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Emerging Markets – Overtaking the Hare

Updated: May 20, 2022

I consider myself lucky in that it's always been pretty obvious to me that companies are almost entirely about people. Find sensible people who are dedicated to quality, whether relating to product, balance sheet, working environment or customer service and, unless you’re really unlucky with the industry, you've found a good investment.

"Asian companies have not been able to pass on good top-line growth to shareholders"

Being based in Asia for most of my career has helped me to appreciate the difference between good and bad management. Asia’s economic performance has been remarkable, but its high growth path is littered with corporate casualties that expanded too quickly. Although I am not a strict value investor, my natural inclination is to assign a negative present value to a dollar spent on new capacity. The beneficiaries of a company’s expansion often tend not to be its shareholders but other stakeholders such as its bankers, employees, or local suppliers.

The performance of Asian equity markets over the last two decades illustrates this point nicely. In spite of Asian ex Japan economies having outpaced their Western counterparts by around 4 per cent per year over the last 20 years, you’d be wrong to think shareholder returns in Asia had been similarly superior. The MSCI AC Asia ex Japan index since the end of 1987 has appreciated 831 per cent on a total return basis, exactly the same as the MSCI US index. It seems that Asian companies have not been able to pass on good top-line growth to shareholders, at least not in the case of the average company.

But unless you’re an ETF disciple, why would you be interested in the average company, particularly in a region where it’s easier to distinguish between the reckless and the cautious? Perhaps because the majority of Asian equity funds have performed even worse than the average company, suggesting that fund managers too have been casualties of the growth trap.

There are six companies we have held in our Asian portfolios for the last 15 years or more, namely QBE, Rio Tinto, Swire Pacific ‘B’, OCBC, Unilever Indonesia and Ayala Land, none of which could ever have been considered terribly exciting. Swire Pacific is and always has been a conservatively run conglomerate; OCBC a sturdy Singaporean bank; while Unilever Indonesia’s fast moving consumer products are intrinsically unexciting. But since the end of 1995, the six companies have produced an average total shareholder return of 917 per cent, compared with the overall regional MSCI index return of 166 per cent. Ayala Land has been the only disappointment, largely because Manila property prices have gone nowhere for 15 years.

The fact is, in the race to produce good returns for shareholders, the tortoise usually beats the hare. This is a valuable lesson for investors and managers.

Published in Investment Adviser

The views expressed in this communication are those of Peter Elston at the time of writing and are subject to change without notice. They do not constitute investment advice and whilst all reasonable efforts have been used to ensure the accuracy of the information contained in this communication, the reliability, completeness or accuracy of the content cannot be guaranteed. This communication provides information for professional use only and should not be relied upon by retail investors as the sole basis for investment.

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