The young ones
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Aberdeen’s equity head Hugh Young has been with the firm since the 1980s and his investment style, honed on Asian markets, now dictates the group’s overall process.
In basic terms, Young focuses on fundamentals and on cutting out market noise, with stock selection grounded in company visits. He believes good solid stocks will outperform over the long term and seeks to buy these as cheaply as possible.
While concerned about a potential bubble in China, Young believes Asian markets still look attractive, with solid banks, a healthy consumer and high savings rates.
“Overall, Asian governments are strong, companies have done nothing stupid and consumers are not mortgaged up to the hilt. And with the region benefiting from the liquidity rescue packages sloshing around the world, it looks in rude health,” he says.
“But governments cannot stimulate their economies for ever, sparking fears of a double dip, and Asia as supplier to the West cannot be immune from any downturn.”
With that in mind, Aberdeen predicts reasonable, not earth-shattering, GDP growth from Asia this year, largely because of lingering problems in the West.
Young, who manages the $4.9bn Global Asia Pacific fund, has consistently been sceptical on China, struggling to find transparent, successful companies independent of Government policy.
China’s emergence as an investment market has altered the face of Asian investing and Young said the country’s slow embrace of capitalist principles has been a positive.
But his concerns have always been that growth has gone too far, too fast and with billions pouring into the country, he sees areas like property as close to bursting.
“Many Chinese companies remain largely state-controlled and we have struggled to find professionally run private firms on the mainland with a track record of looking after shareholders,” he adds.
“That explains our underweight in the country. Where we do have exposure, it is through Hong Konglisted companies that can demonstrate how they have added shareholder value throughout the cycle.”
Despite his current caution, Young is positive on develop-ments in China and expects to have more invested on the mainland in five years’ time.
India has been the other major country to emerge as an investment opportunity in recent years and Young has been more comfortable investing there.
In many ways, he sees the country as the mirror image of China, with a fairly ineffectual Government not running the economy so well but many great firms for a stockpicker. And while Indian equities appear expensive at this stage, Young says some of the premium is justified given the robust returns on capital these stocks generate.
He notes Indian subsidiaries of multinationals such as Unilever, Glaxo and ABB, as well as several homegrown companies in areas like pharmaceuticals and IT. In the latter, he highlights India’s clear and sustainable advantage, thanks to a well-educated, English-speaking, price-competitive workforce.
Aberdeen’s fundamental approach makes for relatively low stock turnover, with Young himself owning certain holdings since the late 1980s.
On the whole, 2009 saw minimal activity on the portfolios, although Young did add some more aggressive positions early in the year on growing confidence. These included Hong Kong Exchanges and Clearing, which runs the Hong Kong stock exchange, a high-beta position as its fortunes vary with equity levels.
The team has since sold down this stock to reflect a slightly more cautious stance, with Asia still dependent on final demand from the West.
Without jumping into speculative stocks, Aberdeen’s Asian portfolio produced second-quartile numbers last year, which Young said was surprising given the conservative positioning.
Caution on a surging Chinese market has hit other defensive Asian managers, but Young has benefited from his decent weighting in India and large sector positions in areas such as financials. He has maintained almost 30 per cent of the portfolio in this sector, citing a much stronger outlook for Asian banks than their Western counterparts.
“Most Asian banks have no prop trading desk and only lent out between 70 and 80 per cent of mortgages to people who could afford to make the repayments,” he adds.
“Banks across the region offer good investment opportunities. However, we remain skewed away from those in mainland China as many are still state-run.”
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