Fund of the Fortnight: Aberdeen Asia Pacific Equity
Manager Hugh Young is very experienced, and has weathered numerous and varied market cycles, staying the course and firmly adhering to his investment process. Young has consistently followed his long-term investment strategy for over 29 years, buying into regional Asian companies he has thoroughly analysed and understands, and holding them.
Young took over the fund in February 1990, fairly shortly after its launch in April 1987, and has remained at the helm since then. The fund aims to grow investors’ capital by investing mostly in companies in the countries of the Asia Pacific region, excluding Japan. Stock turnover is typically very low at 10-15% p.a. and is mainly a result of topping and tailing, with new names rarely added.
Young is also Head of Asian Equities at Aberdeen, and his 40 strong team of investment professionals are located across six locations (Singapore, Sydney, Bangkok, Kuala Lumpur, Hong Kong and Tokyo) managing sizeable c.$114 billion of equities in the Asia region, including Japan (at 30 May 2014). The team must reach a consensus before a stock is included into a portfolio.
While Young is currently overall positive on Asia, expecting its economies to grow at a higher pace than those of the developed world, he is conscious that economic growth does not necessarily translate into strong financial market performance, as the Chinese market has demonstrated over the past few years.
Moreover, the regional investment environment has become more challenging: companies’ earnings growth in Asia has slowed to 8%-10%, well below its historical average of 13-14%, mainly as a result of intensifying competition and cost pressure, complemented by risks around US tapering and domestic policy tightening. In a tougher environment careful stock picking remains at the core of Young’s buy-and-hold approach, and the team gets even busier, doing a lot of due-diligence work to find new high quality regional businesses.
While potential concerns about slowing growth complemented by risks weigh on the economies, Young holds to his view that companies with transparent corporate governance and strong balance sheets are likely to outperform the indices. He strategically avoids Chinese banks and internet companies, including larger ones, such as Tencent or AliBaba, primarily on the grounds of their perceived to be opaque corporate governance practices. Leveraging Aberdeen’s broader resources, Young invests a few percentage points of the fund into other house funds, the largest investment being Aberdeen Global – Indian Equity fund.
As expected from the characteristic investment style, portfolio positioning has little changed over the past two years, with just DBS Group being added. Representing over one-third of the portfolio, financial stocks may, on the first glimpse, raise investors’ eyebrows, until they learn that most of these businesses had been put under the magnifying glass of the team prior to their purchase and have since remained in the portfolio for many years. Interestingly, despite being broadly positive on the Asian economic growth, fuelled by increasing consumer spending, consumer discretionary sector’s weight at
4.5% is nearly half of that in the benchmark. This is another example of the fund’s stock picking style, where sector and geographic allocations purely result from stock selection, rather than macro-views.
Geographically the fund is heavily invested in Hong Kong (22.5% against 9% in the MSCI AC Asia Pacific ex Japan benchmark), Singapore (19% against 4.5%) and India (12% against 6.5%). In the former two, Young claims to be able to find best companies in Asia, with strong corporate governance and a global, as well as regional footprint. Indian companies in the portfolio have mostly domestic business focus and are set to benefit from the country’s economic growth and wealthier population. While the fund remains overweight India relative to its benchmark, being positive on the country’s market performance longer-term, and is a comfortable 10-12% country weighting in his portfolios, Young has cut exposure a bit following the sharp market rally this year.
The following three examples illustrate the team’s investment style, skilful stock picking and tedious due-diligence approach and include: the Philippine property developer Ayala Land, which is well managed, has a sound financial position and ample land bank; Malaysian retailer Aeon Co that offers access to the growing domestic consumption, has strong fundamentals, and has demonstrated prudent management, able to extract additional value through asset disposals as it owns the building and land in which it operates. Multi-Bintang Indonesia brewery is another consumer stock to benefit from the country’s sizeable consumer base and rising purchasing power. The company is well-run and has consistently delivered double-digit earnings growth, while paying dividends.
We hold the manager in high regard, and the active management style resulting from the team-based, integral investment process, consistency of its application as well as performance stability, give us comfort to believe in the fund producing solid long-term returns going forward, particularly as compared to funds with similar objectives.
Victoria Chernykh is senior research analyst at Bestinvest.