While investors seeking out the quality names in developed markets that have performed so strongly in recent years might find such companies too expensive, there are alternatives elsewhere, according to First State Stewart Asia’s Alistair Thompson.
Quality-growth investors such as Terry Smith, Nick Train and Michael Lindsell have dominated the sectors they operate in during recent years as their strategies have delivered strong outperformance and attracted large inflows.
However, outside of the developed markets they operate in there can be found a number of interesting companies with just as strong fundamentals.
Thompson, who co-manages the offshore $574.2m First State Asian Growth fund with Richard Jones, said there are a number of companies in the Asia Pacific region with strong management teams and steady, sustainable earnings growth “through good times and bad” for investors with a long-term outlook.
“It doesn’t matter what Donald Trump tweets or what happens with interest rates, there are some very long-term factors that are likely to lead to these companies continuing to grow,” said the First State Stewart Asia manager.
As the below chart shows, the MSCI Asia ex Japan Quality index has significantly outperformed the broader MSCI AC Asia ex Japan benchmark by returning 15.58 per cent against the latter’s 9.37 per cent rise over the past year.
Performance of indices over 1yr
Source: FE Analytics
The first area that Thompson highlighted was the consumer sector, where around a quarter of his portfolio is invested, which he said has been driven by some “pretty strong tailwinds”.
In recent years as the region’s middle class has continued to grow, with more disposable income finding its way to consumer brands.
“To give you one example, we’re an investor in a company called Nestle India, which is a listed subsidiary of Nestle Switzerland,” he said. “Nestle [India] pay a 4 per cent royalty to the parent company and that royalty gives them access to Nestle’s R&D [research & development].”
This, said Thompson, gives the company access to the parent’s multi-billion-dollar brands and manufacturing capabilities and expertise.
“If you look at Nestle In India, they generate $1 of revenue per capita,” he said. “If you look at Nestle Pakistan, their revenue per capita is $5.5. If you look at Nestle Philippines, it’s about $20 per capita.
“What this means is that we think that as Nestle India accesses more of the parent company’s brands and puts it through the existing distribution, then there’s no reason why Nestle India shouldn’t have a revenue per capita the same is not greater than that of Pakistan.”
“In other words, we reckon that in the next 10 years or so, Nestle India can rise by five times in terms of in terms of size.”
The other area that has become interesting is healthcare, which is also benefiting from demographic trends in emerging markets.
“There’s a company called CSL and they make a number of different drugs from blood,” he said. “Their product Immunoglobulin is a protein that carries different things like salts and nutrients through the blood system and they’re also one of the largest flu vaccine manufacturers in the world.
“Immunoglobulin has been going through the roof largely because in places like China demand is growing very quickly. Patients are being diagnosed much better [and] there is also an antibiotic resistance problem and a lot of these problems can be solved through immunotherapy, which is where CSL comes in.”
Performance of stock over 3yrs
Source: FE Analytics
Thompson added: “It just came out with a new [flu vaccine] product that has a 40 per cent efficacy or greater than the current product.
“I don’t know if you’ve had a flu jab ever, [but] I tend not to use them as they only have a one-in-three chance of working. With CSL that probability has become much greater and, lo and behold, they charge twice the price for it.”
The final area that the manager is finding strong quality names is the financial sector, “particularly in India”. While Indian banks get a lot of negative coverage in the media due to non-performing loan exposure, there are some that are worth a closer look.
“About 70 per cent of the Indian banking sector is controlled by the state banks [who are] saddled with non-performing loans, they don’t have the capital to investing the business,” said the First State Stewart Asia manager.
“So, investment in things like mobile banking and technology tends to be much lower than private banks. These private banks are taking market share by about 1 per cent per annum and that is likely to increase.”
The Alpha Manager continued: “One thing that Indians are very good at is information technology and these banks… sort of bypassed telephone banking and internet banking and went straight to mobile banking.
“It’s meant that rural penetration in the banking sector is another major area of growth.”
Nevertheless, the region does come with a fair amount of negative sentiment these days, with the US-China trade war springing to many investors’ minds. However, Thompson said that this is the wrong way of looking at the region.
“Life’s exciting enough as it is without sort of waking up from wondering what might be happening politically, globally [like] Brexit or Trump or China and India, for that matter,” said Thompson. “The key is to try and identify companies that can weather these storms over the long term.”
Yet, the strong performance of the quality style in recent years might make valuations seem more expensive now than they have been previously, but that might be something worth paying for.
“We’re definitely valuation focused,” he explained. “It’s an interesting one because we used to use the acronym GASP – growth at a Scottish price – because we have Scottish heritage.
“Unfortunately, now certainly with quality companies there aren’t really many Scottish prices around. There isn’t much value.”
Thompson concluded: “What investors are prepared to do nowadays is pay up for that sustainability of earnings. You take a company like CSL and it probably can grow earnings over the next five years between 15-20 per cent per annum. Those growth rates are very hard to come by.”
Performance of fund vs sector & benchmark over 5yrs
Source: FE Analytics
Over the past five years, First State Asian Growth has made a total return of 49.98 per cent compared with a 58.68 per cent gain for the MSCI AC Asia ex Japan benchmark.
The fund has an ongoing charges figure (OCF) of 2.11 per cent.