1. Staying Focused in Frantic Times

    In the midst of the pandemic, do Mercado Libre
    and Avantor’s bonds offer long-term value?

    Charlie Houston
  2. September 2021

    The value of any investment can fall as well as rise and investors may not get back the amount invested.

  3. The onset of the pandemic spurred dramatic change across the world. Entire industries of travel, leisure and retail were upended by social distancing restrictions. Global markets tumbled before climbing to record heights. The breath-taking pace of innovation hastened the development of novel vaccines in record time.

    Covid-19 has accelerated pre-existing trends with so-called pandemic beneficiaries, with ecommerce and vaccine manufacturing becoming the focus of newspaper headlines. The Nobel prize-winning economist Robert J Shiller argues that such narratives, and their variants, spread like pandemics among investors and have a causal effect on market behaviour. To deliver long-term reliable income for our clients, we seek to understand the world beyond the stories and avoid chasing hype. As ever, it is vital to calmly focus on what matters and home in on the fundamental factors driving long-term resilience of the businesses we lend to.

    There are, however, two bonds that we added over the past 18 months, one in ecommerce and the other in vaccine manufacturing, that we think make great income investments – and not just for a pandemic.


    The other Amazon in South America

    Stories abound about the growth of ecommerce as retail shops were forced to close their doors through national lockdowns. However, Mercado Libre, the leading online marketplace in Latin America, is a case in point as to why it is worth peering beyond the headlines.

    Since it was founded in the late 1990s in Argentina, Mercado Libre has expanded into 18 countries. Sales on the platform last year reached almost $21bn, triple the level of 2015. On its own, this leading ecommerce platform has been hugely successful. But what might be surprising is that this is not what we find most exciting. What makes this a resilient business to lend to for the long term?

    Roughly half of Latin Americans do not have a bank account, making it difficult to manage their incomes and expenses, build savings or run small businesses. In 2014, Mercado Libre launched Mercado Pago, an online payment system which can be used by merchants via card readers, QR codes and phone wallets. Last year, Mercado Pago processed almost $50bn of payments, 10x more than in its first year. More recently, it has introduced simple consumer savings instruments and small merchant loans. While the ecommerce opportunity is on the surface for all to see, we believe the payment platform will be the driving undercurrent – and one that the market is not fully appreciating.

    Mercado Libre has achieved all of this while prudently managing its funding sources and maintaining excellent liquidity. The strong balance sheet underpins its ability to pay a reliable income to bond investors. As the company grows and its revenue stream becomes more diversified, this income stream becomes more resilient, and the bonds may receive ratings upgrades and increase in price. With a current yield of over 3% and the opportunity of capital appreciation, there is more to these bonds than meets the eye.


    A MercadoLibre Inc. distribution and fulfillment center in Cajamar, Sao Paulo state, Brazil.
    © Bloomberg/Getty Images.

    Science is magic that works

    Another great success story of the pandemic has been the unprecedented pace at which scientists across the globe developed vaccines against the virus. Companies like Moderna, Pfizer and AstraZeneca, who developed some of the first successful vaccines, have dominated the front pages. But as in many great success stories, there is a crucial role played by supporting characters, which can often go unappreciated. Avantor provides a great example.

    Avantor is a life sciences company that provides chemicals, materials, and specialist equipment to R&D laboratories. For over 240,000 customers worldwide, the company sources, manufactures and supplies more than six million different products, ranging from glass beakers and test tubes to the high purity chemicals required to produce novel mRNA vaccines. Increasingly, the company is playing a new support role by providing auxiliary services to laboratories, such as routine experiment preparation, freeing scientists to focus on the science.

    Avantor has an integral role to play in enabling continued innovation, as a company embedded in all steps of the research process, from early-stage exploratory research and development through to production of a final therapeutic. With this long-term tailwind, Avantor has received multiple upgrades from rating agencies, rising from a B to a BB credit since our initial investment.

    From superstars who are more than they seem, to unsung heroes of scientific advancement, we focus on the underlying prospects of a business, often hidden beneath short-term waves. This allows us to hand-pick opportunities missed by the wider market, driving outsized income over multiple years. Because in the long term, that is what actually matters.

    Mercado Libre is held in Strategic Bond and Global Strategic Bond portfolios. Both Mercado Libre and Avantor are held in the High Yield Bond and Multi Asset Income portfolios.

  4. Actual Investors
    are focused. 

    Not frantic.


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