PORTFOLIO REVIEW

China has been once again a headache for us in 2024. After three years of negative performances, Chinese markets finally recorded some positive performance despite a very tough start of the year with double-digit losses recorded in January. Getting there turned out to be a real roller coaster: Throughout the year announcements were made by the government to provide comfort to market participants, typically following some market correction. It started in January with the replacement of the chairman of CSRC, the Chinese regulator, which has always been in the past a trigger for market rallies. Throughout the year we also saw the so-called National Team that consists in state-controlled funds step in and coordinate to reinvigorate (some would call it “manipulate”) the market. These interventions typically had positive market impacts that lasted at best a few days, at worst a few hours, just the time needed for market participants to realise that these reassuring words were just that – words and nothing else. We made the mistake of believing in these stimulation announcements, and more specifically in March when we decided to reduce our China’s underweight position, in May after the government came out with a comprehensive housing rescue package and we decided to add exposure to the property sector through its strongest state-owned developer China Resources Land, and in September when the leadership came up with a plan to refinance local municipalities that are running out of cash and we raised our exposure to the largest benchmark names. Trusting the Chinese government cost us a fair amount of performance and taught us a lesson. China was by far the biggest drag on our performance this year and the source of numerous debates within our firm.

Korea was another complicated market to navigate in 2024 as political turmoil towards the end of the year with a failed coup added to the structural issues faced by Samsung Electronics, dragging down the entire Korean market by a whopping 9.6% as measured by the Kospi index. More specifically, Samsung Electronics, by far the largest company of Korea, failed to develop AI chips that could compete with those manufactured by TSMC on the logic side and by SK Hynix on the memory side. The biggest humiliation probably came when Samsung admitted in November that it asked TSMC to produce for them the Exynos advanced communication chip it had designed but could not produce. This could be best compared to BMW one day asking Mercedes Benz to make a car BMW had designed but could not manufacture. Samsung Electronics saw its share price drop by 32% in 2024, dragging along the way many suppliers such as Hansol Chemical which we sold during the year.

The mirror image of Korea was Taiwan, once again the best performing market of Asia. TSMC is in our opinion the common denominator of all AI chips designers. It holds a monopoly for the manufacturing of these expensive microprocessors, and has no serious competitor in its rear mirror, especially after Samsung Electronics admitted its shortcomings. The supply chain that revolves around TSMC also benefited greatly from TSMC’s successes in 2024. One of them is Chroma ATE, a testing equipment manufacturer that counts Nvidia as a client and has its equipment installed in TSMC’s factories. Its share price gained 92% in 2024, while TSMC gained 81%.

It is worth noting that such a diverging performance between the Taiwanese and the Korean markets is unheard of, the two countries being very similar in many respects, not least of all their large dependence on high tech.

Our Indian exposure did well in 2024, gaining on average 15.8% and outperforming the local market. It is indeed an expensive market, but these lofty valuations can be justified. There has been some correction in October and November after the government published some disappointing macro numbers, but local investors quickly stepped in and bought the shares that foreign institutions were trimming when they thought that the Indian market had run too much for too long. Our real estate investments in India gained on average 46% during the year, followed by our healthcare investments that gained 22%. To a certain extent we see India being a mirror image of China. On the geopolitical front, Modi is the friend that all leaders want to have while they are reducing their exposure to China. When doing our on-site due diligence, we could not fail to notice the optimism of the management of the companies we met and have investments in. It is also a fast-moving country that requires quick decisions when it comes to adding and trimming names as business opportunities come and go in rapid successions.

Our exposure to Southeast Asia is not high, around 9% on average in 2024, including an investment in BOC Aviation that accounted for approximately 3%, an aircraft leasing firm incorporated in Singapore that runs a global business which has little to do with Southeast Asia per se. We were not exposed to the Philippines and Thailand in 2024 as we did not identify any attracting opportunities, notwithstanding the political uncertainties that always prevail in Thailand.

On the other hand, we have always liked Indonesia where the market is quite deep, the population is large, young and dynamic and most importantly the fertility rate is high (around 2.4). Unfortunately, the appetite Indonesian corporations always had for US dollar denominated debt makes the country vulnerable to a rising US dollar as was the case in 2024. The rising dollar explains why the Indonesian market as measured by the Jakarta Composite Index dropped by 2.6% in 2024. Despite our fondness for this country, we have trimmed our exposure as we saw the dollar rising, especially around the time of the US presidential election.

Our exposure to Malaysia is small – less than 1% on average in 2024. It consists in one bank – Maybank – that is exposed to the fast growth of data centres operated by the leading cloud companies. Malaysia tends to be a shallow country with few investment opportunities. However it is a country that has finally become politically stable after years of turmoil, and that bodes well for its future.

ASIA PORTFOLIO

JKC Asia Fund gained 0.3% when the MSCI Asia ex. Japan index gained 9.7%.

Our best pick this year was Chroma, the Taiwanese testing equipment maker that has Nvidia as a client and that had a performance attribution of 2.1% in 2024. Coming second was Fuyao Glass, a large Chinese windscreen manufacturer that had the great idea to buy from General Motors a factory located in Ohio back in 2014, putting the company in an enviable position in this time and age of import tariffs. Fuyao’s performance attribution was 1.7% in 2024. In third position was Oberoi Realty, an Indian luxury property developer that focuses exclusively on Mumbai. Being focused on one city only, it is not a very large company. It manages its development and its balance sheet in a very prudent way and is often blamed by sell-side analysts for being too conservative. This strategy paid off with a performance attribution of 1.0% in 2024. In fourth position was SITC, the container shipping company that saw its freight rates shoot up when the war in the Middle East shut down access to the Red Sea and the Suez Canal. SITC’s performance attribution was 0.6% in 2024. In fifth position was BLS International, the Indian company that provides visa outsourcing services to consulates around the world. Its performance attribution was 0.6%.

Our two largest performance drags were Chinese consumer names: Yum China, the operator of KFC and Pizza Hut in China, and China Resources Beer, the largest beer company of China and owner of the Heineken franchise. These are two names we had owned for several years and that had been dropping as Chinese consumers cut on daily expenses. Still, we decided to hold on to them as the government promised to take action to revive domestic consumption, which was, once again, a false promise. Their performance attribution was -1.8% and -1.7% respectively. The third largest performance drag was Hansol Chemical, a Korean chemical company that supplies industrial gases to Samsung’s factories in Korea and China. We have owned that name since June 2015 and first bought it at around KRW 100,000. It reached a peak of KRW350,000 in 2021, and we trimmed significantly our position. Exercising our stop-gain policy, we sold our exposure this year around KRW180,000 after the company saw its share price impacted by the Samsung debacle, even though sales and profits are still in line with market expectations. Its performance attribution was -1.6%. The fourth and fifth worst performance attributions came from two Chinese names, textile manufacturer Shenzhou International (performance attribution -1.3%) and China Resources Land (performance attribution -1.2%), a large state-owned property developer that we bought after the Chinese leadership announced its rescue package for the property sector. In hindsight, we should not have trusted the words of the Chinese government.

At the end of the year, the fund’s exposure to China (including Hong Kong) stood at 33.8% (benchmark 34.2%), to India was 23.8% (benchmark 21.9%), to Taiwan 17.9% (benchmark 22.1%), to Korea 8.0% (benchmark 10.1%) and to Southeast Asia 10.2% (benchmark 10.1%). The cash position at the end of December stood at 4.7%.

CHINA PORTFOLIO

JKC China Fund gained 5.3% when the MSCI China gained 15.7%.

The largest performance attribution came from Fuyao Glass, the auto glass producer that has factories in Ohio (performance attribution 2.1%), JCHX Mining (performance attribution 1.5%) and Zijin Mining (performance attribution 0.9%), the former being a contract mining operator with global operations and the latter being the largest copper and gold producer of China with extensive operations in Africa and which benefited from the strong performance of gold in 2024. The fourth best contributor was SITC, the container shipping line that benefited from the closure of the Red Sea (performance attribution 0.8%), followed by TFC Optical, a recent addition to the portfolio that makes fiber optic components used in Nvidia servers (performance attribution 0.4%).

At the other end of the spectrum, our biggest underperformers were two domestic consumer companies, China Resources Beer (performance attribution was -2.0%) and Yum China (performance attribution was -2.0%), followed by one exporter, textile company Shenzhou International that got badly hit by the perspective of import tariffs from China even though all its US exports are coming from its factories located in Vietnam and Cambodia (performance attribution was -1.8%), and two Tesla suppliers, one making chassis (Tuopu, performance attribution -1.3%) and one making air control systems (Sanhua, performance attribution -1.4%).

One can only notice that the best contributors to the fund’s performance in 2024 are companies that have extensive overseas operations, be it American factories, mines in Africa, exposure to global commodities or container ships sailing across Asia. The farther the exposure to domestic China, the better the performance.

The cash position at the end of December stood at 8.3%.

OUR ESG ENDEAVOURS IN 2024

The year 2024 has been eventful in the realm of sustainability and ESG. The pace of significant policy developments has accelerated, creating a challenging environment for businesses and asset managers striving to adapt to an ever-evolving regulatory landscape. This complexity is further intensified by the uncertainty stemming from ongoing political pressures and backlash. The interplay of regulatory shifts and political dynamics has left many companies and investors like us grappling with how to balance compliance, stakeholder expectations, and long-term sustainability goals.

Amid these shared challenges, we have continued to expand our ESG initiatives throughout the year. As our funds shifted toward more diversified strategies, we remained steadfast in our commitment to evaluating the ESG aspects of every investee company in our portfolios. This dedication has enabled us to seamlessly integrate ESG considerations into our investment decision-making processes. By doing so, we were able to unlock new investment opportunities while strengthening our risk management practices, ensuring that our approach aligns with both sustainability goals and long-term value creation.

As we anticipated, the past year has been marked by significant turbulence for the ESG movement worldwide, particularly on both sides of the Atlantic Ocean. The momentum behind ESG initiatives has faced considerable headwinds, with growing backlash against green policies and climate-related disclosures in both the U.S. and Europe. In the United States, the long-awaited SEC climate disclosure rules were swiftly challenged in court just weeks after their release and remain under judicial review to this day. Geopolitical events have further complicated the landscape. Military conflicts in Ukraine, and, more recently, escalating instability across the Middle East have driven increased demand for oil, which runs counter to activist calls for phasing out fossil fuel development. This rising demand underscores the tension between immediate energy needs and long-term sustainability goals. Meanwhile, numerous politicians and executives have increasingly voiced their concerns over what they perceive as the deindustrialization of the U.S. and European economies. These critiques are often accompanied by arguments for protectionist measures framed as essential for national security. The European Union’s wavering stance on Chinese electric vehicles serves as a prime example of this dynamic. Together, these factors have created a challenging environment for advancing ESG priorities, underscoring the complex interplay between economic, political, and environmental considerations. For asset managers like us, this further highlights the need for a nuanced approach to investment strategies, balancing short-term market dynamics with long-term sustainability objectives to generate both financial returns and positive societal impact.

On a more positive note, significant progress was made on the regulatory front in 2024. The EU’s Corporate Sustainability Reporting Directive (CSRD) and Corporate Sustainability Due Diligence Directive (CSDDD) came into effect, introducing mandatory disclosure requirements for tens of thousands of EU companies and their major suppliers outside the bloc, with its spillover effect expected to drive ESG performance of companies globally. In Asia, considerable efforts have been made to align disclosure standards with the ISSB framework, with policy development taking shape in Hong Kong, India, China, Korea, and Singapore. Towards the end of the year, China finalized the basic rules of its first Corporate Sustainability Reporting Standard. The forthcoming specific measures are set to align with the ISSB framework in terms of information quality and disclosure topics while incorporating uniquely Chinese themes, such as rural development. In a welcome development, the COP29 event also concluded with significant achievements, including a $300 billion annual commitment from developed nations and finalized rules for an international carbon market. For asset managers, these developments present new opportunities to enhance portfolio alignment with global sustainability trends while navigating the evolving regulatory landscape to identify long-term value creation prospects.

The year 2025 is expected to be notably more volatile for ESG. In the EU, it will be a critical juncture for the bloc’s credibility when it comes to green development, particularly with the outcome of the SFDR review and the first wave of CSRD reporting. In the US, the new Trump administration is most likely to scale back ESG initiatives, posing significant challenges for the low-carbon transition and sustainable investments. In Asia, the focus will likely remain on advancing climate and sustainability disclosures in alignment with the International Sustainability Standards Board (ISSB) standards. Navigating this complex landscape, especially amid a weakening macroeconomic environment, will be a formidable challenge for asset managers like us. Nonetheless, our primary goal remains unchanged: to deliver superior and sustainable returns to our clients and investors, while fostering responsible investment practices that contribute to our shared vision of a more sustainable future.