Searching for bargains among Asia's small caps
For more than 25 years, Aberdeen Asset Management has applied its shrewd, company-focused approach to stock picking in Asia. The Scottish firm hired Hugh Young to cover Asian equities in 1985, and sent him out to start an office in Singapore seven years later.
‘We try not to overpay for growth stocks. We are contrarian; we get excited when markets are weak’ – Christopher Wong
Christopher Wong is helping to carry on that tradition. The senior investment manager on Aberdeen’s Asian team says the firm’s investment philosophy demands growth at a very reasonable price. Fittingly, Wong – a Malaysian national – was educated in Scotland, picking up a bachelor’s degree in accounting and finance from the Heriot-Watt University in Edinburgh.
He also puts heavy emphasis on managerial interaction, a key part of Aberdeen’s approach wherever it operates – indeed, a recent in-house report on the Aberdeen Asian Smaller Companies Investment Trust describes meetings with management as ‘an essential step’ in the investment process.
Why have you increased the market cap limit for the Aberdeen Asian Smaller Companies Investment Trust from $750 mn to $1 bn?
The increases have been gradual over several years since we set up the fund in 1995. For the smaller companies unit trust [an open-ended fund] the limit is $2.5 bn so, from that perspective, $1 bn is not that big.
How has Hugh Young influenced the team’s decisions?
He is still the main manager of the trust, but there are about 45 investment professionals at Aberdeen across Asia, and there is no ‘star’ fund manager concept. We embrace a team approach for all our funds and strategies.
Do you meet companies as part of your investment process? If so, what contrasts do you notice between firms in developed markets and those in emerging markets?
We would not invest in any company until we have met with it. Preferably, we would like to meet senior management. Developed market companies probably have more structure in corporate governance and ownership; in emerging markets, a lot of businesses are probably run by entrepreneurs. In emerging markets, the understanding of capital markets is different and we have to do more education.
One of our big advantages is that we have local offices dotted around the region – hence, better knowledge on the reputation of the company owners. That matters as they can have multiple businesses; we ask ourselves: is their focus on the business? We look at the composition of the board.
Then we consider the solidity of the financials: we focus on companies with a strong yield and recurring earnings, and we pay a lot of attention to the annual report. Aberdeen is one of the founders of the Asian Corporate Governance Association and employs someone full time to work on these activities. We look at the issuance of options, corporate transactions, whether they are at a fair price; and we look at poison pills, which could give carte blanche to major shareholders to issue shares.
Tell me about some of your largest overweight positions. Can Madras Cements overcome revenue pressures and cost inflation?
Our logic is that India is a big domestic market, but its infrastructure is bad. We see a major need for infrastructure in India in years to come, although Madras Cements has been hit in the short term by overcapacity.
What about clothing and fashion retailer Giordano International?
Giordano has over the years developed a decent brand; it’s the Gap of Asia. It has a strong distribution network and brand visibility across Asia, and it’s trying to move the brand up the value chain: it has Giordano Kids and Giordano Ladies, which are positioned as mass premium products. It has plenty of mileage for growth, and not just in Asia. It also has a good accountant in its chief executive, who has kept working capital at decent levels.
Any sectors you don’t like?
No, we are bottom-up stock pickers so we are extremely open; overall we want domestic consumption stories. Our investment philosophy is growth at a reasonable price, and that means – for a business rooted in Scotland as we are – growth at a Scottish or ‘stingy’ price. We try not to overpay for growth stocks – like when, for example, mining companies suddenly become very hot. We are contrarian; we get more excited when markets are weak.
Have you made any disposals recently? If so, why?
Sometimes [we make] disposals because the person at the top turns out to be a crook, or the valuation gets very expensive, or the firm is taken out through an M&A transaction, and then we are happy to sell. But better the devil you know than just trading around.
What is your average holding period?
We tend to have a three-to-five-year horizon, but there are some we have held for 20 years.
Do you have a price target in percentage terms when you buy a stock and, if so, what is it?
We have no price targets but we visit holdings at least twice a year.
How many companies do you meet with each year?
Across our Asian team, we meet more than 1,500 firms each year.
What balance between strategy and finance do you look for when meeting management, and how does this vary between your major overweight companies?
We don’t have a checklist where we rate different attributes. What we care about is this: is that manager trustworthy enough for us to give him or her money? Can we make money in the longer term? If the firm is run by a crook, the chances are your money will disappear. We put more emphasis on the people running the firm.
How should companies with high cash balances decide between dividends, reinvestment in the business, and acquisitions?
We have had instances of this: we owned a Singaporean retailer, and 40 percent to 50 percent of its market cap was in cash. Every year, we brought this up at regular meetings or AGMs. Eventually it did pay dividends, after we kicked out some board members. But we are not like US hedge funds, which air frustrations in the media. Maybe ours is the Asian way, making sure nobody loses face.
Name: Aberdeen Asian Smaller Companies Investment Trust
Assets: £380 mn ($611 mn)
Top five equity holds: AEON, Multi Bintang, Shangri-La Hotels, Bukit Sembawang Estates, Giordano International
Top five country allocations: Malaysia (21.7%), Hong Kong (15.7%), Singapore (11.8%), Thailand (11.1%), India (10.0%)
The firm says: ‘The objective… is to maximize total return to shareholders over the long term from a portfolio of smaller quoted companies (with a market capitalization of up to approximately $1 bn at the time of investment) in the economies of Asia and Australasia, outside Japan.’
Details correct as at August 31, 2013