Annual General Meeting

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[00:00:13.43] SAM: Good afternoon, everyone. Firstly, to follow on from the chair, it is good to see some familiar faces at the other end of the room. It is really nice to see you all once again in person, and hopefully 2022 onwards will mark the resumption of normal, corporate business normal, normal business for all. And, of course, it would be remiss of us not to take a moment and think that the last year, two years, have been very difficult for many in the city, in the UK, and of course, across the world and in frontier markets.

[00:00:54.65] And clearly everything that we talk about today probably pales in insignificance, or definitely pales into insignificance through the difficulties that many people have gone through since the last AGM or over the last couple of years. And it's definitely worth us bearing that in mind before we return to matters financial. There are many issues in the world that are considerably more important than that.

[00:01:17.00] Having said that, if we go through the presentation, as a reminder of bigger picture thoughts, this opening slide has been with us for some time, and it's worthwhile remembering really what we do in this fund. We go into the nitty gritty in a few minutes, but ultimately we invest capital in companies that serve the needs of 3 billion of the world's poorest people in a world that sometimes ignores large sections of the globe, I think it's really, really important that we remember that's essentially what we're doing, investing in frontier markets.

[00:02:00.94] And if we, again, think about the big picture story that we've said many times before, these markets represent 30% of the world's population, 10% of the world's GDP. And yet are only 1% of the world's indices, a percentage that has actually fallen over recent years.

[00:02:19.62] While people claim to be interested in this 30% of the world's population, actually what has happened in recent years as people have spent more and more of their capital investing in the rich countries which we find somewhat strange, and also ignores the long-term structural opportunities that these countries have when we think about urbanization, when we think about democratization of finance.

[00:02:42.21] When we think about the way the world is moving, we think the future is not necessarily purely in Europe and in the Northeast Coast of the United States. We think that economic growth, development, and social mobility are going to be much better represented in other parts of the world-- Emily.

[00:03:04.69] EMILY: Thanks, Sam. So on this slide it's highlighting a little bit some of the countries where we are invested and trying to give a bit more of a flavor of the sort of opportunities. Because I think sometimes when we talk, it ends up being very big picture. And we wanted to try and just give a few more examples of the sort of companies we invest in to try and bring it to life.

[00:03:23.08] So you can see, for example, we invested in a wind farm. Actually, it's in Europe. I always wonder why the arrow is pointing to the Southern Africa, but it's just a rather short arrow. So we invested in a wind farm in Europe that we think is very interesting, and obviously at the moment really benefiting from the high energy prices that we're seeing at the moment in Eastern Europe-- sorry.

[00:03:42.58] We invested in a farming asset in Vietnam that's producing milk, actually really benefiting from some of the demographic trends that we're seeing there. A health care operator in Egypt, which again, actually has had obviously a very good couple of years, sadly, but really being able to roll out testing facilities for all sorts of diseases across the population there.

[00:04:06.40] And we invested in a mining asset in Chile, which is really key in providing the materials needed for EV batteries, so really benefiting from the huge growth that we're seeing in EV battery. And Sam again has touched on this, really just some of the areas, again, the sort of trends that are driving performance, the sort of themes that we're invested in.

[00:04:28.58] I think these are themes and trends that are talked about very much in relation to more developed markets. But actually a lot of these come down into some of these smaller countries as well that really we are seeing just very strong trends of digital consumption. And that's really benefiting some of the companies in our portfolio as well.

[00:04:50.23] If we talk, about why are frontier markets interesting at the moment? Well, we've put this chart in just as one example of something that's very much at an all time high at the moment. This is not just over this time period, but very much an all time high.

[00:05:06.85] Indonesia is an exporter of coal, of commodity prices, commodities-- sorry, materials. And that has really been benefiting their trade balance. We think that that means there's a lot of money, therefore a lot of dollars, which have been flowing into Indonesia, which we expect will result in trends of improved consumption domestically.

[00:05:30.51] And those trends have improved consumption that we will see across frontier markets is actually quite at odds, I think then, with the sort of valuations that we're seeing in frontier markets, where although we have growth, which I think rivals the growth that we see really anywhere else in the world-- that's real endogenous GDP growth that's driving earnings growth, revenue growth in the companies that we're invested in. That is still coming at much lower valuations than we see in more developed markets.

[00:06:03.88] So it's interesting in a world where growth is scarce and investors are looking for growth, and I think these markets really offer growth. But also actually in a world where value is probably more in fashion at the moment certainly in the last six months, well, I think actually these markets also offer a lot of value.

[00:06:22.90] So, really, on both of those fronts we think frontier markets look really interesting. And perhaps I'll hand back to Sam then to take us through the final slides.

[00:06:34.63] SAM: So if we look at the next slide, it's always worth remembering this is not a fund that focuses on income. It is a cherry on the cake as it were. And it's interesting to note that even in the last year when lots of people were cutting dividends, the board over the period ending September 21 gave the assurance it would be paying $0.07 as a dividend.

[00:07:01.81] And the companies managed to generate even more income than that during that period, during that rather difficult period. And the reason why we look at income is not just because they pay it out. Because it reflects companies that are burning capital.

[00:07:15.34] One of the big issues of investing in emerging markets or markets in general is, do you get your money back? Are the companies just run for the egos of management, or companies actually good stewards of capital? And one of the purposes of a dividend, one of the things that are dividend shows is that the companies actually are generating cash. It's not just a mirage.

[00:07:34.33] They're not just growing know year by year, but actually generating low cash flow, which some companies have done and probably will never generate any cash flow. One of the interesting things about the companies in frontier markets is a lot of them generate a lot of cash flow. It shouldn't all be paid out as dividends, because that obviously takes away from future growth. But is it interesting to see the percentage that they are paying back to us.

[00:07:59.14] And we've said for many years now that the companies in our portfolio grow by about 10% to 15% a year, obviously not in a beautifully linear fashion, but they grow by about 10% to 15% a year payout ratios are not changing very much. So over time, we would expect the absolute amount of dividends to increase. But, obviously, not on a year-by-year basis, because this is not an income fund.

[00:08:20.62] What are the challenges out there for us? In a world that's recovering, I guess the challenge is or could be a resurgence of COVID. We have Omicron today, but perhaps we'll have a new variant at some point in the future. We think that many of our countries are much more resilient and have proved much more resilient than the West over the last two years.

[00:08:40.72] Why exactly that is the case, why exactly the number of people who have become ill or those who have sadly died is far fewer percentage-wise in our countries than it is in Western Europe? We probably won't for some time to come.

[00:08:56.44] There are lot's of theories and speculations, but it's definitely been factual that our countries have survived the last two years in general better than the West. But, obviously, any resurgence of COVID will dampen down future economic growth.

[00:09:13.48] The next big issue that we are facing, which is a global issue of course, is inflation. I think inflation today is the highest it's been in my professional career, not just in the UK, not just in Western Europe, but in the US and in many countries.

[00:09:31.09] It is interesting, though, when we think about our frontier markets that many of these countries do not have record breaking inflation by their standards. Obviously, inflation is ticking up. But, actually, inflation in many of these countries is more normal than it is than the level of inflation that we're seeing in the UK and in Europe.

[00:09:51.13] And, finally, we have a big exposure to the Middle East and any concerns increases of tensions there would be damaging for the portfolio. Obviously, the Middle East has been a challenged area for decades now. And the question is not, is it a challenge at an absolute level, the question is the direction of travel.

[00:10:12.22] And one of the big developments of the last two years, which probably has been missed by many people is actually the Middle East remarkably is looking better than it's done for a long time. Over the last few years the spat within the GCC between Qatar on the one side and Saudi and the UAE on the other side has been broadly resolved. One can actually fly from Doha to Dubai today, which one couldn't a couple of years ago.

[00:10:37.45] Turkey which had very challenged relations with Saudi Arabia, with the UAE, with Egypt, with Israel, seems to have patched up some of those relationships, which is a positive development for the region as a whole. You can fly, which you couldn't two years ago, from Tel Aviv to Dubai-- 10 times a day, in fact, if you want to fly today.

[00:10:59.56] And this is a very big change for the Middle East as a whole. For whatever reason, relationships across the Middle East are better, obviously still challenged in so many ways. And when anyone says, invest in the Middle East, everyone is always concerned about war, and so they should be.

[00:11:16.03] But the direction of travel, again not in a linear fashion, is actually more positive than many people have realized. But, obviously, that can all change given the nature of the regimes and governments in that part of the world. And it's something we watch very closely.

[00:11:33.26] We go to the next slide-- as a reminder of the things we've been saying for the last 10 AGMs, and there is one consistent message that we have been saying for the last decade. These markets offer growth, as Emily said, in a growth stock world. They offer yield in a world where very little does, even with interest rates ticking up marginally.

[00:11:50.89] They offer extremely cheap valuations. These markets on 10, 12 times earnings, which is pretty impressive given the growth, and they offer surprisingly low volatility, a point we have made in previous AGMs. The volatility in frontier markets is less than it is in the FTSE.

[00:12:08.32] Even though each of these countries is volatile, when you put them all together, they are remarkably less volatile than the FTSE or the S&P. So that's what these markets offer in general. What does this fund offer? It offers active management. This is not about a tracker fund. I do not think that would be the best way of investing in these markets.

[00:12:25.57] They offer hard currency returns. As we've said many times before, this is not about offering you returns in [INAUDIBLE] or kwacha. This is about hard currency returns, and that's what we focus on. We focus on liquidity management. All our stocks trade every single day. There is no mark to make believe, no pre-IPO situations, and this is, again, a message that we've given for years.

[00:12:44.65] And we offer discount management. As we have said once again for the last 10 years, if people for whatever reason wish to redeem, they will have an opportunity every five years to do so at NAV less cost. The last opportunity was in the beginning of 2021, the opportunity before that was in 2016.

[00:13:00.64] So about four years from now if people are unhappy, they will be able to get out at NAV. And that's really important. Because we don't want the focus of Emily in mind discussions to be, are we trading at a premium, are we trading at discount?

[00:13:13.75] We want to invest over the medium to long term in a series of countries that are growing that have massive opportunity and a series of companies that are really exciting and not getting to short-term issues. And that's often what happens when discounts widen. So for us this continues to be a great place to invest, a series of countries that are emerging stronger on a relative basis than others from the last two challenging years.

[00:13:40.48] And, unfortunately, seeing that slide every year just reminds us that another year has ticked by. But the message that we are giving to investors remains the same. So with that, I hand back to Emily.

[00:13:53.20] EMILY: Thank you, Sam. I'm just going to put up a few slides now just showing the characteristics of the portfolio. But this is really the time to be thinking about questions and getting ready. Because we're going to move to questions to Q&A in just a couple of slides.

[00:14:06.47] So on this slide, you can see the split of the portfolio by country. And you can see the index weights. Actually, I don't think any of that should be too much of a surprise to those of our investors who have been here a number of times before. But you can see the large weights in Saudi Arabia, as Sam mentioned, a country that's really benefited from the rise in oil prices and from the stability that we have seen in the Middle East and the huge development of that economy.

[00:14:35.50] You can see in Indonesia, a country I've already mentioned, is really benefiting from the exports that it's been doing. And you can see in Vietnam a country just really benefiting from demographic trends. And that's remained a key contributor in the portfolio over quite an extended period of time.

[00:14:52.93] If we move to the next slide, you can see the split of the fund by sector. And you can see there that their larger weight than normal that we have in financials. But that's a sector at the moment that I think is really benefiting from the global trends that we've seen in terms of a rotation towards value and benefiting from the rise in interest rates.

[00:15:15.57] And moving on to the top 10 positions that we have in our portfolio, hopefully some of these stock names will be familiar from previous years. Because, again, I don't think turnover has been too high. But you can see tallying with the two previous slides, the rise of the Saudi financials, the Saudi banks that have done well this year.

[00:15:38.26] And you can see from the different flags the number of different countries that we have in the top 10, with that still representing quite a diversified portfolio, which is how we really like to keep the fund. And then just to put up a final slide showing the performance you can see over the different time periods and the rolling time periods, just to give an idea of how the fund has done over the last few years.

[00:16:04.07] And I think that is the final slide that we wanted to give as a presentation. Hopefully-- it's not very legible on that screen, but hopefully it's in the presentation packs as well so that you can see those numbers if you'd like to have them, see them in more detail. But I think at that point we'd love to move to Q&A. I'm very happy to take any questions.

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