Asia has always been an exciting area in which to invest. Nominal GDP growth of 9.3 per cent per annum over the past 20 years, compared with 4.2 per cent in the US, promises fast-paced innovation.
Despite this period of spectacular growth, the region has plenty left in the tank, according to Martin Currie Asia Unconstrained fund manager Damian Taylor.
Indeed, Taylor feels investment opportunities in the region are mounting. The removal of trade barriers has led to increased intra-Asian trade and an expanding middle class has led to the spread of financial services. Meanwhile, technology has disrupted many established companies, creating opportunities for others.
The challenge for investors is to identify businesses able to translate this growth into attractive returns for shareholders. Easy access to loans has lowered entry barriers to many industries, which has resulted in excessive competition and lower profitability. The region also has a history of poor capital management.
To enhance the team’s research process Martin Currie uses forensic accounting to assess a company’s systems and processes to determine whether presented figures reflect reality. They are not looking for fraud per se; even the most thorough forensic accounting is not guaranteed to uncover this. Rather, they look to test the strength of a company’s cash flow and balance sheet.
Return on invested capital is, rightly, another important factor Taylor takes into account. Asia, like any other region, tends to move in business cycles. The manager therefore tends to focus on companies with low debt (so are more likely to survive through tougher times) and a history of stable returns over five to seven years. As company management are “stewards of the capital”, he also feels it is important to engage with them to satisfy his investment is in good hands.
In addition to forensic accounting and earnings analysis, Taylor aims to determine if a company’s growth is sustainable, with particular focus on competitive advantage and strategic direction. The ultimate aim is to identify companies trading below their intrinsic value. This in-depth focus on stock selection means the manager has high conviction in the future success of the 20 to 30 companies in the portfolio.
The top 10 positions in the trust account for around 50 per cent of the portfolio and have a bias to Singapore, Hong Kong and India. Many of these businesses are internationally-focused technology businesses, such as Tencent Holdings and Tata Consultancy Services.
This concentrated approach results in low turnover – currently less than 15 per cent. Indeed, over the past year there have been only three sales and three purchases made. M1 Limited, a Singapore telecoms company, and Tsingtao, a Chinese brewer, were two of the investments sold. Both companies faced increased competition due to new entrants to the market, weakening Taylor’s conviction.
The third sale was British American Tobacco Malaysia, where illegally imported cigarettes that circumvent excise duty have obstructed the company’s growth trajectory.
The board recently proposed a new dividend policy whereby the natural yield of the portfolio, currently 2.1 per cent, would be supplemented with an additional 2 per cent taken from the capital value.
A vote at the AGM in July will determine whether this new approach is applied. I would prefer to take the natural yield and decide for myself if I want to uplift this by selling down some of the capital value.
However, in our current low interest rate environment it would appear wealth managers have pushed for higher income return from their investment, even if this comes at the expense of capital.
Dividend policy aside, I like the manager’s low turnover, unconstrained, long-term approach. Furthermore, the trust’s discount to NAV is 13 per cent compared with an average discount of 2 per cent for its Asian equity income peers. As the performance of the Martin Currie Asia Unconstrained trust has been stronger than that of its peers, this represents an attractive buying opportunity.
Mark Dampier is head of research at Hargreaves Lansdown