“We are patient, long-term investors and our investment approach isn’t tied to indices – but anchored in a process of understanding companies first and foremost, ahead of regional or country trends in the decision-making process,” the manager explained.
South Korean companies account for 17.3 per cent of the Matthews Pacific Tiger fund’s assets (as of 31 March 2014). While this is a slight underweight relative to the MSCI AC Asia Pacific ex Japan index, Shroff, who heads up the fund, says he’s far from negative on the country, explaining that he pays little attention to his benchmark when constructing the portfolio. The manager says he seeks to invest in good businesses run by transparent and well-motivated management teams, with a focus on the domestic market, a simple business structure and a strategy that is easy to understand.
Skincare specialist Amorepacific is Matthews Tiger Pacific’s biggest holding (as of 31 March 2014), and is listed in Korea.
“Our portfolio looks different to others’ – you probably wouldn’t think of a high end cosmetic company from South Korea would be such a big position,” said Shroff.
According to Shroff (pictured), over the past decade, Amorepacific has wisely invested in China, building out robust sales and distribution infrastructure there.
“This company is gaining traction in China and its endeavours to capitalize on a trend of increased aspirational purchases by Chinese women are gaining headway,” he said.
“We continue to look for companies that benefit from growing Chinese consumer demand and, indeed, Asian demand in general.”
Still, Shroff says one of the obstacles investors have faced in the past is a narrow and concentrated corporate landscape.
“Chaebols, or large Korean conglomerates, dominate the market place, which then makes it very difficult for small and medium-sized companies to take market share,” he said.
He adds that he’s encouraged by the efforts of the Korean government to encourage the development of the small and medium enterprises, though:
“We are starting to see greater diversity in the types of businesses, but it is just beginning. Over the next few years, I think there could be more and more small and mid-cap companies, which will be a welcomed development.”
While the manager says he is very much a bottom-up stock picker, he is alert to the possibility of broad-based sell-offs leading to attractive valuations in the region.
Shroff states Thailand is particularly interesting at the moment, and a country that he has been increasing his exposure to.
Prior to the country’s sell-off he says he was put off by valuations, due to the significant re-rating in the Thai market in 2012 and the early months of 2013. FE data shows the Thailand Bangkok SET index doubled between October 2011 and May 2013.
“In early 2013 we felt valuations were a little punchy, but that all changed in a matter of weeks,” he said. “Thailand has been a rough ride for investors of late, largely due to the politically induced volatility. But valuations in certain sectors are starting to look compelling again. ”
Performance of indices over 3yrs
Source: FE Analytics
“The demonstrations are viewed from this part of the world as a big negative, and the general impression is that the Thai economy, people and businesses are on edge. In reality, the business community has learnt to take these kinds of developments in their stride.”
“Thailand is in the middle of a stalemate with its political parties and the end game with the political process is unclear, but it’s clear to us that Thailand’s attraction – both for strategic investors and tourists – in unlikely to be dented in the long run.”
“I’ve come to appreciate that businesses are very resilient. They may be impacted and there may even be disruptions to underlying demand, but it is likely to be temporary, as long as the political process doesn’t drag on and on.”
Shroff has taken his exposure to Thailand to just under 6 per cent, making it one of the portfolio’s largest overweights relative to the fund’s MSCI AC Asia Pacific ex Japan benchmark (as of 31 March 2014). He hasn’t ruled out increasing his exposure further still.
Matthews Pacific Tiger fund has been a strong performer since it was launched into the UK retail market in February 2011, beating its benchmark with returns of 16 per cent. It’s also well ahead of its IMA Asia Pacific ex Japan sector average over the period.
Performance of fund, sector and index since Feb 2011
Source: FE Analytics
As well as outperforming, the fund has also been less volatile than its sector and peers, reporting a lower max drawdown, which measures how much an investor would stand to lose if they bought and sold at the worst possible times. FE data shows that fund has a max drawdown of 17.84 per cent over the period, compared to 20.61 per cent from the IMA Asia Pacific ex Japan sector average.
Sharat says corporate governance is one of the key parts of his investment process, and has helped the fund to protect against the downside.
“We have three key drivers in our stock selection framework: the first is looking for companies with stable and sustainable growth and the second is corporate governance,” he said.
“We invest with a long-term time horizon, and our investment process places considerable emphasis on an understanding of corporate structures and management incentives to minimize the risk of governance-related issues.”
“If we aren’t confident in the governance, we won’t invest.”
“The third thing we look at is valuation. We don’t have a rigid metric in mind, but we set ourselves a range of valuation outcomes. If a company passes the first and second frameworks and gets into the right valuation band, we buy it.”
Shroff explains that the fund tends to be at a premium to the market because he focuses on service sector like consumer stocks, which tend to trade at higher P/E [price-to-earnings] ratios.
Aside from Thailand and South Korea, Shroff is optimistic about India, which is currently his biggest overweight. His co-manager Richard Gao explained why the duo are so optimistic about the country in a recent FE Trustnet article.
India has a 17.7 per cent position in the fund – an overweight position of 9 per cent (as of 31 March 2014).
Shroff is optimistic about the outlook for Vietnam, though he says that the breadth and depth of the capital market needs to continue to develop.
He also likes Indonesia, which is domestically oriented much like India’s economy.
“There’s no doubt there are challenges to the country. Like India, it has a big current account deficit, and is heavily reliant on foreign capital,” he explained.
“However, I think Indonesia has the potential to grow in the mid-single digits rate for some time, led by consumer demand. Tapering in the US has hit the country, but hasn’t permanently dented the country’s growth prospects.”
Sharoff has a 7.2 per cent stake in Indonesia, which compares to 3.4 per cent in the index (as of 31 March 2014).
This article was written in collaboration with and is sponsored by Matthews Asia.