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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