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Flags of Convenience

Flags of Convenience

Currently there is a political spat with Iran over the seizure of a British-flagged oil tanker in the narrow Straits of Hormuz which separate Iran from the United Arab Emirates.

This latest diplomatic incident follows the Royal Marines’ prevention of an Iranian oil tanker from delivering a cargo of crude to Libya off the coast of Gibraltar earlier this month.  The delivery would have been in violation of European Union sanctions against Iran.  Iran promised retaliations.

The Stena Impero, seized by Iran’s Revolutionary Guard in international waters, was flying a British flag while another oil tanker was recently boarded by the Revolutionary Guard despite flying the country of its registration – Liberia (well done if you recognised their flag below the title of this blog). Presumably the Iranians googled the name of the tanker, Mesdar and saw that it is UK-owned.

Emerging Markets & Asia

Samsung might not appear to be a flag of convenience but investors in ‘emerging markets’ especially passive versions, might want to look under the bonnet to see what the engine of returns look like.  Taking the MSCI Emerging Market Equity Index as representative of the opportunity set, Asia dominates the landscape representing around 75% of the index by market capitalisation – if you believe market cap is relevant as most do – we don’t.

Despite the inclusion of Iran’s neighbour and enemy, Saudi Arabia in the MSCI Emerging Market Index, the index is dominated by four Asian countries with a combined weight of 63.72%: China (31.55%), South Korea (12.37%), Taiwan (10.83%) and India (8.97%).  Additionally, of the top ten stocks by weighting (totalling 23.52%), nine are Asian. Third on the top ten list is Samsung, based in South Korea, designated as an ‘emerging market’ country.

It is fair to say that Samsung is not really an emerging company.  A quick look at the source of Samsung’s revenues will tell you that a third emanates from North America, add Europe to the mix and you get close to 50%, revenues from Korea are 10%. So, with around 50% of revenues from developed markets, calling Samsung an emerging market company is a stretch but a convenient way to have it in an ‘emerging market’ or Asian equity portfolio.

Needle in a haystack

One of our investment themes is to gain exposure to the rising wealth and expenditure of Asian consumers.  You might think the natural response would be to acquire one or more of the better Asian equity funds.  However, a quick look at the top ten of those funds looks a lot like the top ten of the relevant MSCI index and by default a lot like each other. Samsung features frequently. Index-hugging, asset-gathering behaviour? Probably.

It took some digging to find a fund that could deliver what we want for our investors to reflect the Asian consumer theme.  Fortunately, we did find a provider keen to access the same theme by looking at companies with revenues predominantly sourced in Asia.

Inappropriate Labels

Our last blog carried the above title.  It concerned the inappropriate demarcation lines within bonds/debt (please don’t call it fixed income – there’s a lot of floating income!) that suits asset gatherers but not investors.  The same applies here.  We believe it pays to adopt a holistic approach and look beyond the obvious to reward investors over the long term as opposed to live in fear of underperforming an inappropriately constructed index in the cause of retaining large institutional assets.