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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

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

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

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.