LGM For professional clients and/or qualified investors only

Diversity matters

We have always believed that diversity is critical for business. More diverse companies are better placed to attract and retain top talent as well as improve their customer orientation, employee satisfaction and decision making, all of which can lead to a virtuous cycle of enhanced value creation. Moreover, diversity in the workplace is inextricably linked to equality. Companies that commit to ensuring everybody has an equal opportunity and no one is treated differently or discriminated against will ultimately contribute to the steady erosion of the pervasive gender, racial, ethnic and economic inequality in our societies. With this in mind, we have strived to understand how our companies manage and promote equality and diversity across all levels of the organisation to support long-term financial performance.

An inclusive society has multiple benefits. As long-term investors who are investing to benefit from long-term structural trends, we must consider the issues caused by inequality, including those stemming from discrimination, in each investment we make.

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Key risks

The value of investments and any income derived from them can go down as well as up as a result of market or currency movements and investors may not get back the original amount invested.

Investing in emerging markets is generally considered to involve more risk than developed markets.

Screening out sectors or companies may result in less diversification and hence more volatility in investment values.

Diversity is being invited to the party; inclusion is being asked to dance.Verna Myers

Q3 2020 Investor Note

Responsible Global Emerging Markets Strategy

Contents

While we have big aspirations in driving good diversity and inclusion practices, we also remain humble about the significant challenges that remain in various organisations that are shaped by their cultures and operating environments. In the following paragraphs, we will share our experience of engaging with companies in India on gender diversity issues.

India’s growth story seems to have forgotten about female representation. Despite substantial growth and various improvements, the female workforce participation rate has declined from 30.3% in 1990 to 20.5% last year, according to the World Bank. Nowadays, India ranks lower than countries like Afghanistan, Sudan and Saudi Arabia. These figures are not encouraging—downward trends in female participation in the workforce could dampen our enthusiasm about the structural growth story of India over the coming decades. A recent study has found that when more women join the workforce, wages rise for everyone1.

Womens’ work often goes unrecognized due to traditionally accepted societal roles, which are largely unpaid and not counted in a measurement-hungry system. This is the case in India. It also highlights that there is a large human capital potential that remains an untapped resource more valuable than any oil and gas reserve waiting to be explored. We are keen for our companies to play their part.

What can we do as investors in the context of existing societal norms and other structural challenges? In short, we must make use of our voice as shareholders to act as agents of change. Our goal is to encourage companies to review their talent management policies and procedures, prevailing working conditions and the volume of female representation across all levels to identify gaps and take concrete measures to close those gaps. Our engagement asks include developing a pipeline for female leadership roles, setting up women-focused mentoring programmes, ensuring policies and systems effectively prevent sexual and other harassment in the workplace, and devising flexible working arrangements for women returning to work after maternity leave.

We are in a very important time in history where we can collectively make a powerful leap forward to curb racial, gender and economic inequality. As stewards of our clients’ capital, we are keen to ensure discussions around inclusivity, diversity and empowerment remain a priority for our investments. In the end, we want to ensure our companies benefit from society as much as society benefits from the goods and services our companies provide. Our investment case study for this quarter highlights a financial institution that focuses on lending to women’s groups in rural villages in Indonesia. It is a noteworthy story of positive societal impact alongside long-term value creation for all stakeholders, including us as shareholders.

1 “Working women in the city and urban wage growth in the United States” 2017 by Amanda L. Weinstein

Investment Case Study: Bank BTPN Syariah

Bank BTPN Syariah (BTPS) is a microfinance institute solely focused on the ‘productive poor’ segment in Indonesia, lending to women-only groups at the bottom of the pyramid in rural villages. The bank’s goal is to promote financial inclusion across Indonesia and empowering productive poor families to have a better livelihood. The operation started in 2008 and adopted the business model from the likes of Grameen Bank of Bangladesh.

BTPS undertakes extensive social programs with its customers, including health and wellness, business capacity building and financial literacy programs. It has an average ticket size of ~$140. BTPS has maintained its flat-rate pricing of 30% across all cycles in the past four years.

Shareholders: Have seen impressive growth, with the loan book growing 34% per annum over the past 3 years and with book value growing 43% per year. The bank has generated an average ROE of 33% and ROA of 7.6% over this period. The controlling shareholder, Bank BTPN, owns a 70% stake. The parent is a sound and profitable banking group with an experienced management team and solid asset quality in all the areas that it operates in. The conservative nature of the group is highlighted by the fact that BTPS has 30% of its assets in liquid instruments. It has a unique and high growth franchise with a strong capital position.

Customers: More than 3.1m women entrepreneur borrowers benefit from BTPS’s Paket Masa Depan (Package for a Better Future) product. The company has a team of 11,500 employees spread across 23 provinces who cover 70% of the market. Historically in person, but now more so digitally, this team conducts biweekly face-to-face meetings with the groups across 192,000 neighborhoods, adding to BTPS’s customer appeal and retention. The typical BTPS customers are underprivileged women who live in small villages and make their living from selling goods, food, livestock or making simple products. The group undergoes 4-5 days of training in financial planning and management before a loan is granted. Customers are grouped into a membership system that requires mandatory saving and shared responsibility.

Communities: These are the ultimate beneficiaries, and having a positive impact beyond a financial one sits at the heart of BTPS. The business runs extensive social programs with its customers, including health and wellness, business capacity building and financial literacy programs. Below we share data from the social impact scorecard used to assess impact.

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Causation might not always mean correlation and measuring impact can be a very difficult task; nevertheless, we are proud to see some of these figures heading in the right direction, although it is still early days.

Lending Cycle 1 (first loan)

Lending Cycle 2

Lending Cycle 3

Chance of going below the poverty line

25.8% 23.5% 20.9%

Number of Children who do not go to school

15.3% 12.0% 9.9%

Number of households that do not have a toilet/latrine

14.3% 12.2% 8.4%

Source: BTPN Syriah Q3 2020 report

Employees and community outreach are key parts of BTPS. Microlending is a high-cost, high-touch, people-intensive business. BTPS lends to women-only groups, and the loan officers are all women (94% of all employees are female). The typical front-line loan officer is a high school graduate aged 18-26. The bank is therefore able to offer career and skills development opportunities to young women who might otherwise be channeled into low-skilled service or manufacturing jobs. BTPS has well-established mentoring and coaching programs, with minimum 5% of personnel costs

allocated to human capital development. The relative youth of the workforce means that staff turnover is typically quite high, but the loan officers are nevertheless able to acquire transferrable skills during their time with the bank, particularly around IT and digital applications. In addition, the top management team have been working together for 15 years.

Suppliers of capital benefit from the relatively high rates of return available. With a low CASA ratio at just 21%, BTPS is predominantly third-party funded. The bank’s loan customers are required to open accounts as part of the loan approval process, but their pool of excess savings is typically low, and repayments are usually taken in cash at the regular borrower meetings. That said, the retail savings ratio does rise as borrowers move through the various lending cycles and their capacity to maintain larger current and savings accounts increases. Third parties are nevertheless the main suppliers of capital through time deposits; these are typically retail/mass affluent depositors and business depositors who are attracted by the higher effective interest rates. BTPS’ cost of funds thus tends to be higher compared to the larger, mainstream banks, but this is more than offset by the much higher effective asset yields they generate. With a very strong capital base, and the support of the parent bank (Bank BTPN), as well as the parent bank’s controlling shareholder (the Sumitomo Mitsui Financial Group), the company is well-positioned to weather harsh conditions.

Engagement

This quarter we would like to highlight engagement activities on issues around diversity we have had with some of our companies.

In India, we spoke to Biocon and Marico about their actions to increase the proportion of women in senior management

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roles. We welcomed both companies’ approach to drive diversity as a business agenda rather than a purely human resources agenda. Biocon, for example, utilizes around 70% of its annual recruitment spend on diversity hiring – over the past two years, the company has seen a 25% increase in gender hiring ratio quarter on quarter. Seeing gender diversity under such a strategic lens allows companies to leverage diversity for competitive advantage and, ultimately, enhanced long-term performance.

The two companies have, in our view, set the appropriate scene to increase diversity across all levels of their organisations. There are clear commitments from the top, management teams have led extensive efforts to build a respectful, inclusive and discrimination-free workplace, and they have rolled out initiatives to improve mentoring programmes and flexible working conditions that can help women advance in their careers. However, representation of women, particularly in senior management, remains stubbornly low. We acknowledge that diversity has only recently climbed up management agendas and that time is of the essence for changes in cultural and societal perceptions towards women in the workplace to happen. Therefore, we fully appreciate that it will be a while before we start seeing actions turn into results. We will monitor progress going forward.

We also met with Clicks Group, our South African pharmaceutical chain, after it faced a significant public backlash surrounding a racially insensitive advert put up by a vendor on Clicks’ website. In a country like South Africa, where the legacy of exclusion is still prevalent, these mistakes are just unacceptable – especially from a household brand such as Clicks. Management acted extremely quickly: they removed the advert as well as all of that brand’s products from shelves; the CEO issued a public apology; suspended the employees that allowed the advert to be published; and accepted the resignation of the senior executive associated with that team. In addition, the company made a commitment to step up efforts to collaborate with government to support the development of local suppliers. We welcomed these actions yet urged the company to ensure mistakes such as these do not happen again and, importantly, that Clicks recognize the importance of having the right mindset and leadership alongside a systemic approach to drive the necessary culture change, and thus ensure meaningful diversity and inclusion.

Voting

One of the core pillars of our investment process and philosophy is active ownership, i.e., engagement and voting. On the latter, we believe that we have a duty as shareholders to use our votes to send a clear message to the boards of the companies that we own about improvements they can make in their corporate governance practices. We, therefore, thoughtfully exercise our right to vote across all our holdings.

Let’s start with the high-level numbers, and then move onto some case studies. Over the quarter, we voted on shareholders’

meetings for 11 of our companies. Out of the 106 resolutions we voted on, we voted ‘For’ management for 81.1% of these and ‘Against’ management for 18.9%. There were no votes where we abstained during the quarter.

We will highlight a couple of case studies this quarter, and both the companies operate in China and Hong Kong. For both Sinopharm and Vitasoy, we voted against a significant number of directors. In the case of Sinopharm, where we voted against 8 non-executive directors, the main reasons for these votes were the lack of a fully independent audit committee and a majority independent nomination & remuneration committee, and the presence of three individuals who serve as directors in six or more boards, which can hinder their ability to discharge their roles effectively. In the case of Vitasoy, we voted against the three non-executive directors representing the interests of the controlling shareholder given their membership of the nomination & remuneration committee making it less than majority independent.

In line with our policy, where we vote against any management resolution we will always follow up with a letter or email to the company concerned explaining our decision.

Portfolio

We have initiated in two Indian companies during the quarter. First one is Torrent Pharmaceuticals which is one of the top 10 players in the Indian pharmaceutical sector with a strong domestic franchise spanning forty years of operation in India. Its India business has a focus on Cardiovascular, Central Nervous system, Gastro-intestinal and Women’s healthcare. Torrent are also growing their presence in diabetes, pain management, oncology and anti-infective segments. In India they also have a contract manufacturing business where they produce Insulins exclusively for Novo Nordisk, with whom they have had a 30-year partnership. In the international market Torrent has a significant presence in pharmaceutical markets in the U.S., Brazil and Europe and benefits from a vertically integrated and globally competitive business model. We were attracted to Torrent by its strong presence in India and Brazil (where chronic sales make up 100% of sales), its commitment to provide high quality medicines at affordable prices to consumers across emerging and developed markets, and the long-term secular growth we see in healthcare spending with

One of the core pillars of our investment process and philosophy is active ownership.

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ageing populations and an increase in lifestyle diseases across the key markets it operates in.

Next on our list is Biocon Biologics, India’s largest, fully integrated, innovation-led bio-tech company. Biocon has a strong portfolio and early mover advantage in the first wave of biosimilars both domestically as well internationally2. Biosimilars are at their infancy and have the potential to grow multi-fold as a large portion of existing biologics treatments go off-patent in the next four to five years. Biocon has a strong portfolio and early mover advantage in the first wave of biosimilars; some have been approved and others are in late stage development and soon to be launched. The other key attraction here is Biocon’s ability to attract talent, not only domestically but also internationally. Part of this is due to it being a founder-led business where the founder, Kiran Mazumdar-Shaw, is among India’s first self-made female billionaires; she maintains a controlling stake of this promising business. The business has a strong balance sheet with decent cash flow generation, although most of the cash is deployed to build up the biologics portfolio with various global healthcare names.

We also took the opportunity to take a stake in Zhejiang Supor, is the second-largest global electric cooking appliance player and the largest cookware company in China. It is a business we have been following for a few years now and has a listing history dating back to 2004. In 2006, it received strategic investment from the family-controlled French Groupe SEB, a global leader in small appliances and cookware which today controls over 80% of the business. It has a very strong

distribution with a reputable local and international brand portfolio. We believe the company will benefit from the China’s lifestyle consumption upgrade. The company carries no debt and comes with strong financial fundamentals.

To fund these purchases, we sold out of our positions in ICICI Bank in India and Commercial Bank of Egypt on the financials side and Tinygi (China) and Universal Robina (Philippines) on the consumer side, all from the tail end of the portfolio where positions tend to be smaller. In addition, we rebalanced the portfolios by trimming the position sizes of Wizz Air (UK listed, Hungary based), Discovery (South Africa) and HDFC Bank (India).

We continue to reach out to our companies and their peers during this difficult period where work travel is not encouraged. We have signed up with a large expert network to ensure some of the insights we benefitted from by being on the ground is substituted. So far, it has been beneficial for our discussions to have access to a wide group of individuals who are experts in certain sectors, with direct work experience, who can share their wisdom and on-ground experience with us.

Markets are continuing to bounce back. While we are slightly behind year-to-date, our confidence in our strategy’s companies – and their compounding ability – remains high.

We look forward to updating you next quarter and wish you a safe rest of 2020.

Yours faithfully,LGM Responsible Global Emerging Markets Team

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1 Biologics are large complex protein molecules compared to small molecules that are bigger in size in the orders of 50-1000x. Small molecules are chemically synthe-sized whereas large molecules (biologics) are sourced from biological cells. The innovator molecules are called biologics and biosimilars are generic version of them.

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