In a perfect world, investors would just buy great growth companies and hold them indefinitely. However, markets are far from perfect, and it is interesting to look back on some of our best investments and realise it was the selling of them which was almost as important as the buying.
Chinese educator, New Oriental is in the list largely because of a timely decision to sell in early 2021 as the regulatory net was tightening, and ahead of draconian measures against after school tutoring.
Our decisions to sell footwear maker Li Ning and hotpot ingredients leader Yihai were based on a change of business fundamentals after several incredibly successful years.
And sometimes it is just that valuations become too high, which was the case for gaming and e-commerce player, Sea Ltd. This is also an example, as is New Oriental, which was repurchased once those valuations were reset.
But what links these and other investments in the first place? To begin with, they must be in a business or industry which we expect to grow steadily for several years, in whichever country or region they operate.
We focus on growth generated by domestic consumers, an exciting secular trend in emerging markets. As each country develops, consumer behaviour tends to go through the same patterns, which helps us to identify and predict growth opportunities. Something we often describe as being at ‘the sweet spot of growth’.
Consider the take off in e-commerce in Indonesia. From 2017 onwards it was reasonably predictable as the roll out of 4G phones coincided with improved incomes as minimum wages rose. Many companies flocked to participate in this; however, it was not an investible sector until some consolidation took place. By 2019 it was clear that Sea’s Shopee business was going to be one of the winners.
The trend is inextricably linked to others in the top 10 list: Varun Beverages (Indian packaged food and soft drinks, multi-decade growth in penetration likely from a very low base), Li Ning & Proya Cosmetics (Chinese value brands becoming acceptable to the Chinese consumer), Trent Retail (organised retail and fast fashion in India) and Dino Polska (discounted convenience retail in Poland).
It must also be the right company. This is often a leadership issue or a first mover or other unique advantage. There is usually a reason why a company will grow much faster than the broader industry.
Varun Beverages is such an example. Dramatic, multi-year growth was driven by taking over underperforming regions for its Pepsi products and narrowing the gap to where its better performing regional businesses were, in terms of market share.
These attributes are reflected in the financial metrics we seek. Return on equity (ROE) is an important reflection of a business’ strength and relative position. Our 15% expectation is a good yardstick; a challenging number, but realistic for well-run businesses and a strong indication that they will at least cover their cost of capital.
As an aside, competition is probably the biggest risk for many of our investments and there is nothing like an excessive ROE to attract it, so in this case you can also have too much of a good thing.
Another requirement is good cashflow. We always ask whether our investments are able to support their growth from internal cashflow. But there are often cycles in this.
Li Ning had lost control of its inventories and working capital from around 2012 with disastrous results. With the return of the founder to the business and a painful restructuring, by 2016, this was back under control. Then starts the virtuous cycle of strong cashflow, investment in the brand, market share gains and so on.
Of course there are sometimes other aspects at play, such as a broader acceptance of local brands at the expense of foreign ones, but this only reinforced the virtuous cycle.
Returning to the harder part, the sell decision, and another success story from the early years in Chinese e-commerce. When the sector took off, many foreign brands were unfamiliar with the way Alibaba operated and a small consultancy called Baozun was there to help. After a few years, however, the clients had largely worked it out for themselves and Baozun’s growth prospects diminished.
In India today, e-commerce is just getting into the take-off phase but as is often the case, they are doing things differently. Quick commerce with on-demand, local 15-minute delivery is emerging as the new standard. Although a late entry, the leader in this field, Zomato, has made it into our top 10. Although this field is going through a surge in competition in early 2025, we suspect that in 10 years’ time when we look back on our best-performing stocks of that decade, Zomato will be on the list.
Rob Brewis is investment manager of the Aubrey Global Emerging Markets Opportunities fund. The views expressed above should not be taken as investment advice.