The asset class had a strong run in the aftermath of the global financial crisis in 2008, but the last year or so has been much more difficult. Indonesia and India have very high trade deficits, while Thailand has had political problems to deal with. And China’s growth is moderating. Tapering and general concerns over emerging markets have bit Asian small caps.
So (pictured), who heads up the Matthews Asia Small Companies fund, explains:
“China and India are slowing, and growth in the region is moderating. But, moderation of growth itself is not entirely negative if countries focus on quality of growth and not merely pace of growth, which should be more constructive over the long run.”
“Just because the headline GDP growth numbers are coming down doesn’t mean we can’t find growth in companies. Tapering and slowing growth doesn’t mean the middle classes aren’t still a powerful theme.”
Performance of indices over 5yrs
Source: FE Analytics
“A lot of the factors affecting markets have been macro-led. I must say, I’m less focused on noise stemming from macroeconomic factors and concentrate more on fundamentals. We know tapering is coming and liquidity will therefore slowdown, which means that companies’ fundamentals will be more important to performance going forward.”
So has run the US$1.9m Matthews Asia Small Companies fund since its launch in April 2013 with co-manager Kenichi Amaki. She points to the growth of consumer demand, particularly from the middle classes, as the key theme in her fund.
“Rising domestic demand will be an increasingly important driver of regional economic growth, as wealth and the size of the middle classes grow,” she said. “As economies shift from being export dependent to more consumption driven, they will be less vulnerable to global macro events.”
So says she is often asked by investors why invest in small caps if large caps are cheaper.
“It’s not an either or – I think there is very much room for both,” she continued. “Typically, many of the large-cap portfolios will invest in companies that have a market caps far in excess of $5 billion. I think a small cap portfolio can complement investors’ core Asian portfolio.”
“Smaller caps offer exposure to companies that are typically under-researched and often inefficiently priced compared to larger peers. They can also offer more opportunity for focused growth than the large-cap space and the possibility of more robust domestic consumption growth across the region.”
So believes small companies, in many cases, are nimble enough to react quickly to the region’s changing patterns of consumption.
“It’s not merely a matter of consuming more, but consuming better things.”
Consumer staples and consumer discretionary make up an unsurprisingly big part of the fund, comprising just under a third of the portfolio. Healthcare, which So says indirectly ties in to the greater demand for services from the middle classes, has a 12.3 per cent weighting (as of 31 March 2014).
Matthews Asia Small Companies has a growth bias, targeting quality companies that have the capacity to grow their market share.
“We don’t buy small caps just because they are small and cheap, but only the ones that we think are in the early stages of growth and have the potential to become a mid-cap or even large-cap company over the long term,” the manager explained.
“We look for business models that can deliver sustainable growth. They can’t just be reliant on external capital – the companies need to be able to sustain themselves on their own over time.”
So highlights that management is very important and she seeks motivated management teams that are closely aligned to shareholder interests.
“You can have good business economics and poor management, which doesn’t work,” she said. “We look for sensible management teams whose ambitions lie beyond the short-term price movement of their stock, and whose focus remains on growing the business.”
So says she takes the minimum of a three year view when investing in a company:
“We look for quality companies with sound business models, reasonable operational track records, and strong balance sheets. This has allowed our portfolio to demonstrate higher revenue growth and better return on equity, although at slightly higher valuation multiples, than the benchmark.”
Performance of fund, sector and benchmark since launch
Source: FE Analytics
Matthews Asia Small Companies has made a good start celebrates its one year anniversary today, and has made a strong start on a relative basis since its launch. FE data shows the fund has lost 2.16 per cent since its launch in April 2013 – this puts it ahead of both its sector and benchmark, which are down 6.41 and 5.63 per cent, respectively.
So and Amaki have performed particularly well in the recent upturn in the Asian small cap market since late January.
This article was written in collaboration with and is sponsored by Matthews Asia.