Why does stewardship matter in emerging markets?

Emerging markets have long been understood as geographies of uncertainty.

Political turmoil, currency fluctuations, and poor governance are common themes amongst headlines about emerging markets investing. It is in the context of these hazards that, in our decades of allocating clients’ capital in this universe of companies,  we have looked to find high-quality family owners who act as stewards of businesses over generations, protecting and growing sound franchises that thrive despite the uncertainties that surround them.

The attraction of these stewards, who have in some cases been able to preserve multi-generational legacies, is the time horizons that they bring with them. These multi-generational family owners build business cultures that place weight on institutional memories, patience, and the ability to take decisions that might bring short-term pain but bear fruit over decades. 

To us, these are some of the best run companies in the world.

‘In a world where cheap capital is able to fund such aggressive competition, we believe having a patient steward at the helm, with a century-long history and an eye on running the business for the next generation, is a tangible advantage.’

Resisting short-term pressures for long-term gains

The marriage between long-term thinking and focus on constant operational excellence is exemplified in the culture at Raia Drogasil, the largest pharmacy chain in Brazil. The company was created through the merger of two family-owned pharmacy chains – Droga Raia and Drogasil – with the founding families continuing to control approximately 35% of the business today. Now, with the fourth generation involved in the business, the two families together have more than 200 years of institutional memory preserved and passed down from generation to generation. 

The long-termism that this ownership structure produces has helped Raia Drogasil outlast the aggressive tactics of shorter-term competitors, who may come with the advantages of deep pockets over the span of a few quarters but are unable to match Raia Drogasil’s execution over years. Many of these competitors were focused on speed and quantity of growth, trying to gain market share quickly. Raia’s long history of sound execution, as well as the deep scars they bear in their institutional memory around carrying a leveraged balance sheet, ensured that they approached these short-term pressures with conservatism. Rather than falling into the trap of competing on price, the managers at Raia remained focused on quality of growth – they remained true to the recipe that had served them well for a century, rather than sacrificing their conservatism to match the risk appetites of others. While this approach meant that the company faced some pain in the form of slower market share gains over the course of a few quarters, it ensured that when competition remained unprofitable or put their balance sheets in jeopardy over the ensuing years, Raia Drogasil remained at the ready to reap the fruits and take back their market share. 

Today, Raia Drogasil remains the clear market leader in Brazil, steadily gaining in strength at the expense of their competition. 

In a world where cheap capital is able to fund such aggressive competition, we believe having a patient steward at the helm, with a century-long history and an eye on running the business for the next generation, is a tangible advantage. In our experience, it allows the business to withstand these short-term competitive pressures over the span of a few quarters, only to emerge stronger at the other end.

Patience and perseverance reap rewards 

We see these traits of long-termism and focus manifesting themselves in additional positive ways at some other family-owned companies. Marico, an Indian consumer goods company founded and controlled by the Mariwala family, has its foundations in consistently investing behind adjacent legs of growth in new segments and new geographies. 

Growing out of his family’s oil trading business, Harsh Mariwala sought to build a higher-margin, direct-to-consumer company. Through the 1970s he spent time laying the groundwork of the business, investing in distribution, the brand and – perhaps most importantly – the culture of the company. Starting completely from scratch, these investments paid off in creating rapid growth for Marico’s hair oil products through the 1990s. Marico, however, was still a small fish operating in a big pond, with larger, competent competitors around them. It was at this point in their journey when their largest competitor, Hindustan Unilever, tried to acquire the business. However, Mariwala’s unwavering focus and commitment to building something for the long term led him to reject the offer and continue consistently investing behind Marico. It was this steady reinvestment that finally culminated in Marico becoming the dominant player in hair oils in the country by the mid-2000s and, as fate would have it, Hindustan Unilever choosing to sell their hair oils business to the once fledgling challenger.

Another reiteration of this same patience and perseverance is the manner in which Marico has expanded beyond their home market. Entering Bangladesh in 1999, the company was a complete newcomer in a market dominated by local brands. They  chose to make losses in their first five years, investing  in brand promotion and creating a resilient distribution network. Focusing on growing volumes and creating brand loyalty in those early years now leaves them in the position of being the market leader in Bangladesh with profitability even higher than in their Indian business. 

Finding the right stewards

Not every founding family is made equal of course, and for every one steward we like, there are many others we may think of less favourably. 

However, the actions of the family stewards behind Raia Drogasil and Marico are, to us, evidence that their ownership, and the long-term mindset and behaviour it engenders, are competitive advantages in building businesses across geographies. These companies have prospered despite regime changes or economic booms and busts, and have built a robust runway for growth ahead. We remain excited about these stewards and the advantages they can bring across emerging markets.


Sujaya Desai
August 2021

 

Certain statements, estimates, and projections in this document may be forward-looking statements. These forward-looking statements are based upon Stewart Investors’ current assumptions and beliefs, in light of currently available information, but involve known and unknown risks and uncertainties. Actual actions or results may differ materially from those discussed. Readers are cautioned not to place undue reliance on these forward-looking statements. There is no certainty that current conditions will last, and Stewart Investors undertakes no obligation to correct, revise or update information herein, whether as a result of new information, future events or otherwise.

For illustrative purposes only. Reference to the names of each company mentioned in this communication is merely for explaining the investment strategy and should not be construed as investment advice or investment recommendation of those companies. Companies mentioned herein may or may not form part of the holdings of Stewart Investors.

 

Download a PDF of this article >

 

Investment terms 

View our list of investment terms to help you understand the terminology within this document.

Important Information

This document has been prepared for general information purposes only and is intended to provide a summary of the subject matter covered. It does not purport to be comprehensive or to give advice. The views expressed are the views of the writer at the time of issue and may change over time. This is not an offer document, and does not constitute an offer, invitation, investment recommendation or inducement to distribute or purchase securities, shares, units or other interests or to enter into an investment agreement. No person should rely on the content and/or act on the basis of any matter contained in this document.

This document is confidential and must not be copied, reproduced, circulated or transmitted, in whole or in part, and in any form or by any means without our prior written consent. The information contained within this document has been obtained from sources that we believe to be reliable and accurate at the time of issue but no representation or warranty, express or implied, is made as to the fairness, accuracy or completeness of the information. We do not accept any liability for any loss arising whether directly or indirectly from any use of this document.

References to “we” or “us” are references to Stewart Investors. Stewart Investors is a trading name of First Sentier Investors (UK) Funds Limited, First Sentier Investors International IM Limited and First Sentier Investors (Ireland) Limited. First Sentier Investors entities referred to in this document are part of First Sentier Investors, a member of MUFG, a global financial group. First Sentier Investors includes a number of entities in different jurisdictions. MUFG and its subsidiaries do not guarantee the performance of any investment or entity referred to in this document or the repayment of capital. Any investments referred to are not deposits or other liabilities of MUFG or its subsidiaries, and are subject to investment risk including loss of income and capital invested.

Past performance is not a reliable indicator of future results.

Reference to specific securities (if any) is included for the purpose of illustration only and should not be construed as a recommendation to buy or sell. Reference to the names of any company is merely to explain the investment strategy and should not be construed as investment advice or a recommendation to invest in any of those companies.

Hong Kong and Singapore

In Hong Kong, this document is issued by First Sentier Investors (Hong Kong) Limited and has not been reviewed by the Securities & Futures Commission in Hong Kong. In Singapore, this document is issued by First Sentier Investors (Singapore) whose company registration number is 196900420D. This advertisement or publication has not been reviewed by the Monetary Authority of Singapore. Stewart Investors is a business name of First Sentier Investors (Hong Kong) Limited. Stewart Investors (registration number 53310114W) is a business division of First Sentier Investors (Singapore).

Australia

In Australia, this document is issued by First Sentier Investors (Australia) IM Limited AFSL 289017 ABN 89 114 194 311 (FSI AIM). Stewart Investors is a trading name of FSI AIM.

United Kingdom

This document is not a financial promotion. In the United Kingdom, this document is issued by First Sentier Investors (UK) Funds Limited which is authorised and regulated in the UK by the Financial Conduct Authority (registration number 143359). Registered office: Finsbury Circus House, 15 Finsbury Circus, London, EC2M 7EB, number 2294743.

European Economic Area (“EEA”)

In the EEA, this document is issued by First Sentier Investors (Ireland) Limited which is authorised and regulated in Ireland by the Central Bank of Ireland (registered number C182306) in connection with the activity of receiving and transmitting orders. Registered office: 70 Sir John Rogerson’s Quay, Dublin 2, Ireland, number 629188.

Middle East

In certain jurisdictions the distribution of this material may be restricted. The recipient is required to inform themselves about any such restrictions and observe them. By having requested this document and by not deleting this email and attachment, you warrant and represent that you qualify under any applicable financial promotion rules that may be applicable to you to receive and consider this document, failing which you should return and delete this e-mail and all attachments pertaining thereto.

In the Middle East, this material is communicated by First Sentier Investors (Singapore).

Kuwait

If in doubt, you are recommended to consult a party licensed by the Capital Markets Authority (“CMA”) pursuant to Law No. 7/2010 and the Executive Regulations to give you the appropriate advice. Neither this document nor any of the information contained herein is intended to and shall not lead to the conclusion of any contract whatsoever within Kuwait.

UAE - Dubai International Financial Centre (DIFC)

Within the DIFC this material is directed solely at Professional Clients as defined by the DFSA’s COB Rulebook.

UAE (ex-DIFC)

By having requested this document and / or by not deleting this email and attachment, you warrant and represent that you qualify under the exemptions contained in Article 2 of the Emirates Securities and Commodities Authority Board Resolution No 37 of 2012, as amended by decision No 13 of 2012 (the “Mutual Fund Regulations”). By receiving this material you acknowledge and confirm that you fall within one or more of the exemptions contained in Article 2 of the Mutual Fund Regulations.

United States of America

In the United States, this document is issued by First Sentier Investors International IM Limited, as SEC registered investment adviser. Stewart Investors is the trading name of First Sentier Investors International IM Limited. This material is solely for the attention of institutional, professional, qualified or sophisticated investors and distributors who qualify as qualified purchasers under the Investment Company Act of 1940 (hereafter the “1940 Act”), as accredited investors under Rule 501 of SEC Regulation D under the US Securities Act of 1933 (“1933 Act), and as qualified eligible persons as defined under CFTC Regulation 4.7. It is not to be distributed to the general public, private customers or retail investors.

Other jurisdictions

In other jurisdictions where this document may lawfully be issued, this document is issued by First Sentier Investors International IM Limited which is authorised and regulated in the UK by the Financial Conduct Authority (registration number 122512). Registered office 23 St. Andrew Square, Edinburgh, EH2 1BB number SC079063.