Motley Fool’s David Kuo, who would be here for the Value investing summit interviews long time Singapore expatriate Hugh Young, managing director of Aberdeen Asset Management on his experiences investing in Asia versus Europe.
Aberdeen Asset Management is one unit trust house in Singapore which tells others of its value investing tilt. And it is likely due to the direction of Hugh Young.
[Motley Fool | Look east before its too late | Transcript – requires login]
[Motley Fool | Look east before its too late | Podcast]
It’s a very insightful interview I feel, because it touches on how Asian companies tend to differ from the usual popular western investing methodologies.
Family run businesses
Hugh highlights that in Asia, you have many companies that are still very traditionally managed and could be challenging to navigate:
I think investing in companies is the same wherever you go, so the fundamentals behind it are exactly the same, whether you’re investing out of London, or here into Asia, so you’ve got to look for decent businesses, run by honorable people, with clear and transparent accounting.
So those basic issues are universals, I would argue. Does Asia have different characteristics? – yes, it does, so certainly, when you look at, underneath the bonnet a bit, you find companies that are typically, there’ll be more companies run by families, so more family ownership.
The ownership of companies has not become as diversified as, say, for example, ownership of companies in the UK, or the US, so that is an extra wrinkle. Government intervention also can be very heavy in parts of Asia, so most of China is owned by the government, which is again very different from your Nestlés, your Procter & Gambles, your IBMs.
Sovereign Wealth Funds
Hugh highlights differences in how sovereign wealth funds (SWF) in China and Singapore affects the market. He thinks investors should be wary of how China intervenes with SWF versus that of Singapore:
If you look at Singapore itself as a marketplace, much of Singapore was really started by one of Singapore’s sovereign wealth funds, effectively Temasek, which is an arm of the government, which always makes one think twice, of course – is this being run for minority shareholders, or is it being run for the good of the country?
I think, in Singapore’s case, we’ve seen a clear evolution of the way the government intervenes, or gets involved in marketplaces, so Temasek, while still quite an active investor, has withdrawn substantially from very active investment in the local market, to more of a traditional investor, encouraging actually some of the best corporate governance practices we see across the region.
So it’s become a lot more mature market, the development functions, so that the Singapore market that the sovereign wealth fund had in the early days, is by and large redundant.
I think you’ve got to be very careful how the government acts within the markets. Looking at China, for example, where the Chinese government is far more interventionist, and is using the companies in which it invests, whether it be the ministry or the central government, it’s using the companies in which it invests as arms of government policy, then you’ve got to be far more careful.
I think where Singapore has, for example, developed an industry that can stand on its own two feet, whether it’s the airline, the bank or whatever, there’s a lot more competition, and for us, the government-linked companies, as they’re still called in Singapore, would come into the category of some of the better-run companies, within the region as a whole, and certainly run fairly independently of sovereign wealth funds, so it’s gone to that more mature stage.
The opportunity for Income investors in Asia
Hugh thinks one should not look at where the stock is based in, since many UK companies derive chunks of earnings from Asia and vice versa. You still need to look at each company and value them individually:
You can find, listed in the UK, many companies that derive a big chunk of their profits from Asia, or emerging markets. So I think the simple divisions by country of listing, and assuming that, wherever a company is listed, defines where its earnings come from, has become far more of a blur these days than ever it was twenty or thirty years ago.
So companies have internationalized, we’ve got Singaporean companies with chunky earnings out of the west, and vice-versa, western companies with chunky earnings coming out of Asia. So if you do your homework, you can find companies benefiting from the growth of Asia, which is still pretty self-evident, irrespective of where those companies are listed.
Why Aberdeen favors Asian banks and why they are different from western banks
Hugh highlights here why his funds have a large weighting on asian banks and that they are highly regulated and in more traditional business:
They’re very very different beasts, and certainly if you split up the financial sector, and very crudely, say 40% in financials, half of that, 20%, is in banks.
Then, if you look at how the Asian banks have run their businesses, and how they’ve been regulated, they’re very very different beasts from the banks that blew up in the west. So typically, their loan/deposit ratios are comfortably below 100%; their funding comes from deposits, not the wholesale side; they didn’t get into all these exotic proprietary trading vehicles that the western banks got into; their lending is well-regulated, again by strong regulators.
So for us, they’ve actually been very straightforward plays on growing consumer wealth.
So as people grow wealthier in Asia, they open a bank account to start with. They take out a credit card, they take out a mortgage; heaven forbid, they even buy unit trust products through a bank, so it’s a very very plain vanilla approach, compared to what the city banks and the Scottish banks did.
The preference of OCBC, UOB over DBS
Hugh highlights his tilt towards the family owned banks over DBS, which have much managerial changes:
The reason we preferred OCBC, as we call it, and the UOB, over DBS, were fairly straightforward. DBS has been through a lot of management change, so in the short twenty years I’ve been here in Singapore, we’ve seen various changes at the top, an organization that has not been particularly stable from the management point of view, although the underlying business is a very strong one. So we felt far more comfortable with essentially the family-owned companies, OCBC and UOB.
Again, similar characteristics across all three banks; very conservative; very strong, sensible regulator; very high capital adequacy rates, and very solid portfolios. So we like all three, is the honest answer, today, but for historical reasons, we did avoid DBS because of management changes, in favour of OCBC and UOB, and now all three are being equally well-run.
Nothing wrong with Standard Chartered Bank
Hugh and David are both of the acknowledgement that SCB despite the strong wording of the claim, remains an attractive investment:
Certainly when the recent scandal erupted in New York, I think we were as shocked as any by what went on. We understood that Standard Chartered, along with lots of other banks, have been investigated for what’s happening with the US dollars, and how US dollars have been processed through New York, but the 27 or 28-page statement that came out of Mr Lawsky from New York, was quite shocking stuff.
Certainly the language within it reminded me of Law and Order on TV, it was really attacking language, and we didn’t recognize, in that language, the bank that we knew well, so we know it well at all sorts of levels.
We have staff members whose spouses worked there, and Standard Chartered is quite a compliant organization, so we were surprised at the virulence of the attack, and not pleased, obviously – nobody can be pleased; worried.
Within our portfolios, we actually took the opportunity to add a little to Standard Chartered, on that weakness.
Tilt towards Jardine and his take on conglomerates
Hugh explains his idea over the Jardine group of companies and why conglomerates are very popular in asia:
Conglomerates often do trade at discounts, so there is a conglomerate discount often that applies in markets, and I think people can be very suspicious, in the east, of conglomerates as well. Are there still quite a few conglomerates here? – yes, they are; and why is that? – because they’re family-controlled.
I guess you could look at Swires, if you call that a conglomerate, which we’re also shareholders of, by the way. I think you’ve got to be careful with conglomerates. Again, as with other listed companies, you’ve got to make sure that the people behind them are straight, and that they’re well-run. There are added complications to conglomerates, insofar as there are more moving parts, by definition, so it’s harder to analyse.
The fans of conglomerates, and often the people who run the conglomerates themselves, will say that it smoothes out businesses if they have one cyclical business on one side, and another stable business here, and they don’t all have bad years together.
A warning on yield on Singapore’s properties
Hugh highlights subtly that he thinks the side effect of quantitative easing in the west is manufacturing some yields in property that investors should be wary about:
This is one of the unintended consequences of the dreaded QE that we’ve seen, and it has been driving asset prices up in other parts of the world. Now, that can be equity markets as well, which have done surprisingly well, considering the global economic backdrop, or indeed property prices, and Singapore has had to face soaring property prices, and a strong currency.
So what Singapore has done has been to take various measures against that, so that the government is quite interventionist in that sense, so has put restrictions on mortgages, restrictions on second ownerships – all sorts of restrictions to try and cool down the property market, which has succeeded, and that’s hit short term, that’s hit some of the listed companies, but frankly, they’ve done so well over the last five years, with the rise in property prices, that I think it’s a relatively short term bullet.
But it’s causing government intervention across the region, and it is concerning governments. Property is a very visible aspect of the flow of money, the printing of money in the west, coming to this part of the world. You’re seeing it in the currency markets.
You’re seeing it in any stocks with a yield on, so people are flying into yield stocks, and you’ve got to be very careful, yes, and yield is a good thing to have, but you’ve got to be very careful how that yield is manufactured, and if it’s artificially manufactured, at the end of the day, something nasty is going to happen.
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