Singapore is one the most important investment centres for Aberdeen Asset Management, I travelled there recently to put our readers often challenging questions to Aberdeen’s senior Singapore based team.
Fast links to questions:
How might rising US interest rates will affect my Asian and emerging markets investments?
How Asia is shaping up for an income investor like myself looking for the diversity that the region gives me?
Aberdeen funds/Investment Trusts have not been doing very well of late, what is the reason for this?
What is Aberdeen’s opinion on how China is performing and do they agree with views expressed by Henderson Far East income manager?
Would the Singapore team consider splitting from Aberdeen if it is taken over?
Are Aberdeen still considering launching a global emerging markets smaller companies investment trust?
Does the team view the prospect of US interest rate rises as being reflected in current prices, or are they still a shock to come?
Which areas do the team think will be least affected by a U.S. interest rate rise?
Are there any sectors/areas which are more likely to be negatively affected by rises in interest rates?
Which types of companies/sectors/areas are likely to benefit from China’s transition to more of a consumer/service-oriented economy?
Is there much local concern about how events in the South China Sea could play out?
How can Aberdeen be confident of the accounts mainland Chinese companies provide?
It would be good if you could do a video interview with him. Not a long boring one but a short one on Youtube.
What parts of Asia/emerging markets do you like right now from an investment perspective and why?
Does the Singapore based team invest in Aberdeen’s investment trust of fund range?
Do they think their investment trust ongoing charges are reasonable given recent performance and the trend towards lower charges across the board?
Despite good long term performance, returns over the last 3 years have been poor relative to the sector. Is their preference for Singapore and Malaysia based on their Singapore location? and has this influenced returns?
Generally AAM doesn’t seem keen on China – yet despite the recent downturn in the China stock-market their relative performance is poor – any views?
Aberdeen Asset Management has grown to become one of the largest managers of investment trusts and funds through a series of acquisitions including Murray Johnstone, Edinburgh Fund Managers and most recently Advanced Emerging Capital.
Aberdeen were one of the first asset management firms to head to Asia, with a business that was set up by Hugh Young, who moved to Singapore in 1992. He quickly established a reputation for being a canny manager, even a safe pair of hands, in the wild west of Asian and Emerging Market equities.
He achieved this by developing and honing an investment style that can be characterised as trying to find great companies, and buying them as cheaply as possible. It’s a long term approach that means at times he holds on to stocks that are out of favour with the market, which has a detrimental short term impact on performance. He holds on to them in the expectation that in the long run they will outperform.
Another important feature of the style Young developed is it eschews the star manager approach, in favour of being managed by a team, who discuss and debate the merits or otherwise of the data from their own in house research.
Much of their research is on avoiding investing in companies that hurt long term performance, by management failing to live up to what they say they will do.
Flavia Cheong was recruited by Young in 1996, and is an Investment Director on the Asian equities team and is a CFA Charterholder. I put your questions to Flavia and to Patrick Corfe, an Aberdeen lifer and former journalist who heads up marketing in Singapore. Corfe has been Singapore based since 1999, having previously spend five years in the London office.
Below is a list of 18 question asked by out website members. The members name is displayed before the question followed by the response from Flavia and or Patrick.
1. Andre:
I’d like to know Aberdeen’s view on how rising US interest rates will affect my Asian and emerging markets investments. I am not that bothered about the short term effect, but will it affect things badly for the long term?
I am concerned because I have a lot of money in Asia so I would like to know more about its long term future.
Response:
Flavia: What’s happened since the financial crisis is that we’ve had a lot of liquidity (money) in Asia and EM (emerging markets), and that has distorted assets substantially, whether that be fixed income or property or equities.
In addition, since the so-called ‘taper tantrum’ of 2014 – when the US Federal Reserve first mooted an unwinding of QE (printing money) – we have seen volatility pick up.
We are much closer now to a rise in US interest rates, indeed the market expects it. This should take some of that uncertainty away, provided it cements the idea of a US recovery.
Stronger economic growth in the US is positive for us because we’re not seeing growth pick up elsewhere – be that in Europe, or China or Asia more broadly.
Despite their best efforts, many Asian countries are still very export driven. So a hike in interest rates would be positive for China, Taiwan, Korea, Singapore and Hong Kong (to name just the most trade dependent countries).
Against that, we have countries in Asia that have U.S. dollar pegs – a formal currency board in the case of Hong Kong, an informal link in the case of Singapore – which means that they have given up control of interest rates.
So, the prospect of rising interest rates is causing worries that those economies will slow further. An allied concern is that this will lead to an increase in loan defaults.
Having said that, as a sock selector, we don’t quite buy into this general macro concern (which is what has led markets here to underperform), because the balance sheets of corporates are actually very strong.
It is true credit growth across the region has been rising and that has been leading to a build-up in what is described as non-performing loans (NPLs), which are loans borrowers and defaulting on, but we think we are past the peak and those NPLs are now correcting.
Flavia Cheong, Singapore based Investment Director on the Asian equities team,
2. Pauls:
I’d like to ask how Asia is shaping up for an income investor like myself looking for the diversity that the region gives me.
I have Aberdeen Asia Income and I’m considering the Henderson Far East Income but I expect a lot of Drawdown investors would be interested to learn more about Mr Young’s view and experience on finding sources of income, the sustainability, and what the trends are over there. Are companies increasingly paying decent returns to shareholders, is it patchy, unreliable etc.
Flavia: Well, first as background, I’d say Asian companies are generally very conservative in terms of dividend payments.
They like flexibility and so prefer not to pay out more than they have to. They also tend to pay out of free cashflow (the money a company generates minus costs invoked running/growing the business).
Here they diverge from companies in the West where sometimes maintaining a dividend is a totem even if that means having to gear up (borrow).
We like their approach as it means dividends are more affordable and sustainable, and there is scope for payouts to increase. Japan is slightly different from the rest of Asia because historically payouts there have been measly. But there is a trend now for boards to become more responsive to shareholders and accept the principle that if cash cannot be put to good use there is a case for returning it.
Recently we’ve started to see a decline in company earnings. Although that has not led to a decline in payout ratios, it has reduced the absolute dividend companies can pay. There is a counter-trend, however. Some companies have become willing to pay out special dividends.
For example, Samsung, which has rarely paid dividends (because it has always insisted its cash be re-invested to fund growth) has just announced it will return a third of free cashflow (the money a company generates minus costs invoked running/growing the business) either in the form of dividends or buy backs.
Korea is not much of a dividend paying market, so it will be interesting to see how other companies there react.
Patrick Corfe (left), head of Marketing in Asia for Aberdeen Asset management presenting an award at the Singapore Extreme Sailing series.
3. Yusefmutter
Aberdeen funds and Investment Trusts have not been doing very well of late, what is the reason for this? It is because their investment style doesn’t match this stage in the cycle or is it something else?
Flavia: In our global funds we have had a significant overweight to emerging markets and Asia because valuations are more attractive. Clearly, performance among developed and developing markets has diverged and currencies valuations have worked against Sterling investors.
Within Asia, our country positioning has followed where we find the most attractive stocks (and not the other way around). We have had significant investment in India and Singapore, for example, and by comparison to index and peers are less invested in Northeast Asia. Within our smaller companies portfolios we have been overweight Southeast Asia.
In all our Asian funds we have suffered from a big underweight to China, that is, until the correction in July.
Lastly, we’ve had exposure to certain stocks like Jardine Strategic, which, because of its significant investment in Indonesia has suffered from negative sentiment (towards that country), and this has been one of our worst performing stocks over the last 12 months.
4. AndreaCZ
What is Aberdeen’s opinion on how China is performing? Are they with the views expressed by the Henderson Far East Income investment trust manager that the stock market has got it all wrong and China is doing okay or do they think it is something to avoid?
I’m confused about China after reading about the Henderson managers views so I’d like to know what Aberdeen think about it as well.
Flavia: Our underweight to China is longstanding but requires explanation.
Undeniably China is moving from dependence on investment, especially in the form of state-led heavy industry, to a more ‘asset light’ model where services are more important (as wealth gets recycled into consumption).
What we are seeing now is a crunching of gears as China’s planners try to smooth this adjustment. This is no easy task. One of the consequences of an economy that is still heavily command-led is that prices don’t reflect true supply and demand. Today over-capacity is rife and mis-lending has occurred on an epic scale. The banks are caught up in this as agents of policy. We are confident that Beijing can tide over these problems and recapitalise as necessary, without, for example, re-igniting a credit bubble. But time is needed and volatility is inevitable.
What investors have to recognise with China, further, is that even more than with other emerging markets, the market is not the economy.
The listed market is still dominated by the banks, heavy industries, steel and energy stocks. These are also the type of Chinese companies listed in Hong Kong. The majority are state-owned, so not run for outside shareholders or for profit.
Accessing growth stocks is therefore not easy. You have to understand the complexion of each industry, the players and how competition operates, if at all. The auto sector is a good example. Outwardly it looks buoyant but many of the operators face losses because of over-capacity.
Turning to the ‘new economy’, we have seen some headline grabbing IPOs such as that for Alibaba in New York. But like many of its rivals, it is spending aggressively and moving away from its core online business. So it’s difficult to work out its direction and how well it is doing.
Our main gripe otherwise is over corporate structure. You have no recourse in law because China doesn’t recognise foreign ownership of internet and media companies. Perhaps that might change but for now it’s a big risk.
Another sector we have looked at is medical. It’s a huge theme across Asia. Demand for services is rising because of higher spending power and an ageing population.
In China hospital providers are very fragmented and small, and yet valuations are steep.
Medical instrument makers face cost pressures; and pharma producers are where India was ten years ago, making low margin generic drugs. They are looking to consolidate but it’s difficult to identify who will be the winners and losers. And all the while they’re not cheap either.
Aberdeen advert on Singapore’s extensive underground railway system that’s used by 85% of the population.
ArkWelder
5. My main question is one which is unlikely to be answered: would the Singapore team consider splitting from the parent company in the event of a takeover of Aberdeen by a larger concern?
Flavia/Patrick: First, there’s no basis in the recent rumours and we rebutted the FT’s coverage straight away. Our share price has admittedly been weak, but that is for well-advertised reasons, namely our emerging markets performance and associated client outflows. Our Group cash balance and cashflow is strong.
Your second point on a break-up is this: MUTB (Japanese insurer) and Lloyds Bank together own more than a third of the company. Add in staff and the percentage is probably 40% or so. We have close relations with both groups, as distributors of our products. We have their support. If there is interest from a big private bank like Credit Suisse, well, that says more about the cyclicality of the investment bank industry. (We have bought significant asset management businesses from both Deutsche and Credit Suisse since 2005.)
Splitting the Singapore operation was a possible 15 year ago at the height of the split capital crisis. But that moment has long passed. It would not make sense now because we have global distribution and inter-dependency.
We source funds around the world to manage in the region; conversely, there are Group capabilities we wish to sell into Asia. Building out areas such as multi-assets and property is a central plank of our global strategy.
6.A while back, Aberdeen were looking to launch an investment company whose fishing pool would have been global emerging markets smaller companies – similar to an existing OEIC. Has any further thought been given to this, or is it still on the backburner for now?
Flavia/Patrick: We run global emerging market products on the open ended side, so notionally to us, yes, that’s very attractive. At this point in the cycle we’re finding potential names at decent enough prices. But clearly sentiment towards the asset class is poor, so the timing in terms of asset-raising would not be good.
7. Does the team view the prospect of US interest rate rises as being reflected in current prices, or are they still a shock to come? i.e. what are the possibilities that FE/EM markets will rise once the ‘bad news’ is out of the way?
Flavia: The way the markets sold off at the end of the summer when the Fed hinted at an imminent rate hike goes to show you that there is a lot of uncertainty, even for a decision that has been so well flagged. In this instance, China’s devaluation seemed to spark a wider worry over slowing growth and the effect globally.
We do not believe that once rates do go up markets will rally. It is more likely that at first we’ll see a period of volatility as investors look to see whether there really is a sustainable recovery in the US or not. The more trade-dependent markets in Asia may well underperform. Those economies with currency pegs will be hurt most because they have less policy options.
Over the longer term it will play out fine, once investors see that balance sheets, be these corporate or government, are basically quite strong. The trouble is emerging markets have under-performed for five years and the issue right now is that earnings are quite weak. Until we see this situation changing, market conditions could remain difficult.
8.Following on from (7), which areas do the team think will be least affected by interest rate rises? e.g. income stocks; smaller companies; growth stocks; local currency debt; Far East vs. Latin America vs. Europe, Africa etc
Flavia: When interest rates rise equities generally underperform. But if those interest rate increases indicate sustained economic growth then equities will recover and you would expect growth stocks to perform first.
Higher borrowing costs could then prove a thorn in the side for more leveraged companies, especially if they have been borrowing offshore and their revenues are mis-matched.
9. Are there any sectors/areas which are more likely to be negatively affected by rises in interest rates?
Flavia: Many Chinese companies borrowed in USD and face maturing debt in 2017/18. When they refinance they could face a hit to earnings if they have to pay out higher rates. Unsurprisingly, we’re seeing companies in Asia refinancing in local currencies where they can.
10. Which types of companies/sectors/areas are likely to benefit from China’s transition to more of a consumer/service-oriented economy?
Flavia: As discussed, we would be buyers in the medical sector at the right valuation and provided we find companies that meet our quality criteria. Granted, there are lots of ‘ifs’ and ‘buts’ here. The comparison we instinctively make is with India where there is a far greater depth of companies: multi-nationals, consumer stocks, retailers, manufacturers, IT… so it remains our hope that as China deregulates we can get access to a greater breadth of companies than at present.
11. Is there much local concern about how events in the South China Sea could play out? And are there any views about a likely positive resolution?
Flavia: I’d say there’s awareness but not concern. When I first started investing there was a continual focus on Taiwan/China: Taiwan routinely conducted military exercises in the Strait that separates them. As for the two Koreas, they are technically still at war – almost 60 years after they divided the peninsular. So these tensions have always existed. The thing about China is that while it wants its place as a global super power it isn’t yet a rich country like Japan. As China looks for recognition to find its place, this tension will persist. But Asian countries are pragmatic and have a history of saying one thing in public but behind the scenes doing another. China regards Taiwan as a renegade province. Yet the two are about to meet officially for the first time since 1949.
Aberdeen sponsor Singapore’s extreme sailing series.
WickedInvestor
12. How can Aberdeen be confident of the accounts mainland Chinese companies offer and if they can’ take them at face value do they need to undertake further work themselves to properly understand the businesses they’re looking at.
Flavia: In China – in fact anywhere in Asia – the financials are just one facet of the company. It’s where our due diligence begins. But they are meaningless without an understanding of how the company is managed, the key sponsors, their backgrounds, political alliances, who the other shareholders are, the sources of finance, and so on. With China, the difference is one of degree. You just have to do a lot more work because many of the companies we meet are under new entrepreneurs and are ‘new money’. It isn’t the same as, say, India or Indonesia where the families may have been around for a couple of generations or more. Everything in China has happened in the last 20 years.
SandraDore
13. It would be good if you could do a video interview with him. Not a long boring one but a short one on Youtube.
Dice McCairn: We’re trying to organise that for a later date Sandra.
AlexWind:
14. What parts of Asia and of emerging markets do you like right now from an investment perspective and please explain why and if you think these are long term situations or short term tactical investment opportunities?
Also I agree with @sandradore that it would be nice if you did a little video interview. You don it on almost any decent mobile phone like your iPhone. I have videoed events and added them to Youtube using just my phone.
I will probably read the article you write about this too but I think I would like to see him being interviewed as well.
Flavia: Wherever we invest we take a long term view of companies we invest in. With respect to Asia we have significant overweight positions in Indonesia and India. When we compare India with China, in particular, it’s instructive.
India is not a cheap market in terms of P/E but companies there are careful with their capital; management and margins are generally better than in China as well. You find more companies that are profit oriented rather than sales oriented.
To take an example, the cement and brewing industries in China might be controlled by just a few players but they have no pricing power and very low profit margins as a result.
Four players in brewing take 60% of the market, but they make little money. Now, intuitively this makes no sense. Here’s a country of a billion consumers growing at 6-7% with rising discretionary income. They should be printing money. What lets them down is indiscipline. There’s no control on capacity, which points to poor capital allocation. The companies spend on things and in areas that don’t yield a reasonable return.
To add something on Indonesia, this is a country with 250m people so a fraction the size of China but with better demographics. It’s resource rich too, not a centrally planned economy. We’ve been buying Astra International, the preferred partner of many of the multi nationals there.
Mammon
15. Many of the most pertinent questions have been asked by others but I’d be interested to learn of Mr Young and co invest in any of their investment trust range (if they’re able to do so from Singapore) and if he and they do which one’s do they own.
Secondly, you should do a video interview, on a mobile phone or a professional set up. I can’t think of a reason why you wouldn’t want to do that but I can think and of many reasons why you should.
Flavia: All our senior management invest in the funds they manage, be these investment trusts and/or mutual funds. Aberdeen pays 80% of discretionary compensation in the form of deferred payments spread over three years from the time of award. The default payment is in PLC shares; alternatively, eligible staff can take 50% of this sum in the form of in-house funds.
SCJim
16. Do they think their investment trust ongoing charges are reasonable given recent performance and the trend towards lower charges across the board. I notice that both Schroder Oriental Income (SOI) has lower charges than Aberdeen Asian Income (AAIF) and Pacific Assets (PAC) has lower charges than Asian Smaller Companies (AAS).
Answer from Dice: Fees are a matter for the London/Edinburgh offices. They are not decided in Singapore and the local team’s knowledge of them is limited.
17. Despite good long term performance, returns over the last 3 years have been poor relative to the sector. Is their preference for Singapore and Malaysia based on their Singapore location? and has this influenced returns?
Flavia: The key overweight position is in India as well Hong Kong and Singapore. We have discussed India at length.
We favour the city states because, since the financial crisis, they have been at the forefront of improvements in corporate governance – Singapore especially. Within the region only Australia is better.
The other point is that Singapore and Hong Kong are really just places of listing. Companies in both places may have domestic businesses but for the ones we invest in the majority of sales are from operations around the region. For example, SingTel draws 60% of profits from Indonesia, Australia, Indonesia and India. Whereas Hong Kong is very much a proxy for China, Singapore tends to offer exposure to Southeast Asia.
18. Generally AAM doesn’t seem keen on China – yet despite the recent downturn in the China stock-market their relative performance is poor – any views?
Flavia: It’s incorrect to say we don’t like China. This suggests we have a prejudice. As discussed, our frustration is simply with not being able to access growth in a way that gives us comfort.
In the past few months our relative performance has improved because of the China underweight but perhaps not as much as might have been desired. This is largely because of our exposure to Southeast Asia, where currency falls have exacerbated market declines. Plus there are one or two stock specific reasons.
I should emphasise under-performance always concerns us. But it has to be understood in the context of our focus on the long term and the deep knowledge we have of what we own. We invest in profitable businesses. There is little that has happened lately to make those companies suddenly unprofitable. Market noise doesn’t change fundamentals.
20. What do AAM think about the planned proposals for the Silk Road investments which have had a lot of media coverage, will this change their views on China or bring new countries/companies into their investment landscape?
Flavia: Brokers love to sell concepts and the Silk Road is just the latest one. But we don’t consciously pick themes nor do we have a top down overlay. It’s simply not how we run money. We’re stock pickers. Our default position is always one of scepticism and to ask what could go wrong. And that can lead to radically different conclusions. Years ago – the mid 90s –everyone was very excited about Vietnam. But the problem then is that there really weren’t sensible ways of accessing that market. It was an illiquid casino. Several boom-and-busts later and not that much has changed, alas. There are a handful of investable companies but the private sector really isn’t very well represented. So we have exposure to Vietnam through the likes of Siam Cement in Thailand, which has investments across IndoChina; similarly in Yoma, a listed company in Singapore, we have exposure to Burma.
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