Activist fund Cartica pushes for sustainable practices in India, including making underwear better

This update corrects the name of the state where Barger’s mother comes from to North Dakota from South Dakota.

Convincing companies to adopt better environmental, social and governance practices is still a work in progress in emerging markets.

But that has yet to deter Cartica Management, a $2 billion women-led fund with an ESG focus, from rolling up its sleeves in developing countries like India, where plans to reshape its largely informal economy are taking root.

“We have been investors in India over the years, and quite significantly,” said Cartica co-founder Teresa Barger, in an interview with MarketWatch. “Even before Modi’s first election, we thought India’s back was to the wall and it would need to reform.”

Prime Minister Narendra Modi was voted into India’s top office in 2014 with the goal of increasing foreign investment in India and spurring domestic growth. He won a second term in May with his government vowing to bring “big-bang” reforms in the first 100 days.

Prior to Modi’s ascent, Cartica saw promise in Page Industries Ltd
a family-run manufacturer of Jockey and Speedo brand underwear that was founded in Bangalore in 1995 and has since expanded into leisure wear.

“Underwear is a small luxury in India,” Barger said of the undergarment’s rise. “Either you are starting to wear store-bought underwear or you are moving from saggy-baggy underwear to undergarments you don’t need to worry about not fitting well.”

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While India is still home to the largest population of poor people of any country, it has cut extreme poverty, or those living on less than $1.90 per day, by half over the previous two decades to 21% as of 2011, according to data from the World Bank.

What’s more, consumption patterns have increased among India’s poorest 40%, where 65% had access to electricity and 74% owned a mobile phone as of 2011-2012, according to the World Bank.

Economic gains have benefited the textile industry, too, with Page seeing its sales increase 19.4% as of March 2019, based on a five-year compound annual growth rate, according to FactSet data.

Page sales climb in past five years

Page International Ltd

Page said it aspires to eventually reach sales of $1 billion in dollars, while promising to maintain high labor standards by outlawing child labor, abiding by health and safety standards and paying workers at least minimum wages, according to recent company reports.

For Cartica, bolstering the social leg of Page’s ESG mission has been a focus, including encouraging the garment maker to disclose all it knows about its suppliers so that it can be ranked by KnowTheChain, an international benchmark set up in 2016 to help combat forced labor.

“This is a standard in textile-related industries,” Barger said.

While Page’s stock has tumbled 29% this year, it has outperformed on a longer-term horizon. Looking back five years puts Page stock up 143%, versus 35% for India’s bellwether S&P BSE SENSEX Index
according to FactSet data.

It turns out, having a reform government at your back helps.

By Barger’s telling, the Modi government’s Goods and Services Tax of 2017 replaced India’s patchwork tax system with a centralized one that improved domestic commerce, but also cracked down on textile makers that operate off the books.

“Companies that were informal now have to become taxpayers,” Barger said. “When they become taxpayers, they are more on a level footing with the listed companies.”

Cartica Way

Cartica invests in publicly-listed family or founder-controlled companies that are trading below their intrinsic value, but where it sees a path forward for share prices to rise.

This chart shows the break down of the fund’s investments by region as of end of July, with India being its largest exposure at 28.7%, followed closely by Brazil at 21.87%.

India, Brazil are No. 1 and No. 2

Cartica data

The goal, Barger said, is to outperform the MSCI Emerging Market Small and Mid Cap Index by a significant margin. The index returned 6.43% this year so far through July 31.

Recent years have seen more companies and investors promote sustainable practices as a core part of doing business. Lately through, even the California Public Employees’ Retirement System, one of the first public-pensions to adopt social activism in its investments, has been having second thoughts, due to part to fears of lost revenue, according to The Wall Street Journal.

In emerging markets, however, ESG returns have stood on their own.

A BlackRock Investment Institute report from 2018 found that emerging market equities with an ESG-focus produced annualized returns of 9.1%, versus 7.8% for those with a traditional focus, when examining benchmarks for the region from 2012 to 2018.

Returns in the U.S. were flat for both types of investments at 15.8%.

“Early evidence suggests that focusing on ESG may pay the greatest dividends in emerging markets,” according to BlackRock.

Boots on the ground

Barger, who speaks Arabic and French, is no stranger to the developing world. She was born and raised in Saudi Arabia, where her father was part of a team that first discovered oil in the Kingdom. On her mother’s side were cowboys from the Badlands of North Dakota.

She graduated from Harvard, then Yale School of Management. Prior to co-founding Cartica, she spent 21 years at the International Finance Corporation, a counterpart of the World Bank that uses private finance to help combat extreme poverty.

There have been surprises along the way.

For one, executive pay, often a contentious issue in the developed world, rarely has been a problem in the companies where Barger likes to invest.

Barger said family-controlled companies, in particular, tend to keep a lid on top compensation. “As an aside, often I will attribute that to the mother,” she said. “She’s just not going to let them pay themselves too much.”

Also, Barger found that companies in Brazil and Mexico have been quick to get with the ESG program.

“You’d be surprised how many companies have practices that are good, but not always written down as policy, then, almost never disclosed,” she said.

Another revelation, on a more personal level, came when Barger was getting started on raising funds for Cartica. She called a friend for advice on her pitch book and was told to stand back and let her male colleagues do most of the talking.

“At the end, her main comment was that you can’t present without a man,” Barger said. “I was shocked that she said that.”

But then again, that was a decade ago, Barger said.

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