Hugh Young: Why you should be wary of Asia
Aberdeen’s FE Alpha Manager says a spate of high-profile corruption cases and other business scandals have highlighted the pitfalls of investing in the world’s most exciting growth region.
Investors must approach the booming Asian economies with caution as politics and corporate governance issues can catch out even the savviest individuals, says Aberdeen’s Hugh Young.
The FE Alpha Manager, who heads the team behind the Aberdeen New Dawn Investment Trust
, says many investors are seduced by the growth figures in the region and overlook details of companies’ management, including whether they are corrupt or open to political influence.
"We look to how the companies are run and for whom they are run," he said. "We are quite wary of resource or energy companies and we are most wary when governments are a major shareholder, in particular government-controlled utilities. We avoid family-run companies like the plague."
Despite being extremely careful to avoid investing in politically sensitive companies, Young says he has fallen foul of questionable corporate governance himself. He saw two directors of Sun Hung Kai, a Hong Kong property company held by the Aberdeen trust, arrested for corruption last year.
The manager says the lack of transparency in China makes it a particularly risky market, admitting the recent Bo Xilai scandal took his team’s contacts completely by surprise.
"We have seen quite a few bombs explode in China," he said. "We are still pretty wary overall."
Performance of trust vs benchmark over 10-yrs
Source: FE Analytics
The Aberdeen New Dawn Investment Trust has returned 65.9 per cent over five years and 313 per cent over a decade, according to data from FE Analytics
, compared with 48.54 per cent and 152 per cent respectively from its MSCI Asia Pacific ex Japan benchmark.
The fund made limited portfolio changes in the last 12 months and has a low turnover. It has held six of its top-10 holdings for over a decade, and two others for more than seven years.
"But the Sun Hung Kai property company shows we can still have surprises," said Young.
The manager believes the outlook for Asian economies is still positive, despite worries about the eurozone crisis having a knock-on effect on business sentiment. Although he thinks earnings will have a tough year he says there are still opportunities to find good-quality firms.
"Company balance sheets are fantastically strong in the region so we do not worry about slowdowns. We like India more than other investors, we have about 12 per cent in Indian holdings, but from a macro point of view the government has done everything in its power to drive investors away. India has some great companies."
The trust invests in the country through the Aberdeen Indian Equity fund domiciled in Mauritius, avoiding India’s capital gains tax regime. Holdings in the company include local subsidiaries of GlaxoSmithKline and Unilever.
Young is wary of the growing interest in the Asian consumer boom and is underweight relative to his peer group.
"Companies in the consumer sector have got high price-to-earnings ratios. They’re probably too strong so we have taken only a little off the top," he explained.
"Nothing fundamental has changed economically in Asia. Generally growth is slowing and Asian businesses are quite cautious – they are reading the same headlines as us."
Corporate governance remains a major issue in the region, and Young says Aberdeen is trying to improve shareholder rights through the Asia Corporate Governance Association. The reaction has been mixed, with some companies embracing investor involvement and others less keen. This is one reason why Young avoids family-run businesses.
"In China however, the issue at a small cap level is probably just theft," he laughed.