anoth er busi ness i mpacted by C ovi d-1 9,wi th h otels,bars and restaurants i n i ts mai n mark ets of Uganda,Tanzani a and,i n parti cular Kenya all subj ect to closure.A s wel

192、l as volume reducti ons,th e busi ness also h ad to deal wi th a mi x ch ange away from k egs and crates i nto bottles,cans and 6-pack s as h ome consumpti on became a greater proporti on of i ts sales.Th e table overleaf sh ows th e i mpact on of currenci es on th e C ompany i n 2 0 2 0.Th e overal

193、l i mpact of currenci es i n th e year was to detract from performance by 5.7%.20Fundsmi th E mergi ng E qui ti es Trust plc A nnual Report for th e year ended 3 1 D ecember 2 0 2 0Strategi c Report Top Five%Bottom Five%C h i na0.2I ndi a-2.5 Ph i li ppi nes0.2Uni ted States-1.1 E gypt0.1B razi l-1.

194、1 I ndonesi a0.0Turk ey-0.6 B angladesh0.0South A fri ca-0.3 Table 1 3:Source:Fundsmi th Th e posi ti ve contri buti on of currenci es to th e portfoli o was li mi ted.Th e C h i nese Yuan performed strongly agai nst oth er countri es h elped by a conti nued trade surplus and also a rapi d return to

195、 economi c growth after th e C ovi d-1 9 outbreak was controlled.Th e E gypti an Pound conti nued to benefi t from th e I MF restructuri ng programme i mplemented previ ously,wh i lst th e Ph i li ppi ne Peso benefi ted from a sh arp fall i n i mports to th e country.I n 2 0 1 9 th e I ndi an Rupee

196、was th e bi ggest si ngle detractor from performance,both i n terms of th e currency i mpact and th e total i mpact on portfoli o performance(over 4 0%of th e portfoli o i s i n compani es li sted i n I ndi a wi th th ei r earni ngs overwh elmi ngly deri ved i n Rupees).I n 2 0 2 0,th i s repeated i

197、 tself and th e Rupee was one of A si as weak est currenci es,pri mari ly due to weak eni ng economi c data i n I ndi a and aggressi ve rate cuts by th e Reserve B ank duri ng th e year.E lsewh ere,Lati n A meri can currenci es were weak (parti cularly th e B razi li an Real)but also th e US dollar(

198、both MercadoLi bre and XP are li sted i n th e US i n US dollars).Th e Turk i sh Li ra was also weak on concerns about poli ti cal i nterference i n th e countrys economi c i nsti tuti ons ami dst conti nued h i gh i nflati on.Th e South A fri can Rand,li k e th e B razi li an Real,suffered from bot

199、h concerns over macroeconomi c poli ci es and lower resource pri ces.We conti nue not to h edge currenci es,pri mari ly due to cost and complexi ty.Th e regi onal G eograph i c break down of th e portfoli o as at th e end of D ecember 2 0 2 0 i s sh own below:Regi on%I ndi a4 2.9 A si a(ex-I ndi a)2

200、 7.0 Lati n A meri ca1 5.7 E astern E urope,Mi ddle E ast and A fri ca1 1.3 C ash3.1 1 0 0.0 Table 1 4:Source:Fundsmi th I ndi a experi enced a severe di srupti on and slowdown i n economi c acti vi ty i n th e fi rst h alf of 2 0 2 0 because of stri ct and extended lock down i ntroduced by th e gov

201、ernment i n li gh t of th e pandemi c.Si nce September,th e number of C ovi d-1 9 cases i n th e country h as come down exponenti ally and economi c acti vi ty h as rebounded sh arply.Pri me Mi ni ster Narendra Modi also took th e opportuni ty to mak e furth er reform to spur domesti c manufacturi n

202、g.Our portfoli o i n I ndi a h as been a net benefi ci ary of th e pandemi c wi th th ose stronger consumer brands gai ni ng mark et sh are and i ncreased awareness around h ealth and di gi tali sati on.I ndi a returned to growth i n th e fi nal quarter of calendar 2 0 2 0.I ndi a i s th e largest m

203、anufacturer of vacci nes i n th e world and h as started i ts i noculati on programme,wh i ch we h ope wi ll h elp to sustai n th e rebound i n economi c acti vi ty i n 2 0 2 1.A s always,th e portfoli os wei gh ti ng i n I ndi a i s not a deli berate j udgment on th e I ndi an economy,but more on t

204、h e quali ty of company we h ave found and th e opportuni ti es open to th em.I ndi a retai ns a large number of i nvestment opportuni ti es,wh eth er i t be I nvestment Managers Revi ew21Fundsmi th E mergi ng E qui ti es Trust plc A nnual Report for th e year ended 3 1 D ecember 2 0 2 0li sted mult

205、i nati onal subsi di ary,li sted busi nesses operati ng across th e country(and i n some cases wi th i nternati onal operati ons outsi de of I ndi a)and also regi onal busi nesses.A s well as h avi ng a young and i ncreasi ngly educated populati on,th ere remai ns si gni fi cant scope for urbani sat

206、i on(wh i ch i n i tself wi ll bri ng a sh i ft from i nformal mark ets and dri ve premi umi sati on)and,of course,I ndi as i nsti tuti ons h ave proved to be resi li ent i n th e decades si nce i ndependence.A lmost all of our consumer h oldi ngs i n I ndi a saw an accelerati on i n mark et sh are

207、gai ns from regi onal brands and i nformal players because of better executi on,consumers gravi tati ng towards trusted brands,more resi li ent supply ch ai ns,faster adopti on of tech nology to i nteract wi th di stri butors and consumers and strong growth i n di gi tal ch annels.Our h ealth care p

208、ortfoli o i n th e country,mostly i nvested i n di agnosti c testi ng busi nesses li k e D r Lal Path labs,Metropoli s and Th yrocare,i ni ti ally saw a si gni fi cant i mpact on test volumes due to reduced prescri pti on rates,delays i n electi ve surgeri es and pati ents reluctant to vi si t local

209、 labs.H owever,all th ree busi nesses rebounded strongly i n th e second h alf of th e year wi th several structural ch anges tak i ng place i n th e sector.Th ese i ncluded an accelerati on i n mark et sh are gai ns from i ndependent mom-n-pop labs th at control 8 5-9 0%of th e overall mark et,si g

210、ni fi cant growth i n h ome collecti on of test samples,i ncreased di gi tal engagement wi th consumers from book i ng tests to collecti ng and analysi ng test results and consumers becomi ng more consci ous about th ei r h ealth and ch oosi ng to do preventi ve or wellness tests.I n fact,th e found

211、er of one of our portfoli o compani es sai d,“C ovi d-1 9 h as been a bi g PR exerci se for di agnosti cs.”We beli eve C ovi d wi ll dri ve faster consoli dati on of th e fragmented di agnosti cs sector i n I ndi a.Our second largest exposure i s C h i na.We h ave four C h i na exposed compani es,th

212、 ree of wh i ch are li sted i n H ong Kong,wh i ch to us typi cally provi des greater transparency wh en compared to mai nland li sted comparators.Two of th e portfoli os th ree largest h oldi ngs at th e end of 2 0 2 0 were compani es wh i ch deri ved th e bulk of th ei r revenues from th e PRC.C h

213、 i na conti nues to h ave speci fi c i ssues wh i ch reduce th e number of i nvestment opportuni ti es avai lable to th e C ompany and i f anyth i ng th e i nvestment envi ronment i n C h i na h as deteri orated.C h i na lack s an i ndependent legal system,ownersh i p structures can be murk y and bi

214、 ased agai nst i nsti tuti ons,corporate governance can be poor,government gui dance and regulati on i n th e economy can be unh elpful and often enterpri ses do not naturally operate or allocate fi nanci al capi tal i n a logi cal economi c manner benefi ci al to all sh areh olders.Th e last poi nt

215、 can be brough t to bear by a qui ck analysi s of Kwei ch ow Moutai,one of C h i nas largest domesti cally li sted busi nesses and wi dely h eld by a number of emergi ng mark et funds.I n spi te of th e busi nesses excellent returns and h i gh margi ns,we h ave sh i ed away from i nvesti ng and th e

216、 reasons wh y sh ow some of th e i ssues forei gn i nvestors i n C h i nese compani es h ave to assess.2 0 2 0 saw th e group carry out a substanti al bond i ssue,not to develop i ts own busi ness,but to refi nance an i ndebted toll-road operator i n i ts h ome provi nce of G ui zh ou.B oth busi nes

217、ses h ad th e same controlli ng sh areh older-th e provi nci al government.A nd not stoppi ng th ere,th e provi nci al government h as twi ce recently transferred 4%sh are stak es from th e h oldi ng company to i tself and subsequently sold th em i n th e mark et.Of greater alarm to any sh areh olde

218、r i n th e group would be wh y at least 1 4 seni or offi ci als of th e company and i ts C E O h ave been arrested or placed under i nvesti gati on for corrupti on si nce Spri ng 2 0 1 9 and persi stent rumours 22Fundsmi th E mergi ng E qui ti es Trust plc A nnual Report for th e year ended 3 1 D ec

219、ember 2 0 2 0Strategi c Reportof th e provi nci al government look i ng at stri ppi ng th e sales and mark eti ng(and th us th e mai n source of profi tabi li ty)out of th e li sted enti ty.To us,even th ough th ese i ssues may not be uni que i n a C h i nese context,th ey are certai nly ri sk s wh

220、i ch rule out i nvesti ng.We are unwi lli ng to i nvest i n compani es wh i ch are below th e quali ty th resh old of th e fund j ust because th ey may be good compani es i n a C h i nese context.Setti ng asi de th e 2 0 2 0 i mpact of th e Trump admi ni strati on placi ng i nvestment sancti ons on

221、a number of C h i nese compani es wh i ch i t deemed to be mi li tary controlled,th e year also saw a mark ed i ncrease i n regulatory i nterventi on by th e mai nland auth ori ti es i n th e largest pri vate compani es,and most notably th e maj or pri vate i nternet busi nesses such as Tencent and

222、A li baba.Zh i gang Tao,a professor of economi cs at th e Uni versi ty of H ong Kong sums up th e regulatory envi ronment i n C h i na neatly,wi th state owned compani es bei ng th e favouri te k i ds of th e soci ali st government of C h i na,wh i le pri vate fi rms are adopted k i ds faci ng syste

223、mati c di scri mi nati ons and substanti al constrai nts i n busi ness entri es and subsequent operati ons.A li baba(a busi ness we do not own)to us proves an i nteresti ng example of wh at may be acceptable beh avi our elsewh ere but i s not always acceptable to regulators i n th e PRC.A lth ough w

224、e h ave always h ad concerns about A li babas governance and accounti ng poli ci es,regulators i n th e PRC took i nterventi on to a new level wh en th ey forced th e spi n-out of th e groups Fi ntech busi ness,A nt Fi nanci al,to be abandoned at th e 1 1 th h our.Setti ng asi de th e reputati onal

225、i mpact on A li baba and i ts founder Jack Ma,to us th e wh ole i nterventi on by th e Peoples B ank of C h i na and oth er regulatory i ssues bri ngs to bear two poi nts.Fi rst,and goi ng back to th e Kwei ch ow Moutai example,we conti nue to be surpri sed at h ow li ttle some emergi ng mark et i n

226、vestors(and of course almost all E TFs)look at wh at th ey are i nvesti ng i n.Th eextensi ve work we carri ed out on A nt Fi nanci al clearly suggested to us th at i t i ncreasi ngly look ed li k e a bank,smelt li k e a bank and th erefore probably was a bank,and th us openi ng i t up to regulatory

227、 ri sk,wh i ch ulti mately came to pass.Second,regulatory processes i n C h i na are brutal.Th ey are typi cally qui ck,lack th e scope for any busi nesses to prove a case,h ave very li mi ted consultati on and i mplemented i nstantly.To us,i f we see such ri sk s,we wont i nvest.Th e crack down on

228、A nt Fi nanci al h i gh li gh ts th e i ssues i n C h i nas fi nanci al system of debt and th e overall lack of transparency i n th e fi nanci al system.We see li ttle ch ange from our commentary of last year wh en we noted th at C h i na appears to h ave a tri ple bubble i n i nvestment,real estate

229、 and credi t.To us,th ere are th ree areas of parti cular concern i n C h i nas debt structure-th e scale of local government debt,debt h eld by property developers wh i ch needs refi nanci ng(much of wh i ch i s offsh ore i n H K$or US$)and th e debt lent to overseas governments and proj ects as pa

230、rt of th e B elt and Road i ni ti ati ve wh i ch may not h ave th e cash flow to cover th e borrowi ngs tak en out.Our concerns remai n ampli fi ed on th e basi s th at C h i nese busi nesses(and state enti ti es)are often not th e best allocators of capi tal.To us,one of th e reasons beh i nd th e

231、A nt Fi nanci al crack down was a worry by th e C h i nese auth ori ti es th at th e more lendi ng wh i ch went th rough a platform li k e A nt,th e less clear debt ri sk s i n C h i na became,i ncreasi ng th e ri sk to th e fi nanci al system as a wh ole.C h i na h as,h owever,managed one of th e e

232、arli est and more sustai ned recoveri es from th e C ovi d-1 9 pandemi c,i n spi te of and because of early quaranti ne measures tak en i n Q1 and Q2 last year.C h i na recorded 2 0 2 0 economi c growth of 2.3%and forecasts for 2 0 2 1 seem to suggest th at G D P growth wi ll come i n at around 8%.I

233、 nvestment Managers Revi ew23Fundsmi th E mergi ng E qui ti es Trust plc A nnual Report for th e year ended 3 1 D ecember 2 0 2 02 0 2 0 was a di ffi cult year for Vi tasoy.One of i ts C h i nese plants i n Wuh an h ad to deal wi th th e enforced closure of th i s for several month s i n th e year.C

234、 onsumpti on was i mpacted both i n mai nland C h i na and H ong Kong,wh ere th e on th e go consumpti on wh i ch dri ves product sales was li mi ted by quaranti ni ng and reduced overall footfall.I n addi ti on,th e closure of H ong Kongs sch ools for a large part of 2 0 2 0 also h i t th e groups

235、sales.Th e recent results presentati on i ndi cated strong recovery i n th e C h i nese mark et,and th e groups recently opened new plant i n D ongguan i n th e PRC wi ll h elp support future sales volumes.Vi etnam,li k e C h i na h elped by a combi nati on of centrali sed control and a local party

236、organi sati on(both of wh i ch support quaranti ni ng and track i ng),h as been relati vely i mmune from C ovi d-1 9 cases.Th i s h as h elped th e economy perform better th an almost all oth er economi es,wi th 2 0 2 0 G D P growth of 2.9%.Our one h oldi ng i n th e country remai ns Vi etnam D ai r

237、y,and th e busi ness h as been h elped by th e trends wh i ch h ave dri ven i t over recent years-mark et sh are gai ns,new product launch es and premi umi sati on.I n 2 0 1 9 th e group took a controlli ng stak e i n ri val dai ry fi rm G TN,wh i ch not only gave i t a stronger posi ti on i n north

238、 ern Vi etnam but also allowed a number of cost savi ngs and procurement synergi es to be exploi ted.Th e performance of our one remai ni ng h oldi ng i n I ndonesi a,Prodi a,h as been di sappoi nti ng.Th e medi cal di agnosti cs busi ness struggled due to th e di srupti on caused by repeated lock d

239、owns i n th e country wh i lst,i t also suffered from a decli ne i n day to day medi cal testi ng acti vi ty as customers sh i ed away from vi si ti ng doctors or h ealth centres duri ng th e pandemi c.Th e development of h i gh er cost di agnosti c servi ces and preventati ve screeni ng procedures

240、h ave fai led to li ft profi tabi li ty i n spi te of opportuni ti es offered by C ovi d testi ng.Our remai ni ng th ree tobacco i nvestments are all seei ng di fferent trends i mpact th ei r mark et.C eylon Tobacco retai ns i ts monopoly posi ti on i n Sri Lank a,and we see th e electi on of a pote

241、nti ally more pro-busi ness government as potenti ally h elpful for th e busi ness.Th e ci garette mark et i n B angladesh,wh ere we conti nue to h old B A T B angladesh retai ns a number of growth dri vers,i n parti cularly premi umi sati on.B A T B angladesh i s,h owever seei ng i ntensi fi ed com

242、peti ti on from Japan Tobacco i n i ts mark et.We retai n a posi ti on i n E gypts E astern C ompany S.A.E,wh i ch i s a busi ness wh ere we beli eve restructuri ng and better capi tal allocati on can turn h ealth y returns i nto very attracti ve ones,alth ough executi on i s dependent on th e E gyp

243、ti an governments pri vati sati on programme.I n terms of our oth er h oldi ngs i n E gypt,E D I TA saw a strong performance i n bak ery and cak es,but bi scui ts,candy and rusk sales suffered as consumers,parti cularly ch i ldren,stayed at h ome.I ntegrated D i agnosti c H oldi ngs i s look i ng at

244、 carryi ng out a j oi nt li sti ng on th e E gypt exch ange i n a move to encourage local i nterest i n th e sh ares.A si mi lar move i s also bei ng consi dered by D P E urasi a wh i ch i s evaluati ng a j oi nt li sti ng i n i ts mai n mark et of busi ness acti vi ty,Turk ey.D P E urasi a was a fr

245、ustrati ng performer for th e fund i n 2 0 2 0,wi th C ovi d-1 9 h amperi ng both tradi ng and th e groups turnaround strategy i n Russi a.A lth ough we i nvest i n busi nesses rath er th an sh are pri ces tak i ng a vi ew th at i f a busi ness performs strongly and consi stently i t wi ll be reflec

246、ted i n i ts sh are pri ce,th e sh are-pri ce performance of D P E urasi a i s,to us,exacerbated by a li sti ng i n London wh ere i t i s h ard to garner new i nvestor i nterest.Our oth er i nvestment i n Turk ey,B I M,performed strongly i n a tough consumer mark et and h i gh i nflati on envi ronme

247、nt.To us,B I M h as a very attracti ve counter-cycli cal busi ness model,operati ng i n h i gh-densi ty 24Fundsmi th E mergi ng E qui ti es Trust plc A nnual Report for th e year ended 3 1 D ecember 2 0 2 0Strategi c Reportresi denti al areas wi th a li mi ted range of value-ori entated goods.Th i n

248、k C o-op store locati ons wi th an A ldi style product offer.A fter th e sale of Ti ger B rands,we h ave only one h oldi ng i n South A fri ca,C li ck s.C li ck s retai ns a strong mark et posi ti on and alth ough sales of beauty products h ave suffered duri ng South A fri cas lock down,th e busi ne

249、ss i s well placed for future growth.B oth Nestl Ni geri a and E A B L are,i n our vi ew,th e best i nvestments for two attracti ve th emes our fund can benefi t from-th e ri se of th e Ni geri an consumer and A fri can beer consumpti on-wi th i n a western corporate governance structure.Ni geri as

250、populati on i s forecast by th e UN to double from c.2 0 0 mi lli on now to c.4 0 0 mi lli on by 2 0 5 0 and th en almost double agai n between 2 0 5 0 and 2 1 0 0,mak i ng i t th e th i rd most populous country on earth by th e mi d-2 0 4 0 s.I n terms of our i nvestments i n Lati n A meri ca,we h

251、ave already touch ed on H ypera,MercadoLi bre,XP and Loj as Renner.Walmart de Mexi co performed strongly at th e operati onal level,no doubt h elped by th e pandemi c,but th e sh ares weak ened i n th e latter part of th e year as i t announced i t was under i nvesti gati on by Mexi cos competi ti o

252、n auth ori ti es for anti competi ti ve beh avi our,someth i ng wh i ch th e group deni es.C ovi d-1 9 i mpact A t th e ti me of wri ti ng,th e k nown global death toll from C ovi d-1 9 h as reach ed over 2 mi lli on.A lth ough wi th a mortali ty rate somewh at lower th an past-pandemi cs,th e econo

253、mi c di srupti on caused by th e pandemi c h as been both severe and unprecedented i n modern ti mes.Our portfoli o went i nto th e pandemi c wi th a h i gh allocati on to defensi ve busi nesses i n areas such as consumer staples,grocery retai l and h ealth care.Th e maj ori ty of th e busi nesses w

254、e own h ave no net debt,and wh ere we do own busi nesses wi th debt we ensure th at th ey are li gh tly geared.We were also well placed to avoi d busi nesses wi th ch aracteri sti cs wh i ch h ave struggled i n th e downturn,most notably fi nanci al leverage,an exposure to compli cated cross-border

255、supply ch ai ns,a dependency on di screti onary consumer expendi ture and operati onally geared busi ness models i n sectors such as travel,lei sure and h ospi tali ty(to put th i s i nto perspecti ve we h ad j ust two stock s i n th ese sectors at th e outbreak of th e pandemi c).A ccompanyi ng th

256、e severi ty of th e di srupti on h as been an accelerati on of th ree structural ch anges wh i ch are goi ng to become i ncreasi ngly domi nant over comi ng years:Formali sati on C onsoli dati on D i gi tali sati on We beli eve th e FE E T portfoli o i s well posi ti oned to be a net benefi ci ary o

257、f th ese trends,no doubt accelerated by th e pandemi c.A lth ough th e rate of accelerati on of th ese trends i s uncertai n,ti mes of economi c uph eaval tend to magni fy and accelerate soci al,economi c and poli ti cal ch ange.We beli eve th at most of our compani es wi ll be benefi ci ari es of t

258、h e th ree trends.Fi rst,formali sati on wi ll dri ve i ncreasi ng post-pandemi c awareness of food provenance,a desi re to k now th at food and dri nk bei ng consumed i s safe and bough t from a sh oppi ng envi ronment wh i ch i s clean and effi ci ent.Our i nvestments i n branded food busi nesses

259、and modern trade retai l are well placed to benefi t from th i s,wh i lst we would also i nclude greater h ealth care awareness as I nvestment Managers Revi ew25Fundsmi th E mergi ng E qui ti es Trust plc A nnual Report for th e year ended 3 1 D ecember 2 0 2 0a benefi ci ary of post-pandemi c forma

260、li sati on.A gai n,we are well placed to benefi t from th i s trend.Th e pandemi c h as placed a h uge number of busi nesses under both operati onal and fi nanci al strai n.Th ose busi nesses wi th weak er busi ness models or fi nanci ally leveraged balance sh eets are not goi ng to be well placed r

261、elati ve to th ei r competi tors.Si mply put,stronger busi nesses wi ll get stronger,weak er ones wi ll ri sk falli ng by th e waysi de.G i ven th e strong mark et posi ti ons and h i gh barri ers to entry exh i bi ted almost unani mously by th e C ompanys h oldi ngs,we would expect th at our portfo

262、li o compani es wi ll be able to benefi t from opportuni ti es to i ncrease mark et sh are,ei th er th rough acqui si ti on,or far more li k ely organi c growth.Th e th i rd trend accelerated by th e pandemi c i s th at of di gi tali sati on.D i gi tali sati on to us tak es two mai n forms of i nves

263、tment opportuni ty-busi nesses wh i ch are outri gh t di gi tal busi nesses i n th e I T space,or non-di gi tal busi nesses wh i ch can benefi t from th e ri se of di gi tali sati on,parti cularly i n areas such as customer engagement and retai l di stri buti on.A large number of compani es we own,m

264、any of wh i ch were bough t at i ncepti on,are well placed to benefi t from th e latter trend.I n terms of di gi tal busi nesses,as such i nvestment opportuni ti es h ave become avai lable over ti me,we h ave made selecti ve i nvestments i n busi nesses such as MercadoLi bre,Tencent,XP and I nfo E d

265、ge,all of wh i ch are di gi tal busi nesses well placed to benefi t from mark et leadersh i p,i nnovati on,di srupti on and th e mi grati on of previ ously off-li ne acti vi ti es i nto th e di gi tal domai n.Summary Obvi ously th e C ompany h ad a strong 2 0 2 0,both i n absolute and relati ve term

266、s,and also saw an appreci able narrowi ng of th e di scount to stand at 3.1%at th e end of 2 0 2 0.Th e portfoli o clearly benefi ted from bei ng i nvested i n busi nesses wi th a h i gh degree of resi li ence i n th e pandemi c-wh eth er i t be th e sectors th ey serve,th ei r generally sound fi na

267、nci ng or th e abi li ty of th em to tak e advantage of th e trends of formali sati on,consoli dati on and,i n parti cular,di gi tali sati on th e pandemi c brough t upon.We also tak e th e vi ew th at th e C ompany benefi tted i n 2 0 2 0 from h avi ng a lower exposure to fronti er mark ets,a great

268、er exposure to h ealth care and tech nology(both sectors wh i ch performed strongly over th e year),greater concentrati on and less reli ance on li sted multi nati onal subsi di ari es(we i ncreasi ngly di fferenti ate between th ose wi th h i gh-cali bre local management and th ose wi th revolvi ng

269、 door expat management wh ere we typi cally h ave concerns over i ncenti vi sati on and th e abi li ty of th ose busi nesses to i nnovate).I n contrast to a reduced portfoli o wei gh ti ng i n li sted multi nati onal subsi di ari es,th ere h ad been an i ncrease i n busi nesses wh ere th ose runni n

270、g th em h ave consi derable economi c i nterests i n th ose busi nesses,wh ere we beli eve i nnovati on h as a h i gh er pri ori ty and deci si ons can be tak en i n th e long-term i nterest of th e busi ness wi th out bei ng swayed by th e sh ort-term.To put h ow th e portfoli o h as evolved over r

271、ecent ti mes i nto perspecti ve,over th e course of 2 0 1 9 and 2 0 2 0,th e proporti on of th e portfoli o i nvested i n fronti er mark ets fell from 1 2%to 7%,wh i lst th e proporti on of th e portfoli o i nvested i n tech nology and h ealth care rose from 1 9%to 3 6%,wi th th e proporti on of FE

272、E T i nvested i n consumer sectors falli ng from 8 1%to 6 4%.Over th e same ti me peri od,th e proporti on of busi nesses th e fund i s i nvested i n outsi de of government or multi nati onal control h as i ncreased from 5 3%to 7 6%.Over th e number of stock s h eld by th e fund decreased from 4 5 t

273、o 3 6,reflecti ng an i ncreased focus on th ose stock s i n wh i ch th e managers h ave th e greatest convi cti on.26Fundsmi th E mergi ng E qui ti es Trust plc A nnual Report for th e year ended 3 1 D ecember 2 0 2 0Strategi c ReportE nvi ronmental,Soci al and G overnance(E SG)Fundsmi th consi ders

274、 sustai nabi li ty ri sk s and th e net i mpacts a portfoli o company h as on both th e envi ronment and soci ety as much as i s possi ble wi th th e avai labi li ty and consi stency of reporti ng of non-fi nanci al data pertai ni ng to E SG i n emergi ng mark ets.A s long term i nvestors,we consi d

275、er th i s a fundamental part of h ow we assess th e long term sustai nabi li ty of a companys returns i n our i nvestment process.A s part of th i s,we engage wi th compani es on a regular basi s on areas th at i t can add value and vote all avai lable proxi es to promote th e sustai nabi li ty of l

276、ong term returns.Furth er i nformati on can be found i n th e Strategi c Report on page3 5.Outlook A s managers we wi ll conti nue to seek to i nvest i n resi li ent compani es,wi th h i gh returns on capi tal,th e abi li ty to rei nvest th at capi tal at h i gh rates of return i n order to sustai n

277、 th ose returns.Ona relati ve basi s,performance wi ll always be i nfluenced by E TF and I ndex fund flows,th e bulk of wh i ch ends up i n busi nesses we would never h ave any i ntenti on of owni ng.A s emergi ng mark ets h ave developed,i ncreasi ng opportuni ti es h ave presented th emselves to i

278、 nvest i n busi nesses th at meet our exacti ng cri teri a i n h i gh er growth segments such as h ealth care and tech nology.A lth ough not exclusi ve to th ese sectors,we saw towards th e end of 2 0 2 0 i ncreasi ng si gns of valuati ons across emergi ng mark ets becomi ng more stretch ed,parti cu

279、larly i n C h i na-focused busi nesses wh ere domesti c and i nternati onal i nsti tuti onal fund flows h ave h ad an i mpact,qui te often on i lli qui d sh areh older structures wh ere th ere i s scope for sh are pri ce movements to be magni fi ed.A sell-off i n February 2 0 2 1 seemed to suggest t

280、h at our vi ew h eld some credence,even th ough i t di d i mpact some of our h oldi ngs.I n spi te of th i s,we beli eve th at th e C ompany conti nues to offer i nvestors exposure to some of th e best compani es avai lable to own i n emergi ng mark ets and we look forward to reporti ng on h ow th e

281、se busi nesses develop over ti me.Michael OBrien Fundsmi th LLP I nvestment Manager 3 1 March 2 0 2 1 I nvestment Managers Revi ew27Fundsmi th E mergi ng E qui ti es Trust plc A nnual Report for th e year ended 3 1 D ecember 2 0 2 0I nvestment Ph i losoph y Fundsmi th E mergi ng E qui ti es Trust pl

282、c(FE E T)i nvests i n compani es wh i ch h ave th e maj ori ty of th ei r operati ons i n,or revenue deri ved from,D evelopi ng E conomi es*and wh i ch provi de di rect exposure to th e ri se of th e consumer classes i n th ose countri es.Fundsmi th LLP appli es a th ree step i nvestment process to

283、i mplement th at strategy:1.We ai m to i nvest i n h i gh quali ty busi nesses I n our vi ew,a h i gh quali ty busi ness i s one wh i ch can sustai n a h i gh return on operati ng capi tal employed i n cash.We are seek i ng a sustai nable h i gh rate of return.A n i mportant contri butor to th i s i

284、 s repeat busi ness,usually from consumers.A company th at sells many small i tems each day i s better able to earn consi stent returns over th e years th an a company wh ose busi ness i s cycli cal,li k e a steel manufacturer,or“lumpy”,li k e a property developer,a movi e studi o or even a drugs co

285、mpany.Th i s approach rules out most busi nesses th at do not sell di rectly to consumers or wh i ch mak e goods wh i ch are not consumed at sh ort and regular i ntervals.C api tal goods compani es and i ndustri al suppli ers mak e components,i ngredi ents and pack agi ng to sell to busi nesses.B us

286、i ness buyers are able to defer purch ases of such products wh en th e busi ness cycle turns down.Moreover,busi ness buyers employ staff wh ose sole raison dtre i s to dri ve down th e cost of purch ase and length en th ei r payment terms.I n contrast we as consumers h ave no di rect bargai ni ng po

287、wer.A n i mportant contri butor to resi li ence i s a resi stance to product obsolescence.Th i s means th at we try not to i nvest i n i ndustri es wh i ch are subj ect to rapi d tech nologi cal i nnovati on.I nnovati on i s often sough t by i nvestors but does not always produce lasti ng value for

288、th em.D evelopments such as canals,rai lroads,avi ati on,mi croch i ps and th e i nternet h ave transformed i ndustri es and peoples li ves.Th ey h ave created value for some i nvestors,but a lot of capi tal gets destroyed for oth ers,j ust as th e i nternet h as destroyed th e value of many tradi t

289、i onal medi a i ndustri es,most notably newspapers,as well as qui te a lot of capi tal i nvested i n th e i nternet compani es th at di dnt mak e i t and at th e peak of bubbles such as th e D otcom boom.E ven wh en a company sells to consumers,i t i s unli k ely to fi t our cri teri a i f i ts prod

290、ucts h ave a li fe wh i ch can be extended.Wh en consumers h i t h ard ti mes,th ey can defer replaci ng th ei r cars,h ouses and appli ances,but not food,toi letri es,cosmeti cs and cleani ng products.H ence we do not i ntend to i nvest i n manufacturers of consumer durables.We seek to i nvest i n

291、busi nesses wh ose assets are i ntangi ble and di ffi cult to repli cate.I t may seem counter-i ntui ti ve to seek busi nesses wh i ch do not rely upon tangi ble assets.Th e busi nesses we seek to i nvest i n do someth i ng very unusual:th ey break th e rule of mean reversi on th at states returns m

292、ust revert to th e average as new capi tal i s attracted to busi ness acti vi ti es earni ng above-average returns.Th ey can do th i s because th ei r most i mportant assets are not ph ysi cal assets,wh i ch can be repli cated by anyone wi th access to capi tal,but i ntangi ble assets wh i ch can be

293、 very di ffi cult to repli cate,no matter h ow much capi tal a competi tor i s wi lli ng to spend.Moreover,i ts h ard for compani es to repli cate th ese i ntangi ble assets usi ng borrowed funds,as bank s tend to favour th e(often i llusory)comfort of tangi ble collateral.Th i s means th at th e bu

294、si ness does not suffer from economi cally i rrati onal(or at least i nnumerate)competi tors wh en credi t i s freely avai lable.To be fai r,duri ng equi ty mark et“bubbles”,some i rrati onal competi ti on can be funded by equi ty wh i ch seems to requi re no foreseeable return,but such D otcom styl

295、e ph enomena mostly seem to attract capi tal to tech nology,bi otech,soci al network i ng,e-tai li ng and onli ne busi nesses and not th e less glamorous world of consumer non-durables.Th e k i nds of i ntangi ble assets we seek are brand names,trademark s,domi nant mark et sh ares,patents,li censes

296、,franch i ses,i ntellectual property or k now h ow,di stri buti on network s,supply ch ai ns,cli ent relati onsh i ps and i nstalled bases of equi pment or software th at lock i n cli ents for servi ce,spares,repai rs,renewals,consumables and transacti ons.Some combi nati on of such i ntangi bles de

297、fi nes a companys franch i se.Si nce stock mark ets *Where we refer to our investments in Developing Economies or Emerging Markets we mean countries other than those included in the MSCI World Index,i.e.in the widest possible sense.Clearly when referring to others references to emerging markets,deve

298、loping economies or the developing world their own definition applies.28Fundsmi th E mergi ng E qui ti es Trust plc A nnual Report for th e year ended 3 1 D ecember 2 0 2 0Strategi c ReportI nvestment Ph i losoph y typi cally value compani es on th e not unreasonable assumpti on th at th ei r return

299、s wi ll regress to th e mean,busi nesses wh ose returns do not do th i s can become undervalued.Th erei n li es our opportuni ty as i nvestors.We avoi d compani es th at h ave to use leverage to mak e an adequate return on equi ty.We only i nvest i n compani es th at earn a h i gh return on th ei r

300、capi tal on an unleveraged basi s.Th e compani es we i nvest i n may well h ave leverage,but th ey dont requi re borrowed money to functi on.For example,fi nanci al compani es(such as bank s,i nvestment bank s,credi t card lenders or leasi ng compani es)typi cally earn a low unleveraged return on th

301、 ei r assets.Th ey th en h ave to lever up th at capi tal several ti mes over wi th money from lenders and deposi tors i n order to earn wh at th ey deem to be an acceptable return on th ei r sh areh olders equi ty.Th i s means th at not only are th ei r unlevered equi ty returns i nadequate,but per

302、i odi cally th e supply of credi t i s wi th drawn,often wi th di sastrous consequences gi ven th e i lli qui di ty of th ei r asset base.I n assessi ng leverage,we i nclude off-balance sh eet fi nance i n th e form of operati ng leases,wh i ch are common i n some sectors,such as retai li ng.Th e bu

303、si nesses we seek must h ave growth potenti al.I t i s not enough for compani es to earn a h i gh unlevered rate of return.Our defi ni ti on of growth i s th at th ey must also be able to rei nvest at least a porti on of th ei r excess cash flow back i nto th e busi ness to grow,wh i le generati ng

304、a h i gh return on th e cash th us rei nvested.Over ti me,th i s sh ould compound sh areh olders wealth by generati ng more th an a pound of stock-mark et value for each pound rei nvested.I n our vi ew,growth cannot be th ough t about sensi bly i n i solati on from returns.Rapi d growth may be good

305、news or i t may be bad news.I t depends on h ow much capi tal you h ave to i nvest to generate th at growth.Th e source of growth i s also a factor to consi der.G rowth i n profi ts from i ncreasi ng pri ces can si mply bui ld an umbrella beneath wh i ch competi tors can flouri sh.We are more i nter

306、ested i n compani es wh i ch h ave ph ysi cal growth i n th e merch andi se or servi ce sold th an si mply pri ci ng power,alth ough h avi ng both i s ni ce.2.We try not to overpay for sh ares wh en i nvesti ng We only i nvest wh en we beli eve th e valuati on i s attracti ve.We esti mate th e free

307、cash flow of every company after tax and i nterest,but before di vi dends and oth er di stri buti ons,and after addi ng back any di screti onary capi tal expendi ture wh i ch i s not needed to mai ntai n th e busi ness.Oth erwi se we would penali se compani es wh i ch can i nvest i n order to grow.O

308、ur ai m i s to i nvest only wh en free cash flow per sh are as a percentage of a companys sh are pri ce(th e free cash flow yi eld)i s h i gh relati ve to long-term i nterest rates and wh en compared wi th th e free cash flow yi elds of oth er i nvestment candi dates both wi th i n and outsi de th e

309、 portfoli o.Our goal i s to buy securi ti es th at we beli eve wi ll grow and compound i n value,wh i ch bonds cannot,at yi elds th at are si mi lar to or better th an wh at we would get from a bond.3.We ai m to buy and h old We ai m to be long-term,buy-and-h old i nvestors.We seek to own only stock

310、 s th at wi ll compound i n value over th e years.A ccordi ngly,we try to be very careful about th e stock s we pi ck.We do not h ave a good new i nvestment i dea every day,or i ndeed,not even every year.E ven wh en we are able to fi nd a new company we would li k e to i nvest i n,we h ave to wai t,

311、someti mes forever,for a pri ce and valuati on at wh i ch we can j usti fy i nvesti ng.Th e resulti ng low level of deali ng acti vi ty also mi ni mi ses th e fri cti onal costs of tradi ng,a cost wh i ch i s often overlook ed by i nvestors as i t i s not normally di sclosed as part of th e costs of

312、 runni ng funds.Our i nvestment ph i losoph y i s also defi ned by a number of th i ngs we dont do:(A)We try never to engage i n so-called“G reater Fool Th eory”We really want to own all of th e compani es th at we i nvest i n.We do not buy th em k nowi ng th at th ey are not good busi nesses or are

313、 over-valued i n th e h ope th at someone more gulli ble wi ll come along and pay an even h i gh er pri ce for th em.We assume th at th ere i s no greater fool th an us.(B)I ndi ces are not used for portfoli o constructi on We are i nterested i n i ndi ces i n order to bench mark our performance but

314、 not as a tool to ai d our portfoli o constructi on.Th e si mplest reason for th i s i s th at we wi sh to perform better th an th e relevant i ndi ces and th e maj ori ty of fund managers wh o h ug th e i ndex composi ti on wi th th ei r portfoli o selecti ons.A s th e legendary i nvestor Si r Joh

315、n Templeton sai d“I f you want to h ave a better performance th an th e crowd,you must do th i ngs di fferently from th e crowd.”29Fundsmi th E mergi ng E qui ti es Trust plc A nnual Report for th e year ended 3 1 D ecember 2 0 2 0Th ere i s also th e problem th at th e MSC I E mergi ng Mark ets I n

316、dex i s domi nated by compani es of a sort th at we would never own.Th e top ten compani es i n th e MSC I E mergi ng Mark ets I ndex are all i n th e bank i ng,energy,tech nology and telecoms sectors.Th ey all fall i nto sectors wh i ch we would never i nvest i n because th ey are cycli cal,rely on

317、 leverage to deli ver an adequate return,are subj ect to rapi d and unpredi ctable ch ange and/or h ave returns controlled by governments.I n contrast,under 1 0%of th e I ndex i s i n C onsumer Staples,wh i ch i s th e bedrock of th e Fundsmi th strategy and a consi stent producer of sh areh older v

318、alue wi th h i gh unlevered returns on capi tal i n cash.(C)We do not attempt mark et ti mi ng Once we are fully i nvested we wi ll not attempt to manage th e percentage i nvested i n equi ti es i n our portfoli o to reflect any vi ew of mark et levels,ti mi ng or developments.G etti ng mark et ti m

319、i ng ri gh t i s a sk i ll we do not possess.We assume th at i f you own sh ares i n FE E T you h ave already tak en th e deci si on to i nvest th at porti on of your portfoli o i n E mergi ng Mark et equi ti es,managed i n th e manner we descri be.Our i nabi li ty and unwi lli ngness to try to mak

320、e mark et ti mi ng calls i s one factor wh i ch prevents us from i nvesti ng i n sectors wh i ch are h i gh ly cycli cal.I t i s possi ble to deli ver performance from such i nvestments,but i t requi res a good sense of ti mi ng for th e economi c cycle and h ow th e mark et cycle relates to i t.I t

321、 also requi res strong nerves,because such i nvestments are often counter-i ntui ti ve,as exempli fi ed i n th e i nvestment adage“Only buy cycli cals wh en th ey look expensi ve”.Th i s i s because wh en th ey h ave li ttle or no earni ngs,and so look expensi ve on th e basi s of th ei r pri ce/ear

322、ni ngs rati o,th ey are at,or close,to th e bottom of th e cycle.Th e converse appli es:you sh ould sell th em wh en th ey look ch eap,as th ey are th en at,or close,to peak earni ngs.We are not sure we h ave ei th er th e sk i ll set or th e consti tuti on for such i nvesti ng.I n any event,i nvest

323、i ng i n cycli cal busi nesses h as one bi g di sadvantage.Th ey are mostly poor quali ty busi nesses wh i ch struggle to mak e adequate returns on th ei r capi tal.Wh i lst you wai t to see wh eth er you h ave got your ti mi ng ri gh t,th e underlyi ng value of your i nvestment i s more li k ely to

324、 erode th an compound wh i lst you awai t th e upturn,and of course occasi onally th ey do not survi ve a cycle at all.(D)C orporate G overnance I nvestment i n E mergi ng Mark ets h as dangers wh i ch mi gh t loosely be labelled as problems of corporate governance.Th ere are examples of compani es

325、wh i ch h ave h ad assets confi scated by governments,wh i ch h ave h ad th ei r k now-h ow tak en by a local j oi nt venture partner wh o h as set up i n competi ti on wi th th em,of mi nori ty i nvestment i n busi ness controlled by local fami li es wh i ch h ave gone awry.We do not i ntend to bri

326、 ng enli gh tenment to E mergi ng Mark ets i n th e form of i mproved corporate governance vi a our i nvestments.We are mi nori ty i nvestors and we wi ll assume th at th e corporate governance landscape we see i s th e one we h ave to deal wi th rath er th an assumi ng we can ch ange i t.Th en we w

327、i ll select i nvestments i n th at envi ronment th e same way th at porcupi nes mak e love carefully.We are h elped i n th i s regard by th e fact th at about a fi fth of th e compani es i n our I nvestable Uni verse and about a quarter of th e portfoli o for FE E T are quoted subsi di ari es,associ

328、 ates or franch i sees of multi nati onal compani es.Th i s certai nly h elps from a due di li gence/corporate governance standpoi nt.(E)C urrenci es Our poli cy i s generally not to h edge FE E Ts currency exposure.Th e excepti on i n FE E T would be i n th e ci rcumstances wh ere we beli eve si gn

329、i fi cant depreci ati on of a currency h as become li k ely but we wi sh to conti nue owni ng th e compani es i n FE E T denomi nated i n th at currency and we are comfortable th at we can put i n place a h edge th e cost of wh i ch wi ll not exti ngui sh any gai ns from h edgi ng.Such a combi nati

330、on of ci rcumstances i s unusual.Fundsmith LLP I nvestment Manager 3 1 March 2 0 2 130Fundsmi th E mergi ng E qui ti es Trust plc A nnual Report for th e year ended 3 1 D ecember 2 0 2 0Strategi c ReportB usi ness Revi ewBusiness Review Th e Strategi c Report on pages 2 to 3 5 h as been prepared to

331、provi de i nformati on to sh areh olders to assess h ow th e D i rectors h ave performed th ei r duty to promote th e success of th e C ompany.Furth er i nformati on on h ow th e D i rectors h ave di sch arged th ei r duty under s1 7 2 of th e C ompani es A ct 2 0 0 6 i n promoti ng th e success of

332、th e C ompany for th e benefi t of th e i nvestors as a wh ole and h ow th ey h ave tak en wi der stak eh olders needs i nto account can be found on pages 3 9 to 4 2.Th e Strategi c Report contai ns certai n forward-look i ng statements.Th ese statements are made by th e D i rectors i n good fai th

333、based on th e i nformati on avai lable to th em up to th e ti me of th ei r approval of th i s report and such statements sh ould be treated wi th cauti on due to th e i nh erent uncertai nti es,i ncludi ng both economi c and busi ness ri sk factors,underlyi ng any such forward-look i ng.B usi ness Model Th e C ompany i s an externally managed i nvestment trust and i ts sh ares are li sted on th e