FEM Q3 2021 Manager Letter

November 2, 2021

The strategy’s performance in the quarter was driven by three key factors:

  1. Reopening sensitivity in the retail and financial services portfolio in Indonesia and the Philippines as those economies emerge from their respective lockdowns as a result of a ramp up in vaccinations in the key economic centers.
  2. A re-rating of our Moroccan portfolio following the results of the parliamentary elections, which saw the long-dominant Islamist party (Justice and Development Party) suffer a major defeat at the hands of pro-business parties led by the Independent National Rally party.
  3. Positive reaction to a strong results season and upgraded guidance from some of the strategy’s largest portfolio companies including Integrated Diagnostics Holdings in Egypt and Jordan and Century Pacific in the Philippines.

In our last letter, we referred to an unnamed investment in the Philippines, which we can now reveal to be Wilcon Depot Inc., the largest home improvement retailer with 70 stores nationwide. Our investment in Wilcon was undeniably triggered by the reopening of the Filipino economy, which should unlock private building and construction activity, the main demand generator for Wilcon’s tiles, building materials, electrical and lighting, and paints lines. However, our thesis is built on a long term view of the company’s ability to leverage its scale, zero debt balance sheet, and management capacity to grow the overall market for home improvement and DIY retail, and consolidate shares from smaller and unorganized competitors who have been weakened by the Philippine’s dismal handling of the COVID-19 pandemic. Wilcon’s private label and exclusive lines are also a key element of its strategy to grow like-for-like sales and increase margins with the latter experiencing a step change (+200 basis points) in the last few quarters. This has been a key driver behind consensus upgrades as management affirmed this is the new level of profitability going forward. Wilcon’s management has done a solid job of managing the business in a very difficult environment through active SKU management, supply chain control, store network expansion, and investment in online channels.

In Morocco, the strategy owns two companies in retail and payments technology, sectors that should see real gains from the positive political picture that is emerging there. Morocco has generally been a very good market for the strategy as it benefits from political stability, low inflation, a stable currency, and a large domestic institutional liquidity pool that supports equity market valuations. The country has also been relatively successful in the handling of the COVID-19 pandemic. As travel resumes, Morocco’s large tourism industry should see a strong recovery (it represented approximately one fifth of the economy in 2019). The newly elected government has the technical and political capacity to execute on reforms that will likely only add to the investment case for Morocco and as such, we continue to be bullish on the strategy’s positioning there.

We are seeing earnings upgrades across a few of the strategy’s portfolio companies, which have also been supportive of the strategy’s recent performance. We highlight Integrated Diagnostics (IDH), the leading laboratory and diagnosis chain in Egypt, Jordan, and Nigeria, which posted exceptionally strong results in the first half of this year with revenue, operating profits and operating cash flows growing 1.4x, 2.9x, and 4.8x respectively versus the same period last year. This strong growth partly reflects a low base last year, but it is also a reflection of increased demand for COVID-19 related testing and the success that management has had in scaling its home testing services (i.e., collection of samples from home and sending test results digitally), which averaged out to 3.6k visits a day in the first half of the year. IDH signed a $45 million facility with the International Finance Corporation (IFC), which it can draw to fund inorganic growth on top of the approximate $80 million of cash on its balance sheet. We also expect IDH’s management to recommend an exceptional dividend once the year concludes given the strong cash generation this year.

We believe that the strategy is entering a strong earnings growth cycle underpinned by the reopening of economies, structural adoption of digital products and services that the portfolio is over-indexed to, innovation from aligned management teams in areas of product development and distribution, and operating leverage that will kick in on the back of sustainable efficiencies that portfolio companies have realised in the last 12-18 months. The strategy remains concentrated but geographically diverse, a reflection of a portfolio construction philosophy that is focused on generating returns from company rather than country/region and that favours long-term value creation over short term returns.

Vergent Asset Management LLP


1. Unless otherwise stated, all data is at September 30, 2021 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).
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Vergent Asset Management LLP
November 2nd, 2021