In the final quarter of 2020, with the overall market focus tilting towards a return to normality and shifting away from those companies that had benefited from the pandemic, we initiated positions in businesses that will likely emerge even stronger once conditions normalize but whose potential the market has yet to fully recognize.

We continued to pursue cyclical growth companies that have been hurt by prolonged lockdowns and will gain from a return to more normal conditions. These are businesses with secular growth opportunities that have been hampered by a cyclical downturn due to the coronavirus outbreak. We have put these cyclical growth companies into two buckets. First, growth stocks that were sold off due to the pandemic and traded at unjustifiably low. We believe they offer attractive risk/reward prospects in a scenario where the pandemic abates. Secondly, high-quality cyclical stocks such as some technology companies that were already benefiting from the adoption of online trends before the pandemic and are continuing to benefit as people stay at home.

During the quarter, we favored more innovative companies with management teams that can navigate, respond and identify opportunities in rapidly changing environments. By innovation, we do not solely refer to the use of technology, but other strategic and enterprising ways a company seeks to improve its market positioning.

Our portfolio positioning remains bottom-up driven and we continue to prefer companies that may be able to gain market share in consolidating industries while also having a strong enough capital structure to weather a potentially prolonged downturn in business activity. We favor stocks with multi-year growth stories and are not merely mean-reversion opportunities.

Information Technology

The portfolio has a substantial exposure to the information technology (IT) sector as we seek to benefit from the long-term growth in demand for memory chips and the surging cloud services market that has continued to increase its share in the global IT spend. The pandemic has brought about a surge in videoconferencing, online shopping, streaming services, and video gaming, increasing the reliance on cloud computing where data is stored, and applications are processed in centralized data centers with users able to access the technology over the internet.

• We increased our exposure to IT services as we bought a position in GDS Holdings, a private datacenter company in China. GDS has been benefiting from structural cloud demand and growing its share above the market due to its superior execution by its stable management team that is return-focused and diversified client base. We believe GDS is one of the highest quality cloud companies in China offering value-added services and stands out from other datacenter companies that end up as pure tech real estate providers. We are optimistic about its long-term demand trajectory as Chinese companies that started out with a public cloud service increasingly move towards hybrid or private clouds and GDS will benefit from such a trend.

Consumer Discretionary

We have a sizeable absolute position in the consumer discretionary sector. We own companies that we believe may exhibit higher growth potential especially as the rollout of vaccines is likely to boost demand for their products and services. We have positions in companies that will benefit from long-term trends such as the strength of Asian consumption supported by increasing household income and the deepening penetration of ecommerce, accelerated by the coronavirus pandemic. 2020 brought forward potentially years of growth in ecommerce as people grew accustomed to working, shopping and consuming media from home, a pronounced shift that benefited established online companies as well as nascent ones. For one, the pandemic increased online grocery shopping in Asia and this behavior could persist even after the end of the pandemic.

• We sought to diversify our exposure to the China online space by establishing a position in Pinduoduo. We believe Pinduoduo, where Tencent has a stake, is able to grow the ecommerce market, helped in part by its differentiated positioning as a marketplace for value-for-money products. We initially deemed that Pinduoduo would have difficulty competing with bigger rivals such as Alibaba, but in the last 12-18 months it has found innovative ways to help grow the ecommerce pie. Its community grocery business will likely be a new growth driver.
• We invested in New Oriental Education, a Chinese after-school tutoring provider that we view as a market share gainer. The company will likely benefit from increased demand for offline tutoring services as living conditions return to normal. While it has a small online learning subsidiary, the company generates the bulk of its revenues from its nationwide network and learning centers in China.

Consumer Staples

We have a significant exposure to consumer staples. Domestic consumption remains an overarching theme in our portfolio. We believe that Asian households are generally under levered and consumption is a secular opportunity. In the quarter, we reduced our allocation to this sector as we switched to more cyclical growth companies that stand to gain from a recovery once the pandemic subsides. However, we still made a company-specific initiation during the period.

• We bought Amorepacific, the largest domestic cosmetics company in South Korea with a growing international business. The coronavirus pandemic and the tenuous China-South Korea relationship have contributed to its depressed earnings, but the vaccine news bodes well for its business and we think that at some point the China-South Korea geopolitical issues can be resolved. We view the company's efforts to clean up its distribution system, cut costs, and launch new products as positive.
• We sold Jiajiayue Group, a food retailer in China with high revenue exposure to fresh products, after it had a strong run in the first half of 2020 during the pandemic. Heightened competition in the online grocery segment with the entry of new companies also hurt the stock. Its rivals have adopted a "community group-buy" model that taps community leaders to collect grocery products needed by their respective neighborhoods through an app. This change to the competitive landscape could scale up fast and potentially affect Jiajiayue's operations.��

Communication Services

The portfolio has a sizable position in the communication services sector in absolute terms. Our focus here is on social media platforms and search engine companies that are benefiting from developments such as increased remote working and consumption of goods and services from home.

• We sold shares in Baidu, the dominant search engine in China, as we viewed its recent acquisition of a video streaming business as lacking in synergy with its core business.
• We invested in Converge ICT Solutions, a Philippine-based fixed broadband company that has gained market share in a two-player underpenetrated market. We think it will continue to benefit from strong demand for connectivity as the pandemic accelerates the work-from-home trend. The Philippines has one of the lowest broadband penetration rates in the region and the competitive landscape is favorable as the incumbent providers focus more on 5G rollout.

Materials

We do not have significant exposure in materials, a traditional value pocket, given our mandate and a dearth of sustainable growth opportunities in this economically sensitive sector.

• With the positive news of vaccine rollout programs and fiscal stimulus measures in parts of the world, particularly outside Asia, we took the opportunity to buy POSCO, one of the world's largest steel producers. Its fundamentals are recovering, which were affirmed by its better-than-consensus solid earnings execution. We believe the recent improvement in the demand-supply dynamic and steel margin will be more sustained this time around. POSCO is expected to benefit from a recovery in auto steel demand and pick-up in shipbuilding orders.