FEM Q1 2022 Manager Letter

May 11, 2022

The strategy experienced a perfect storm of negative risk events during the quarter, starting with the unrest in Kazakhstan in January. This was followed closely by the Russian invasion of Ukraine at the end of February.

The unrest in Kazakhstan proved to be short-lived yet significant in terms of the changes it brought to the political landscape. Former President Nazarbayev was removed from the chairmanship of the National Security Council and several of his key allies were detained in what has been described as a targeted purge. Nazarbayev ruled Kazakhstan since its independence in 1991, before handing over the reins to President Tokayev in 2019. Nazarbayev’s “retirement” was largely cosmetic as he continued to rule behind the scenes, cultivating his status as the father of the nation, and enriching his family and friends in the process (even the capital city, Nursultan, was renamed after him in 2019). Galvanised by the protests, President Tokayev and his camp turned on their old boss, swiftly eliminating him from Kazakhstan’s political life and offering up a range of compromises to protesters under a reformed “New Kazakhstan” agenda. Naturally, with these seismic shifts in the political environment, our investment in Kaspi.Kz suffered, losing 57% of its value in the quarter. In fact, Kaspi.Kz accounted for nearly a quarter of the strategy’s returns in the period.

So, what did we do in response to these changes and how do we feel about our investment in Kaspi.Kz today?

As the events unfolded, we took the decision to reduce risk first and sold approximately 30% of the investment at a price of ~$110/share (for context, Kaspi.Kz GDR shares closed March 2022 at $50/share on the London Stock Exchange). It is important to explain why we didn’t sell more of the stock: the Kaspi app is one of the few true “super-apps” globally, whereby each separate business (payments, e-commerce and consumer finance) combine to create a powerful network effect. This has two key benefits. First, that Kaspi are able to earn on multiple parts of the transactions that take place through their ecosystem, thus supporting strong unit economics. Secondly, they are able to attract new customers at very low cost. More services on the platform naturally draws in more customers and drives higher engagement, which makes Kaspi the ideal ecosystem in which to launch new products. Standalone businesses seen in developed markets such as food delivery, ride hailing and travel ticketing can all be incorporated into the Kaspi ecosystem. In fact, after just 18 months of operation, Kaspi have grown their Kaspi Travel business (think to the largest rail and air ticketing platform in the country, annualizing $330 million in gross bookings as at 1Q22 data.

The combination of these two factors puts Kaspi into the hallowed bucket of companies that offer both a stellar growth and return profile. Kaspi delivered approximately 60% year-on-year earnings growth at an annualized 75% return on equity through 1Q22 – exceptional fundamentals compared to almost any peer globally, and even more so when we remember that they were operating through what was undoubtedly the most challenging period in the company’s history. We were emboldened by the company’s recent announcement of a share buyback of up to $100 million (~1% of market cap) and the reaffirmed guidance. We believe the strategy will be rewarded for being invested in Kaspi.Kz in the long term.

While the strategy has no direct Russian or Ukrainian exposure, a number of countries we are invested in like Egypt, Kenya, Pakistan, and the Philippines are negatively impacted by higher commodity prices. Those countries have a high proportion of energy and food in their Consumer Price Index (CPI) baskets, which results in high inflation and a worsening current account position. Taking that into account, we’ve made some adjustments in the period including exiting from our investment in Edita Food Industries, the leading snacks manufacturer and distributor in Egypt.

Edita is a fantastic business, however we have concluded it will experience lower for longer margins as a result of the pressure on the Egyptian Pound and the rising cost of raw materials. Edita has demonstrated it has pricing power over a few cycles, but we still took the decision to exit, as we think it will take them longer this time to express that pricing power. We are still close to the management team at Edita and believe there will be a time when we are once again investors in the business.

Despite our adjustments, Egypt overall still hurt the strategy and contributed to just over a quarter of the returns in the period. However, we believe that the strategy’s positioning in Egypt is appropriate for this environment and expect significant upside ahead.

We would highlight Fawry as one of the companies we continue to back in Egypt.

Fawry is transforming the payments market in Egypt where over 70% of transactions are still done in cash. In 2021, Fawry served 41 million customers through 269,000 points of sale terminals, and online through their payment gateway, as well as increasingly through the MyFawry app.

Management at Fawry is executing well on its strategy to diversify from traditional payment acceptance (the typical use case is a merchant using a Fawry point of sale terminal to take a cash payment from a customer topping up their SIM card) to higher value financial services including:

  • supplier financing and inventory management (a merchant can pre-order from PepsiCo without using cash or PepsiCo can pay a supplier using Fawry which reduces its cash management costs);
  • agent banking (using an offline network to service third party bank clients);
  • microfinance (disbursing loans to customers using technology and a rich set of proprietary data); and
  • e-commerce (from payment acceptance to buy now pay later).

Fawry’s impressive revenue growth was 34% in 2021. However, one must consider that number in the context of its traditional payments business growing 9% and contributing nearly half the revenue. This is evidence of strong execution from the management team at Fawry and has a positive impact on profit margins. Much like Kaspi, Fawry is a profitable business with EBITDA margins of around 30% that we expect will grow over time as the share of new business grows in the mix.

The strategy experienced strong positive returns from Indonesia and Vietnam in the period. From a top down perspective, both countries are relatively better positioned to weather the current climate; Indonesia is net commodity exporter and has seen improvement in its current account fundamentals, while Vietnam’s foreign direct investment (FDI) based economy means it is generally less susceptible to the ebbs and flows of short- term portfolio flows. Indonesia and Vietnam represent nearly a quarter of the strategy’s capital.

In Indonesia, the strategy is invested in Sido Muncul, an herbal medicine and beverage company that is best known for its flagship brand Tolak Angin. Sido Muncul sources most of its raw materials locally and leverages its superior manufacturing technology to extract market leading yields from those inputs. On top of that natural cost hedge, Sido has significant pricing power in the herbal medicine market given its ~75% market share and unrivalled brand equity (refer to our post on June 4, 2021 to learn more about Sido Muncul).

Sido Muncul is one of the most profitable consumer health companies in the world and is on track for a 15/15 year in 2022: 15% growth in top line and 15% growth in bottom line. Despite the strong share price performance, Sido Muncul’s fundamentals are not adequately reflected in its valuation and as such continues to be the largest investment in the strategy.

Faced with the new variables from the Russian invasion of Ukraine, our team was quick to identify companies that are relatively resilient in this environment. One such company is FPT Software in Vietnam, which we owned in a fairly small size in the past but added to during this period. FPT is part of a broader theme we are expressing in the portfolio around digital transformation and the idea that digital CAPEX spend will continue to grow and become less discretionary as organisations worldwide address the different needs of their customers, employees, suppliers, and regulators. Most of that opportunity today comes from the United States and Western Europe, and that is likely to be the case for some time. As such, the market opportunity for FPT is in fact in those markets, in addition to Japan, where FPT established a strong presence. However, the supply dynamics are very much Vietnamese; FPT counts nearly 16,000 staff, the majority of which are engineers.

Vietnam is an appealing base for IT services exporters due to its large and young population, strong emphasis on STEM in education curriculums and culture. Vietnam’s IT services industry is at a fairly early stage relative to more established Indian, Latin American, and Eastern European competition which translates to a cost advantage that FPT has used to grow and in the process win some major accounts. In fact, nearly half the order book at FPT is from Fortune 500 company clients. FPT’s main competitive advantage on the supply side (i.e.: human capital) comes from the schools and universities it owns and operates in Vietnam, which count for nearly 70,000 students and act as a hiring funnel for aspiring graduates. We see FPT as the ideal play on Vietnam’s human capital development and the global IT CAPEX spend theme. The power of the theme is evident in the numbers: FPT’s global order book was up nearly 20% in 2021, and the quality of the book shows continuous improvement based on contract size (19 contracts above $5 million), scope of work, client profile, and contract duration.

While the performance environment has been challenging in the quarter and the outlook is mired with uncertainties around inflation and interest rates, we think there are a few factors that can help the strategy perform well in 2022:

  • The country mix of the strategy is diverse. While over 80% of the strategy is invested in Asia and Africa, no one country exceeds 20%.
  • As highlighted above, the country mix means factor sensitivities to rates and commodities is somewhat managed. The strategy is, on net, exposed to commodity importers but still benefits from owning businesses in countries with a strong agricultural economy (Kenya and Morocco for example) and countries that have healthy balance of payments (Indonesia on a cyclical basis, Vietnam and Morocco on a more structural basis).
  • Within those countries, the sector mix is deliberately designed to focus on long term themes around the digital economy, financial inclusion, consumer health, and retail. These themes are driven by the formalisation of the economies we invest in and are underpinned by changes in demographics, consumer behaviour, improved regulations, entrepreneurship, and technological advancements.
  • Within those sectors, we own companies that are financially under-levered, have a healthy degree of pricing power and cost variability, and are either owner-operated or multinational-majority owned/operated.
  • The portfolio’s valuation today is attractive. This presents significant return potential for long term investors

The team is committed to our collective goal of delivering differentiated and strong returns to our partners. We have confidence in our investment process and our culture, and believe that will lead to positive long term outcomes for our partners and for us at Vergent.

Vergent Asset Management LLP


  1. Unless otherwise stated, all data is at March 31, 2022 and stated in US dollars (US$). Source: Connor, Clark & Lunn Financial Group, Thomson Reuters Datastream.
  2. Performance history for the Vergent Emerging Opportunities Strategy is that of the Vergent Emerging Opportunities Composite. The Composite has an inception and creation date of August 2018.
  3. Net performance figures are stated after management fees, estimated performance fees, trading expenses and before operating expenses. Operating expenses include items such as custodial fees for pooled vehicles and would also include charges for valuation, audit, tax and legal expenses. Such additional operating expenses would reduce the actual returns experienced by investors. Past performance of the strategy is no guarantee of future performance; Future returns are not guaranteed and a loss of capital may occur. For illustrative purposes, performance fee of 20% on added value over the hurdle rate of 6% plus the management fee of 1.25% have been assumed. Actual management fees charged to a particular account may vary.
  4. There is no benchmark for the Vergent Emerging Opportunities Strategy because it has an absolute return objective
  5. Standard Deviation measures the dispersion of monthly returns since the inception of the strategy.

Benchmarks and financial indices are shown for illustrative purposes only, are not available for direct investment, are unmanaged, assume reinvestment of income, do not reflect the impact of any management or incentive fees and have limitations when used for comparison or other purposes because they may have different volatility or other material characteristics (such as number and types of instruments) than the Strategy. The Strategy’s investments are not restricted to the instruments comprising any one index and do not in all cases correspond to the investments reflected in such indices.

These materials (“Presentation”) are furnished by Vergent Asset Management (“Vergent”) on a confidential basis for informational and illustration purposes only. This Presentation is intended for the use of the recipient only and may not be reproduced or distributed to any other person, in whole or in part, without the prior written consent of Vergent. Certain information contained in this Presentation is based on information obtained from third-party sources that Vergent considers to be reliable. However, Vergent makes no representation as to, and accepts no responsibility for, the accuracy, fairness or completeness of the information contained herein. The information is as of the date indicated and reflects present intention only. This information may be subject to change at any time, and Vergent is under no obligation to provide you with any updates or amendments to this Presentation. This Presentation is not an offer to buy or sell, nor a solicitation of an offer to buy or sell any security or other financial instrument advised by Vergent. This Presentation does not contain certain material information about the strategy, including important risk disclosures. An investment in the strategy is not suitable for all investors, and before making an investment in the strategy, you should consult with your professional advisor(s) to determine whether an investment in the strategy is suitable for you in light of your investment objectives and financial situation. Vergent does not purport to be an advisor as to legal, taxation, accounting, financial or regulatory matters in any jurisdiction, and the recipient should independently evaluate and judge the matters referred to in this Presentation. Vergent Asset Management LLP is registered in England and Wales with its registered office address at 8th Floor, 1 Knightsbridge Green, London SW1X 7QA, United Kingdom (Companies House number OC418829) and is authorized and is an Exempt Reporting Adviser in the USA. It is regulated by the Financial Conduct Authority (FRN: 791909).


This report may contain information obtained from third parties including: Merrill Lynch, Pierce, Fenner & Smith Incorporated (BofAML), S&P Global Ratings, and MSCI. Source: Merrill Lynch, Pierce, Fenner & Smith Incorporated (BofAML), used with permission. BofAML permits use of the BofAML indices related data on an “As Is” basis, makes no warranties regarding same, does not guarantee the suitability, quality, accuracy, timeliness, and/or completeness of the BofAML indices or any data included in, related to, or derived therefrom, assumes no liability in connection with the use of the foregoing, and does not sponsor, endorse, or recommend CC&L Canada, or any of its products. This may contain information obtained from third parties, including ratings from credit ratings agencies such as S&P Global Ratings. Reproduction and distribution of third party content in any form is prohibited except with the prior written permission of the related third party. Third party content providers do not guarantee the accuracy, completeness, timeliness or availability of any information, including ratings, and are not responsible for any errors or omissions (negligent or otherwise), regardless of the cause, or for the results obtained from the use of such content. THIRD PARTY CONTENT PROVIDERS GIVE NO EXPRESS OR IMPLIED WARRANTIES, INCLUDING, BUT NOT LIMITED TO, ANY WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR USE. THIRD PARTY CONTENT PROVIDERS SHALL NOT BE LIABLE FOR ANY DIRECT, INDIRECT, INCIDENTAL, EXEMPLARY, COMPENSATORY, PUNITIVE, SPECIAL OR CONSEQUENTIAL DAMAGES, COSTS, EXPENSES, LEGAL FEES, OR LOSSES (INCLUDING LOST INCOME OR PROFITS AND OPPORTUNITY COSTS OR LOSSES CAUSED BY NEGLIGENCE) IN CONNECTION WITH ANY USE OF THEIR CONTENT, INCLUDING RATINGS. Credit ratings are statements of opinions and are not statements of fact or recommendations to purchase, hold or sell securities. They do not address the suitability of securities or the suitability of securities for investment purposes, and should not be relied on as investment advice.

Source: MSCI. The MSCI information may only be used for your internal use, may not be reproduced or re-disseminated in any form and may not be used as a basis for or a component of any financial instruments or products or indices. MSCI makes no express or implied warranties or implied warranties or representations and shall have no liability whatsoever with respect to any MSCI data obtained herein. This report is not approved, reviewed or produced by MSCI.

Vergent Asset Management LLP
May 11th, 2022