Category: insights

Since the establishment of Mobius Capital Partners, integrating ESG+Culture factors into our research and engagement has been a core component of our investment process. Given our focus on a single strategy, combined with running a highly concentrated portfolio, our ability to conduct thorough research an engagement with all portfolio companies differentiates us from our peers. Accordingly, our ESG+C™ reporting aims to provide transparency on a range of factors, using a framework which is systematic and consistent. What do we mean by ESG+Culture and why is it important? Whilst a focus on Environmental, Social and Governance (ESG) factors has become common over the years, we believe a crucial and missing component within this is Corporate Culture. Whilst some may categorise this factor within governance or even social, we believe culture warrants a distinct and separate categorisation. This is particularly true for emerging market investors, who interact and engage with an incredibly diverse range of corporate cultures throughout the world. There is strong evidence showing that ESG leaders outperform their peers. We believe that by integrating corporate culture into our research process, the outperformance should be greater.

Chart 4, Source: UNPRI Report: ESG and Alpha in China/MSCI, all risk and return figures are annualised (USD)

From 1980 onwards, the concept of corporate culture started gaining attention from academics as well as managers (1). According to the Harvard Business Review, there is evidence that a strong corporate culture benefits a company’s performance. Harvard academic James L. Heskett states that corporate culture “can account for 20–30% of the differential in corporate performance”(2). Furthermore, Andrew Chamberlain, chief economist at Glassdoor, investigated the relationship of a company’s share price development after the companies’ inclusion in the ‘100 best firms to work for’ ranking (3). Chamberlain constructed a portfolio of 36 publicly traded companies of the 2009 Glassdoor “Best Places to Work” ranking. The portfolio consisting of companies such as Netflix (4.4 Glassdoor score) and Procter & Gamble (3.9 Glassdoor score) performed 236% over a five-year period. This equals an outperformance of 115.6% versus the S&P 500 (4). By weighting the companies within the portfolio according to their Glassdoor score, the performance could be improved by 6.7% over a five-year period.

Chart 5, Does Company Culture Pay Off? -Andrew Chamberlain, Ph.D. Chief Economist, Glassdoor

Within emerging markets, we are yet to find a consistent ranking of ‘best firms to work for’ and accordingly it is difficult to replicate the Glassdoor study. LinkedIn for example published a list of top companies in China to work for using data from 40 million users. Top companies included Chinese companies (Alibaba) as well as U.S. companies operating in China (Tesla). However, we believe more consistent rankings will be published over the next decade. What is clear is that assessing corporate culture provides us with a differentiated lens and allows us to select outstanding companies to hold for the long-term. **The ESG+Culture Factsheet:**Within the process of creating the ESG+C™ factsheet, we faced two major challenges:**Our Framework:**By adding culture to the assessment of ESG factors, we decided to create a proprietary framework which allows us to assess corporate culture. Our culture framework consists of five focus areas: “Equality”, “Freedom”, “Recruitment”, “Innovation” and “Remuneration”. The five focus areas within culture are subdivided into different factors influencing the focus area. Many of these factors cannot be quantified themselves. However, proxies can be used to ensure the inclusion of different factors on a quantitative basis.**Data Sources and Limitations:**Information from companies is only considered if it is publicly available and traceable to the source. Accordingly, we avoided private questionnaires or surveys as such a process is difficult to replicate on a quarterly basis. Based on this principle, annual reports are one of the central data sources. Unfortunately, not every company is reporting in English in emerging markets. Furthermore, the reliability of existing data sources is sometimes questionable. Many companies have recognised the importance of ESG and therefore include it into their reporting. Still, there exists a great inconsistency among the various ESG reports. Data is always subject to adjustments due to regulatory requirements from national stock exchanges. **Quantifying qualitative data:**ESG reporting from many of our competitors running emerging market portfolios typically utilises case studies of single portfolio companies. These individual assessments do not show a holistic picture nor do they show the development of the overall portfolio. Culture is often assessed by conducting surveys, a complex and resource intensive approach. Both are lacking transparency and are not objective.Quantifying qualitative data helps to evaluate the overall portfolio and provides comparable data. In general, three different groups of proxies can be identified. First, proxies based on a binary evaluation verifying the existence or implementation of standards or services. Secondly, the weighted average of factors such as the proportion of women in leadership positions. Thirdly, by using external scores such as ratings from the Carbon Disclosure Project.**Portfolio findings:**Whilst this is by no means an empirical exercise, we have several observations from the data within our portfolio. Within the environmental category, whilst 50% of the portfolio publishes an environmental report, only 13% of portfolio companies’ (13%) formulated concrete environmental targets. Among the social factors, more than 40% of the portfolio companies report on their contribution to the UN Sustainable Development Goals (SDG). Most of these portfolio companies contributed to the 8th goal (decent work and economic growth), the 3rd goal (good health and well-being), and the 4th goal (quality education).Reporting according to the standards of the “Global Reporting Initiative (GRI)” has been identified as one of the governance metrics. Across the portfolio, 42% of companies report in line with GRI reporting standards. This is closely correlated to companies which report on the UN SDG goals. While it is common in Latin America to report in line with the GRI standards (100%), Asian companies within the portfolio tend not to utilise the GRI framework (21%). This is not surprising as Brazil became one of the first GRI hubs already in 2007. GRI hubs in Asia were launched later und usually cover multiple countries, increasing the complexity of integrating the GRI standards into different regulatory systems. Reporting in accordance with the GRI standards enables companies to disclose their environmental, social and governance activities. The GRI standards include, for example, reporting on the contribution to the UN Sustainable Development Goals.As previously described, remuneration is one of the five areas of the culture framework. From our decades of experience of investing in emerging markets, share option schemes can provide employees the opportunity to take real ownership within a business. Furthermore, share option schemes create a long-term incentive to act in the interests of a company.72% of portfolio companies offer share option schemes to their employees. The assessment of share option schemes revealed regional differences. Companies within the portfolio incorporated in Europe, Middle East, or Africa (EMEA) tend not to (33%) offer share option schemes to employees. In contrast, Asian (68%) and especially Latin American (100%) companies offer share option schemes to a large extent. Employee satisfaction and engagement is an important dimension to assess culture. Typically, internal surveys are used to measure these factors. As these surveys often lack transparency and their reliability needs to be questioned, we decided to only use publicly available data. Therefore, job and recruiting websites such as Glassdoor appeared to be a suitable data source. Using Glassdoor data is supported by an approach published in the MIT Sloan Management Review. The main reasons for utilising this approach is the reduction of polarization through a series of policies designed to promote honest and representative reviews by Glassdoor. Additionally, unlike other platforms, Glassdoor reviews gravitate towards the centre of the distribution, with fewer extremely positive or negative ratings, drawing a more realistic and less extreme picture. Whilst not all companies in the portfolio have a Glassdoor score, 71% do. Across the portfolio, the average Glassdoor score has an average of 3.63 on a five-point scale.**What are the implications of the ESG+C findings for our engagement:**Based on the reporting, we were able to derive implications for future engagement. Across the portfolio, 18% percent of board members and 17% of management teams are female. As a result of this observation, we will continue to engage on improving gender diversity at the board level as well as across the C-suite. Only 16% of portfolio companies set quantitative environmental targets. We will continue to engage on this area to significantly increase the percentage of portfolio companies with concrete environmental targets. Quantitative environmental targets include the reduction of waste production, reduction of water consumption and CO2 emissions. These quantitative targets can be directly linked to the executive compensation and therefore play a central role in improving the sustainability profile of portfolio companies.Whilst ESG reporting has become more common for portfolios investing in developed markets, the data challenges within our investment universe have made this task difficult for our portfolio. Nonetheless, we anticipate more companies across the market cap spectrum in emerging and frontier markets will improve their reporting over the next decade. At Mobius Capital Partners, we will continue to act as long-term stewards of your capital by engaging with all portfolio companies and will continue to enhance our ESG+C reporting.

**Footnotes:**The Handbook of Organizational Culture and Climate,Sonja A. Sackman – Neal M. Ashkanasy et al.Does Company Culture Pay Off? – Andrew Chamberlain – GlassdoorWhat Great Companies Know About Culture – John Coleman, Harvard Business Reviewhttps://www.glassdoor.com/Award/Best-Places-to-Work-2009-LST_KQ0,24.htm

Further Reading:

‘We cannot “see” corporate culture but it has a clear impact on returns’ ESG Clarity speaks to MCP’s Usman Ali about our ESG+Culture approachTarget top employers to beat the stock market, study finds, The Daily Telegraph on culture driving outperformanceThe ESG+Culture FactsheetPhoto by Jonathan Chng on Unsplash

For Professional Investors onlyInvestment Outlook 2021: Opportunities and Threats in Emerging MarketsLIVE-Stream: 20 January 2021The Investment Team provides an update on performance and engagement for the Mobius Emerging Markets Fund and the Mobius Investment Trust and introduces the new ESG+Culture reporting framework. From January 2021, MCP is reporting on the progress the portfolio is making in areas such as diversity, ESG reporting, company culture and board independence on a quarterly basis. During the webinar, China expert, Arthur Kroeber, joins from Beijing to talk about China’s economy and what to expect from China over the coming years.Please email Anna von Hahn at anna@mobiuscapitalpartners.com should you have any questions or would like further information.

https://vimeo.com/467273550Carlos Hardenberg, Founding Partner of Mobius Capital Partners (MCP) and Marcin Lewczuk, Partner and Investment Team member at MCP, give an update on the Mobius Investment Trust’s performance, portfolio as well as the Investment Team’s active engagement with portfolio companies.MMIT has seen strong performance YTD with the NAV and share price up more than 10% and the Trust outperforming the MSCI EM Mid Cap Index (GBP) over 1/3/6/12 and 18 months.

www.mobiusinvestmenttrust.com

https://vimeo.com/432105685In this video Duygu Inceoz, Head of Investor Relations at Mavi, talks about the company’s relationship with Mobius Capital Partners. Since the investment manager joined the shareholder register in October 2018, it has worked closely with Mavi’s Board, management and wider stakeholders to help unlock additional value. Notable projects include additional transparency around a related party transaction and the introduction of a stock incentive scheme for senior management.Mavi is a leading Turkish apparel retail brand with global operations. It was originally born as a denim company in 1991, but later developed a broader clothing range.www.mavicompany.com

One of the most exciting aspects of being a global emerging market investor is the ability to follow companies, news flow, and trends throughout all continents. Since the start of the current pandemic, we have spoken to companies across sectors and geographies; be it in China, Vietnam, Korea, Egypt, South Africa, Poland or Brazil. It has been a fascinating experience to observe how corporates and countries have prepared, rapidly adapted and in some cases, are beginning to see green shoots of recovery.Whilst much has been written about the ESG implications of Covid-19, there has been little focus on how adhering to good corporate governance during the crisis impacts companies in the emerging and frontier universe. We believe the pandemic presents governance challenges and opportunities. We know from previous studies that companies with stronger governance benefit from a lower cost of capital and better operational performance.1 We argue that companies which demonstrate strong governance will weather this crisis more effectively, whilst the companies which fail to adapt and show robust leadership, may struggle to survive. We explain these issues by assessing and sharing our experiences on the following topics in emerging and frontier market companies: (1) long-term strategic horizons, and (2) the duty of the board of directors.1) Long-term strategic horizons: Many listed companies in emerging and frontier markets have some form of family ownership. In India, over 56% of the largest companies by revenue are family-controlled businesses. In 90% of these family businesses in India, there is managerial involvement by family members.2 One may ask why this is relevant. In a recent article in the Harvard Business Review, the authors stated, “through exercising their rights, family owners have the ability to position the company for long-term success or doom it to failure.”3 In a crisis like now, long-term thinking must not be underestimated; a privilege which many family businesses are poised to benefit from. Difficult decisions will have to be made from scaling down the workforce, reallocating capital to new priorities, and suspending dividend payments. Whilst some companies may be forced to take short-term measures to focus on the next quarter, we believe companies with an engaged and a long-term focused shareholder base (such as families) are better equipped to weather the crisis. Families are often focused on the next generation and not the next quarter. Many of these companies have weathered multiple crises before and their seasoned family members are able to share their retained learnings.In the Middle East, we spoke to one company where the Founder and Chairman has been in his position since 1993. He has sailed through multiple crises, including revolutions, terrorist attacks, and currency devaluations. The company rapidly provided an update to investors providing a detailed outline of how the company has adapted during Covid-19. With an outstanding management team, a strong balance sheet, and clear and transparent communication with shareholders, the company is well-positioned in the current crisis. The conservative approach taken by the controlling family for decades has also resulted in no workforce layoffs. Indeed, the Covid-19 crisis is unique, but a steady hand is an important strength, and in many cases should be viewed as an asset.2) The duty of the board of directors: Boards have been unable to convene like they have in previous crises and have had reduced interaction with management. Whilst management teams must be supported and should not be overburdened at this difficult time, letting accountability sweep under the carpet would be a negative outcome for all stakeholders. One of the dangers of leading through a crisis is the long-standing issue of conformity. Whilst family-controlled businesses in emerging markets offer many advantages, it is important that board members and in particular, independent directors are not afraid to challenge management during this crisis. The psychologist Irving Janis has argued that individuals are more susceptible to group thinking during a crisis in order to reach an agreement.Even outside of businesses where there is family involvement, many emerging market companies suffer from a lower percentage of independent directors compared to their developed market peers. Whilst there is evidence to suggest that board independence in many emerging markets has improved since the global financial crisis, let us not be fooled by the statistics. The various definitions of “independence” have almost become an orthodoxy globally. Yet they do not necessarily prevent board members from turning up (for the foreseeable future on Zoom) to board meetings having rigorously read the board materials, nor do they consider that “independent” directors do not always adequately challenge management.The risk of groupthink is a heightened risk during this crisis. We believe this could be mitigated by following the actions below:1) The role of the chairman: This is a time when the true leadership and capability of a chairman becomes evident. A chairman will find the right balance to work with the management team to see where the future of the company should be. Both the chairman and the CEO must agree on the future vision of the company. It is crucial that if the chairman position is not held by the CEO, management are sufficiently challenged and are pushed on strategic planning post-COVID-19. In the absence of an independent chairman, it is the duty of independent directors to ensure this occurs.2) Utilizing expertise: The board must contribute to the debate on the future of the company by providing experience from the past, in addition to their deep industry knowledge. It often takes a crisis to show if directors are the right fit for board and have a thorough understanding of the business and the industry of the company. A lack of debate across the board and acquiescence to what the CEO or the chairman say does not show true competence.3) Data: data analytics are more useful today than ever before: management must present frequent updates to the board about the performance of the business, not only in financial terms but also by demonstrating how the company is managing relationships with its customers and suppliers. The board can only develop a clear vision of the future by understanding where the stakeholders of the company are moving towards.4) Learning from peers: The board has a duty to challenge management and to assess peers in the industry on a global scale within their industry and niche: if management do not benchmark themselves to best in class industry practices, they should be challenged.Boards are ultimately responsible for the strategy of the business and more specifically, ought to be asking the following questions:

• Are employees healthy and safe? How have management teams assessed this?
• Have board members received a complete risk assessment of the implications of Covid-19 across all aspects of the business? Have they been able to confirm the resiliency of the business model they follow?
• Have P&L stress tests taken place which considers extreme scenarios?
• Does a separate board committee need to be established to address business continuity and contingency planning?
• Does the company have the liquidity it needs to weather the crisis?
• Is it prudent to pay a dividend or engage in buybacks?
• Should the company be re-investing in the business to prepare for the recovery? Where should capital be (re)allocated?
• Are managers clearly communicating with all employees? Are they leading by example and reducing their own compensation?
• How is the company thinking about the communities it is operating in?

We have found the majority of companies in our portfolio to be rising to the challenge and taking robust action. Boards have performed their supervisory function diligently and management teams have taken the necessary measures to secure the survival of the company. Despite boasting a solid balance sheet, in China, a QSR chain has reacted with caution and has suspended its dividend and buyback programme for the next two quarters. The board and management also went further and cut their compensation, whilst extending health insurance for employees’ family members and their parents aged over 75. In India, the Managing Director of an industrial conglomerate has foregone his entire salary until the company’s earnings are back to their pre-outbreak level. Board members and other senior leaders for this company will also see a 30-50% cut in their compensation.ConclusionThe primary goal of corporate governance is to ensure that management and directors make good business decisions. Given the circumstances, today, making good decisions is far from easy. We believe following the crisis, companies will broadly fall into one or more of the following three categories:

• Companies which have failed to adapt their business models and may face significant liquidity issues, with bankruptcy as a bear case;
• Companies which can show resilience in a highly uncertain and rapidly changing post-pandemic world and survive with some necessary adaptations;
• Companies that can grow faster than before, innovate, and create value for all stakeholders. These companies will not only have adapted but will have strategically thought about their business model and will have started to design and implement changes that will allow them to be future leaders in their sector(s).

Whilst boards and management teams have never been in such a situation before, now is the time to show leadership and rise to the challenges. Companies which had previously been prudent and are fortunate to sit on a healthy balance sheet and an engaged and long-term focused shareholder base, should come out stronger. Yet this alone will not suffice; robust, transparent, and exemplary governance from all senior leaders is important today, more so than ever before. Ultimately, strong governance is a prerequisite for emerging as a leader in the post-pandemic world. The winners of tomorrow will be the companies which show leadership today: the companies which look after their employees, who adapt where necessary, who (re)allocate capital to focus on the long-term, and the companies who communicate with all stakeholders more powerfully than they have ever done so before.Usman Ali is a Partner at Mobius Capital Partners1 https://www.smithschool.ox.ac.uk/publications/reports/SSEE_Arabesque_Paper_16Sept14.pdf2 https://www.bcg.com/publications/2016/what-makes-family-businesses-in-emerging-markets-sodifferent.aspx3 https://hbr.org/2020/04/a-crisis-playbook-for-family-businesses

Photo by Dane Deaner on Unsplash

The uncertainty and panic surrounding the Covid-19 crisis has led to rollercoaster stock markets. The extreme volatility is worrying for investors and one question I am frequently being asked is “Have we seen the bottom yet?”At this point the answer to this question is guess work. It all depends on how quickly we are able to contain the virus, how quickly a cure and a vaccine can be found and how quickly regular economic activity can be resumed.However, since I first started investing in emerging markets back in 1987 we have experienced a number of crises and bear markets including the Asian financial crisis, the subprime mortgage crisis and others. We have also witnessed and profited from the recoveries that followed. While this particular crisis is unique in the scale of the actions taken by governments around the world and their effect on economic activity, there are similarities to previous stock market crashes when one assesses the reactions of investors. Some say that this bear market is unique and we have never experienced anything like this before. But it’s important to remember that, as the late Sir John Templeton once said: “The four most expensive words in the English language are ‘this time it’s different.” Human behaviour tends to follow predictable patterns because of built-in emotions that make us human.So what can we learn from history that will enable us to make better investment decisions in times of crisis? Looking at previous bear markets can provide some indication on what we might expect in the current market environment and going forward. Therefore we took some time to study 11 stock markets (U.S, U.K., Turkey, Korea, China, Taiwan, Brazil, Japan, Thailand, India and Hong Kong ) and their bear markets since the end of the 1980s. We have not included the current bear market since it may not have ended yet.The Global PictureWe define a bear market as a decline of 20% or more over a period of at least two months. If this was followed by a 20% rise over a period of at least two months we considered a subsequent fall of 20% or more as a new bear market. Because international investors are usually more interested in U.S. Dollar returns we have chosen USD indices rather than the local currency ones.Based on these indices the average bear market decline was about 49% across all markets but the declines ranged from a low of 23% to a high of 92%. In terms of the length of time a bear market lasted (from the peak of the bull market to the lowest point in the bear phase) this was on average over a year and to be precise, approximately 15 months. But the range was from a few months to over three years. As one would expect, emerging markets proved more volatile than the developed markets with more bear markets, a higher average decline of 51% and a shorter duration of about one year.But let’s have a look at the individual markets. (Please note we are not yet counting the recent market downturn).U.S.Examining the world’s largest market, the U.S., we focused on the S&P 500 Index and found that since 1987 the market experienced only three bear markets, excluding the current one. Those three bear markets averaged a 47% decline and ranged between a low of 34% and a high of 57%. The length of time of the bear markets ranged between three months and three years and averaged 17 months.U.K.In the U.K. the market (in USD terms) was more volatile than in the U.S. Since 1987 the FTSE 100 Index (USD) experienced six bear markets with declines ranging between 65% and 23% with the average being 38%. Like the U.S. the average length of time was 17 months for the bear markets with a range of 4 months to three years.TurkeyTurning to emerging markets, we found that the Turkish market was highly volatile. This is one reason why this market has been very attractive to some investors who love volatility since it provides them with more opportunities. During the time period starting in 1988 the Turkish market experienced 10 bear markets which showed an average decline of 64% with a range of between 81% and 46%. The average length of the bear markets was 14 months but ranged between a high of three years and a low of 4 months.KoreaNext on our list was Korea, another volatile market with nine bear markets. Those bear markets averaged a decline of 49% ranging from a low of 27% to a high of 86%. The average time length of all the bear markets was 17 months and ranged between 4 months and three years.ChinaWe found that the China market as indicated by the MSCI China Index had a total of eight bear markets averaging a decline of 56% and ranging between a low of 33% to a high of 82%. The average length of time was 14 months with the longest period being more than two years and the shortest five months.The MSCI China Index was launched on Oct 31,1995. Data prior to the launch date is back-tested dataTaiwanWe would expect the Taiwan market with its economy so closely tied to China to perform similarly but that was not the case. The Taiwan market proved to be more volatile with 11 bear markets between 1988 and 2019. The average decline was lower than in China with 48% ranging between a high of 80% and a low of 23%. The length of the bear markets ranged between a few months and almost two years with the average being 11 months.BrazilThe Brazilian market experienced 11 bear markets during the period averaging 56% decline and ranging between a decline of 75% and 35%. Average time length was 12 months ranging between a few months and almost three years.IndiaIn India, the market experienced nine bear markets averaging a decline of 44% ranging between a high of 71% and a low of 24%. The average time length for the Indian markets was a little over one year.JapanIn Japan there were seven bear markets averaging a decline of 42% and ranging between a fall of 62% to 24%. The longest bear market in Japan lasted more than three years and the shortest 9 months with the average at 24 months.ThailandThe Thai market was rather volatile with ten bear markets averaging a decline of 46% and ranging between a high fall of 92% and a low of 24%. The average length of time was nine months.Hong KongThe last market we looked at was the Hong Kong stock market, which witnessed eight bear markets since 1987. The average decline was 45% with a high of 64% and a low of 21%. The average length was 13 months.What lessons can we draw from history?So what can we learn from the above? We can see that on average bear markets declined by about 50%. The developed markets declined even less on average. In terms of the length, a bear market lasted on average more than a year. Bear markets in emerging markets were on average lasting shorter than bear markets in developed markets. This is important, as I believe the critical question is not only what the bottom is but how long it will last. You will need the cash reserves to continue to gradually buy and hold for what may seem like a long time.So at what stage are we now? In reaction to the Covid-19 pandemic markets went down between 20 and 30% so much less than the average 50% we have seen above. The market swings have been wild on the upside and the downside. As I write this piece the indexes might already have moved higher or lower.This kind of volatility is not unusual. If we look at the behaviour of the indices in bear markets we see that this sort of up and down is part of the game. So unfortunately, the recent positive movement in many markets does not necessarily mean that we will see a continuous upward trend. There will always be backtracking and corrections along the way. This seems to be confirmed by the historical data from previous bear markets. However, the figures mentioned above are averages and averages are exactly that. The range can be wide. Many bear markets went down far less than 50% so it’s probably a good time to start nibbling but leave enough firepower to continue buying if the markets retreat more.The full economic cost of the shutdowns around the world cannot be accurately assessed and will, of course, be quite different from one industry to another and one company to another. We merely need to keep our eye on the long term developments and take an optimistic stance: Of the many years since 1987 when I’ve been investing in emerging markets all over the world I can say that there are two conclusions that I can confidently ascribe to: (1) all emerging markets experience bear markets, and (2) all emerging markets recover from those bear markets and experience a bull market. It’s very much like the conclusions of Arnold Toynbee, the famous historian and scholar of civilisations since ancient times. After all the years of study he said that there were two conclusions that he could ascribe to: first, all civilisations rise and, second, all civilisations fall. The wonderful thing about this phenomenon in emerging markets is that the rise and fall of the markets is relatively frequent and the bear markets tend to be shorter than the bull markets. So if you are a patient and disciplined investor you can purchase bargain stocks in the bear phases when everyone else is selling.At the rate the coronavirus is spreading globally there might be worse to come but stock markets are starting to price that in. And given the efforts now undertaken by governments, central banks and scientists to contain the crisis I am confident we will see containment followed by a recovery on the horizon but as history teaches us it might not be for another year.

Over the last few days, we have seen significant volatility across all major stock markets as we start to see the impact of the Coronavirus (Covid-19) pandemic. Businesses have been temporarily closed, investments are being held back, employees are working from home, supermarkets are being emptied by panic-buyers and the business climate has deteriorated considerably. Understandably there is a sense of panic. This week with Italy an entire democratic country has been placed under quarantine. These are unprecedented times.Furthermore, as the virus first surfaced in China, it has hit the country particularly hard. This is critical for the global economy, as China is now the world’s largest manufacturing centre and an important source of raw materials. We believe there will definitely be an impact on global growth. While it is difficult to speculate on an exact figure at this stage, we estimate it could be around half a percent. As the crisis continues to develop in Europe and North America, it could be even higher.Given this backdrop, the portfolio of the Mobius Emerging Markets Fund has naturally been affected. Two of our holdings in China will likely be the most impacted. One is a company active in the fast food industry (Yum China) and the other in the entertainment sector (IMAX China). Naturally, they have suffered from the quarantine measures taken by the Chinese government to contain the spread of the virus.The recent news flow from China is more encouraging with newly reported cases declining day by day (down to 24 new cases on 11 March) and we are expecting performance to improve again. It seems China is on the road to recovery. A survey by Made-in-China.com—one of the main platforms connecting Chinese suppliers and global buyers—found that by late February, 80% of manufacturing firms had resumed operations.Overall, the Mobius Emerging Markets Fund has been less affected by the recent volatility than others. The fund outperformed the MSCI Emerging Market Index by more than 7% in the last three months and more than 3% in the last month. If you look at the MSCI EM Mid Cap Index the outperformance is even more pronounced with 10.7% and 5.9% respectively. We are looking to utilise our current cash levels to increase exposure to certain holdings that are now trading at heavily discounted valuations. We are in regular contact with all company management and continue to monitor the portfolio closely.As fundamental investors we take a long term view. Our investment horizon is 5+ years. Despite the mounting number of people infected and the worrying death toll, we believe the impact will diminish over time and the virus will eventually be contained. A tremendous amount of resources is currently being devoted to prevent the spread of the virus and at developing a vaccine.Generally, the case of the Coronavirus is a reminder of how volatile markets can turn over night. As investors we have to be prepared. Portfolios that are globally diversified address this kind of risk and are in a much better position when such events occur.

Having invested in emerging and frontier markets for over 20 years, I have discovered there is a widely held view that corporate governance standards there are generally lower than those in the developed world. Many understandably assume that this is part of the reason why these markets are classified as “emerging”. Often these concerns discourage market participants from investing in the asset class at all. While I agree that standards can be dramatically improved (across both developing and developed markets), I believe that this deficiency presents an attractive investment opportunity.In a blog at the end of last year, my colleague Greg Konieczny challenged investors to see themselves not as passive share “holders”, but as active share “owners”. At Mobius Capital Partners, we act as flag bearers for this cause. We are not discouraged when we encounter a company with a strong underlying business, but poor corporate governance. Instead, we try to understand whether the company’s board and management are interested in listening to our concerns and implementing a programme of reform. For this to be a success, it is paramount that all stakeholders display a willingness to address the deficiencies and not just pay lip service to the problem. As a result, engaging with management and understanding what truly drives them forms an integral part of our 4-6 week due diligence process before we invest in a stock.We often find ourselves pushing at an open door, and this is particularly true of companies that have a strong controlling family stake. In these instances, our proposed changes are often championed internally by the second or third generation. These individuals have returned from Western business schools with an in-depth understanding of the procedures and transparency expected of a publicly listed company. They are hungry to make these improvements and act as the catalyst for change.One of our holdings, a Turkish denim manufacturer, has already successfully introduced a long-term incentive program for executives based on share price performance and operating profit, aligning the interests of the founding family with those of the senior management and the minority shareholders. Our prior experience enabled us to propose a suitable structure.At this stage you may be asking, why is strong corporate governance so important? One early benefit is that it demonstrates to the wider market the company’s intention to be perceived as a reputable. Often it reflects the start of an evolution from a domestic orientated firm to a more international player. More importantly, strong corporate governance creates a solid foundation on which wider operational as well as social and environmental improvements can be built. This can help us unlock further value within a business and drive a re-rating.On the company level we believe an engagement approach based on partnership will play an increasingly important role in the future of active management. We do not wish to dictate to companies how to run their business, but instead help in creating the optimal conditions within which a company can realise its full potential and ensure a long term and sustainable outlook. This is reflected in our focus on ensuring companies have the appropriate board composition, introduce management incentive schemes and adopt best in class investor relations which includes best in class financial, social and environmental reporting.There are signs that national governance is also improving on the macro level in some emerging markets. For example, China’s Securities Regulatory Commission has introduced voluntary environmental and social reporting guidelines for listed companies, which will be mandatory by the end of 2020. India’s Securities and Exchange Board has introduced new mandatory “business responsibility” reports for the country’s top 500 listed companies. They are expected, in time, to be applied to all Indian businesses. And after years of scandals South Korea’s Chaebols are coming under growing national, and international pressure to reform their antiquated corporate governance arrangements.Corporate governance reform seems to be on the agenda in both emerging and “frontier” markets, and for good reason. The evidence reveals a strong link between corporate governance reform and improvements in financial performance. By integrating corporate governance, and environmental and social factors in our investment process, we can significantly reduce the risk profiles of our portfolios. This translates into higher risk-adjusted returns, and associated benefits for companies, all their stakeholders, and emerging markets as a whole.

**Marcin, you have just come back from a trip to Brazil meeting with companies and investors. How did you find the mood six months after Bolsonaro was inaugurated as president?**The mood in the business community has changed since my last visit to Brazil in December, which was shortly after Bolsonaro’s inauguration. There is less optimism now. Both investors and the electorate are waiting for actual progress on the reforms that the newly-elected president has promised, particularly on pension reform. We agree that reforming the pension system is crucial for the economic development of the country. Currently, Brazil’s spending on social security is among the highest in the world. It continuously adds to the high government debt which the IMF estimates will reach almost 90 per cent of GDP this year.**Recently analysts cut their 2019 growth forecasts for Brazil. Does that impact your investment approach to the country?**Not really. The Brazilian economy has gone through a difficult time over the last 4-5 years and there is a lot of room for improvement once reforms begin to progress. Currently, the economy remains depressed and the 1Q19 GDP numbers of -0.2% q/q and +0.5% y/y[1] failed to show an acceleration of growth. However, there are some positive signs: car sales for May 2019 were strong (21.6% YoY)[2], whilst supermarket sales (Abras)[3] grew 8.1% YoY in April (in real terms).We believe that consumer and investor confidence will improve once the pension reform, in particular, is approved and the reform program springs into action.What do you see as the biggest risks and opportunities for Brazil at the moment?The social security reform bill has now moved to the Lower House Special Committee where amendments may be made. The key issue is to what degree projected savings from the reform might be watered-down. The initial proposal foresaw over BRL1.2 trn (c. 18% of nominal GDP) in savings over 10 years. If this falls significantly, which a first congressional committee report seemed to indicate, this might have a negative impact on the Brazilian equity market.Furthermore, apart from the significant increase in debt over the last 15 years, which now limits the government’s ability to increase spending through borrowing to stimulate the economy, there remain a number of structural issues left behind by the previous governments: the significant share of long-term unemployment (5 million workers have been looking for a job for more than a year; 3 million for more than 2 years) has led to a loss in skills and productive capability. The capital-labour ratio in the economy has declined due to insufficient, mis-allocated, and poor-quality investment for a number of years. And with investment lagging, much of the nation’s infrastructure and many public services are in decay.All of this will take time to correct itself. However, we believe Bolsonaro’s reform program, which is centred around free market policies, is the right way forward.Despite the downbeat mood, opportunities remain.Almost 22 years after Brazil undertook one of the largest privatization efforts in history, the new Bolsonaro administration is aiming to repeat, and perhaps exceed, the previous round. There are as many as a hundred state-owned companies which could be liquidated or privatized as part of Bolsonaro’s privatization plan. With some of those state-owned companies being among the largest in the country, such a move would add significant liquidity to the stock market and provide opportunities for investors like ourselves.If the Bolsonaro administration follows through on the privatization possibilities already put in the pipeline by the previous Temer administration, the government could sell nearly USD90bn (c. 5% of Brazil’s nominal GDP) over the next two years (including state stakes in Petrobras, Eletrobras, BNDES, Banco do Brasil and Caixa Economica Federal).Uncertainties remain about the size and timing of the privatisation programme, however the direction is positive – the less state involvement in the economy, the better for the longer-term outlook of the country. While long-term fiscal sustainability depends more on the social security reform than on privatization, the proceeds will nevertheless help fund the government’s transition and maintain fiscal discipline. Moreover, a well-structured privatization push would rekindle investments and improve the efficiency of the economy.Last but not least, another important item on Bolsonaro’s agenda is increasing the trade openness of the Brazilian economy. Brazil is an unusually closed economy when it comes to international trade (export plus imports as % of GDP is only 23.1% which is way below other emerging economies like India or China with 39% and 37.3% respectively))[4].If successful, this reform could lead to improved productivity and increased growth in the longer term.**What are the things you like about the Brazilian market and where do you see opportunities now?**The most differentiating feature of the Brazilian equity market compared to other emerging economies is the quality of management. You rarely find so much focus on return on invested capital (ROIC) and shareholder value creation elsewhere. In Brazil these considerations drive almost every business decision within an organization.Another characteristic of the Brazilian market is a strong desire to improve efficiencies. This is a common theme within Brazilian companies – whether it is an apparel retailer, auto parts manufacturer or a challenger bank- and is usually driven by the adoption of new technologies.During our visits we have been meeting with a number of interesting companies in the consumer, technology, education and industrials sectors. Generally, we remain cautiously optimistic on the Brazilian equity market as valuations are still at a relatively attractive level with strong earnings recovery to come once the economy returns to growth._________________________________[1]Brazilian Institute of Geography and Statistics[2]The Associacao Nacional dos Fabricantes de Veiculos Automotores (ANFAVEA)[3]ABRAS – Brazil Association of Supermarkets[4]EIU, 2017

Indian elections are particularly cacophonous affairs. As the largest democratic exercise in human history comes to an end after six weeks of highly charged voting, many will be relieved that normal life can resume. However, those hoping for an uneventful result may be in for a rude shock. Exit polls released after the final vote was cast on Sunday pointed to a strong Narendra Modi led BJP majority which looked increasingly unlikely just a couple of months ago. Having shocked global markets five years ago by triumphing with the strongest Indian government seen in a generation, Modi may have even bettered his performance in 2014. The polls pointed to the BJP securing over 300 seats of the 543 assembly which would represent improvement from his 2014 scalp of 282 seats. Markets celebrated with the Sensex rallying close to 4% on Monday.It is worth noting that exit polls have struggled with accuracy in the past. Whilst this should come as no surprise to readers in the UK and the US, India’s 2004 exit polls pointed to the BJP winning between 230 and 275 seats. Instead they ended up with only 187 and were kicked out of government. However since then, polling methodologies, sampling and data granularity have improved significantly which diminishes the likelihood of such a severe miscalculation.However, assuming the exit polls have some predictive power, why should this matter for investors and which elements of the reform agenda would then be prioritised?In a period of global policy turmoil, it’s clear that investors seek consistency and predictability. If an emerging market administration is willing to commit to this whilst embarking on a progressive reform agenda, the market will pay up. Whilst debates continue about whether Modi’s first five years had the hallmarks of a Bernie Sanders style administration rather than that of Ronald Reagan, solace can be found through the comfort of BJP’s fiscal conservatism and peerless focus on execution. This will remain in place. Key reforms such as a sturdier Bankruptcy Law, a well-functioning Goods and Services Tax, a flexible inflation targeting regime and success in financially including more than 300m Indians through the biometric identification system have been institutionalised. These will help expand Indian’s productive capacity and propel the country to faster and more sustainable growth. India’s longer term cost of capital will continue to fall.Looking ahead, a BJP led government will likely take less risks in the short term. The rural economy and small businesses have been disrupted by the short term pains of the Goods and Services Tax implementation, whilst demonetisation was largely viewed as a failed and disruptive experiment. The BJP will reward these two sectors for their continued support through a more supportive policy framework. Encouraging private sector participation in agriculture through introducing a regulatory framework for contract manufacturing would be a positive step. The development of modern, large scale warehousing and storage would reduce wastage, boost farm incomes and dampen inflationary pressures.The longer term reforms of addressing bottlenecks in the factor markets of land and labour will be perhaps be the defining feature of Modi’s next five years. Land acquisition continues to be a debilitating constraint to the creation of mid and large scale infrastructure and setting up businesses. Difficulty in acquiring land continues to be the top regulatory hurdle that stalls projects. Addressing this through a transparent auction process, a creative alternative form of compensation and the acceleration of the digitalisation of land records will go some way to relieve manufacturing stress. Tight and constraining labour laws continue to hinder the scale up of organised large scale manufacturing. State government approval is required for firms employing more than 100 workers to lay off staff. It is instructive that the proportion of businesses that employ more than 100 people in India is dwarfed by the respective share in South East Asia and China. India’s much vaunted ‘demographic dividend’ could quickly deteriorate into a ticking time bomb unless job creation is addressed.Clearly a challenging agenda is set out for whoever emerges as India’s next premier. If the exit polls are correct, whilst continuity will remain in place with Modi at the helm, much change will be required to drive India onto a higher plane of growth.