Q&A with  John Ewart, Fund Manager at Aubrey Capital Management, the Edinburgh and London-based investment firm, on Aubrey’s unique emerging markets investment philosophy and process that focuses on the consumer sector. 

You are significantly overweight Consumer Discretionary (45.8%) and Consumer Staples (24.2%) versus the MSCI EM Index (14.19% and 6.2%). Why did you choose these sectors over Information Technology?

As emerging economies develop, the hard-working populations within them start to prioritise different goods and services on their shopping lists. In the last 20 years, the urbanisation of emerging markets has created sufficient wealth to more than double the ranks of the consuming class, to 2.4 billion people. This makes Emerging Market consumption one of the most exciting secular trends open to investors. The Emerging Market universe has excellent IT companies such as TSMC, but there are also many companies within the industry that are subject to industry cycles and pricing pressure. Investing directly to the consumer opportunity is more predictable.

In addition, our consumer opportunity will be different in countries depending on their level of income and wealth.  65% of the Indian population live in rural areas and the demand for staples products is more basic than that seen in China where the majority of the population lives in urban areas and staples shopping will be done in modern supermarkets and include goods that would be considered a luxury for rural Indians. More income results in more choices, and improving diet and health is an important steppingstone for consumers to continue on.

The reality of our portfolio is that we find company specific opportunities across many sectors and currently invest across eight Emerging Market countries.

Which stocks have you added or increased recently and why?

We recently added to our position in Indonesian Bank Rakyat.  BRI is the country’s largest bank by assets and recognised as one of the world’s leading microfinance institutions. The bank operates over 10,000 branches throughout the country and employs over 650K agents, assisting communities with over 30mn customers and over 130mn depositors. The growth outlook is attractive given the stability of the Indonesian economy at present and small business confidence has recovered post Covid and is expected to remain supportive for bank lending ahead of the election next year.

As a portfolio manager, what criteria do you use when investing?

We are growth managers with a focus on cash generation from the business which is then used to fund the expansion of the business. We forecast and model for the next 2 years, as we believe from our extensive experience that it is not possible to predict for longer periods of time. We are typically looking for companies with a competitive market position in their local country, generating a cashflow return on assets of 15% or more and trading on our forecast profit growth to Price/Earnings ratio of less than 1.5X. Our portfolio has typically traded on this PEG ratio of around 1x over the 12 years of existence.

We also attach importance to meeting management, visiting operations and highlighting our longer-term approach as investors. We meet management regularly on our travels across the Emerging Market region, and Edinburgh is also an excellent location for meetings. We will meet over 150 companies per year in our offices and see a similar number on our travels.