Why patience is paramount in Asia

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Over the past 15 years, Aberdeen Asia, Aberdeen Asset Management's Asian arm, has grown to become one of the largest managers of regional ex Japan equities in the world.

Hugh Young, managing director of Aberdeen Asset Management Asia, attributes much of its growth to a policy of moving slowly in the Asian region.

"I think it's important to resist being rushed into things, and typically we are more of a tortoise than a hare," he says. "We go on steadily and slowly but keep going in the same direction. And if people give us time they should be quite pleased with the money we manage for them." Currently, Aberdeen has some £15bn (€22bn) under management in Asian regional ex Japan equities, of a total £18bn under management regionally.

Young and his team have built the business through a strategy of investing in ‘best of breed' companies in the region with reasonable valuations, and sticking with them. "When we started in Asia, the fund managers in the region were very heavy traders, moving in and out of stocks, switching from market to market.

"We were and still are traditional buy and hold investors, so we were just not clever enough to do that. We simply saw that the region was growing very fast, so that if we just plugged in to the best companies and were careful about the price we paid, we could just sit with them."

Today, turnover in the model portfolio of 60 companies is low, averaging 15%. "This is largely a result of topping and tailing holdings rather than adding or dropping companies," says Young. "We've added just one company to our model portfolio so far this year, and we still own quite a few of the companies that we owned in 1992."

The approach requires patience and understanding from clients, he says. "The one thing we can guarantee is periods of underperformance. We can say it is logical that we should do well with this approach but, vis-a-vis markets, we will go through poor patches.

"Over the years we have had our bad
years. The dot.com boom wasn't our type of market. We're investing in the companies that we know, understand and value. So when it comes to explaining things to our investors we want to be totally clear about what we're good at, and when you would expect us to do poorly."

Young was recruited by Aberdeen in 1985 to manage Asian equities from London and co-founded Singapore-based Aberdeen Asia in 1992. He now has overall charge of more than 100 people in Singapore and 25 investment managers stationed across the region, as well as research/investment offices in Australia, Hong Kong, Japan, Malaysia and Thailand.

The expansion of Aberdeen Asia has generally been opportunist rather than planned, he says. "There was no master plan. The aim has always been, over time, to be everywhere if we can manage it. The idea has been to go where we can do something special and where we're strong."

Aberdeen Asia set up its first sales and marketing office in Hong Kong in 1998, an office acquired when the Aberdeen group bought Aetna Insurance. This was followed by an office in Sydney in 2000 with the acquisition of EquitiLink, an Australian firm. Equitilink's large Asian fixed income business was a particular attraction, says Young. "This was something I was excited about because I thought it was really important to be in fixed income for the long term.

"At the same time, it had an equity business. We already knew how to run Australian equities, since we had been running a standalone Australian equity account long before we acquired Sydney, so that was a logical step."

When Schroders pulled out of a joint venture in Bangkok with local partners in 2002, Aberdeen was offered the partnership. "We said yes, but we want the ability to go to 100%. We knew Thailand very well and had been running a dedicated Thai fund since 1989. So we thought we were better than the Thais at
running money."

Aberdeen Asia acquired 100% control in 2005, making it the first and only 100% foreign-owned investment manager in Thailand. "We were market leaders in terms of governance and compliance - we just brought in the group practices - which is exciting and we have the potential to be the market leader in what is a relatively small market."

n Malaysia, Aberdeen Asia set up its own greenfield operation. "We did have a joint venture in Malaysia before, but with only 30% we couldn't do anything. It made us money at the time but it never went anywhere." In 2005, the Malaysian government invited Aberdeen to apply for a licence to be 100% owned. "We leapt at the offer because we were keen on Malaysia," says Young. Aberdeen Asia subsequently became the first of only three foreign fund managers to have been awarded a domestic asset management licence in
Malaysia.

A year later, Aberdeen Asia created an equity research office in Tokyo. "It's a two-tier process," Young explains. "You usually go in as a research operation and then once you've shown that you're serious you then apply to be a fund manager."

The opportunism behind Aberdeen Asia's expansion has been - like its investment process - bottom-up rather than top-down, says Young. "Our expansion has been in a sense driven by Asia. When I see other groups gaily going into China and I can tell it's driven by London or New York, with someone saying ‘China is big - you must go there' and ignoring what their people on the ground are saying."

"We'd also like to be in China, obviously, but it just doesn't seem right at the moment for us. We are looking at China with a view to having something along the lines of a rep office. Whether we do it or not I don't know - it will certainly be very small."

Young says the constraint on further expansion is human resources. "I think it's important not to do too much because it puts a strain not on the cash resources - because the money is in a sense the easy thing - but on human resources. The danger is that you can spread yourself too thinly. Wherever we go, there's got to be a high comfort factor for us. So the offices where we've got investment managers - Sydney, Hong Kong, Bangkok and Kuala Lumpur - we had absolute confidence we could manage the assets really well. That was our first consideration.

"We weren't dependent on the people that we took over. We were confident of our own skills that we had built up over the years. That's important to us, and means that we don't suddenly venture somewhere where we don't have these skills."

he Asian market has changed significantly in the past 15 years, says Young. "Investors and the companies they invest in have become more professional. In 1992 your average investor was a bit flighty, someone who thought you made money by switching agilely between markets. Since then there has been a professionalisation of the fund management industry.

"At the same time the companies themselves have become a lot more professional. With one or two glaring exceptions, there's been a dramatic qualitative improvement in the way Asia is run corporately.

"One's fear is always that, with markets having performed well, companies are tempted to do what they did in the 1990s and branch off into all sorts of new businesses. But they're not doing that this time. There's been a sea change in Asian management, and companies are sticking to their knitting and expanding sensibly within their areas of core competence.

"We are very reassured about how they are running their businesses and managing their balance sheets. If they don't have a need for cash they're now returning it to shareholders, which 15 years ago would have been the last thing they would have thought of."

The new prudence makes another ‘Asian contagion' unlikely, he says. "Companies have fundamentally changed. Debt levels have come crashing down. The average debt levels in our portfolio are around 15%. Back at the top of the crisis of the market as a whole you were talking about debt/equity ratios of about 100%."

The downside of this is that companies have become more expensive. "It is no longer an undiscovered region, and so the valuations have gone up quite markedly in the past five years," he says.

New regional markets have appeared - notably India and China. Young feels Aberdeen Asia's policy of hastening slowly is particularly appropriate for China. "China is a bubble waiting to burst. There's been a wave of speculative money from domestic investors. International fund managers, including us, have largely stood on the sidelines."

China typifies the ‘feeding frenzy' that occurs in markets at certain times, he says. "It reminds me very much of Taiwan back in 1989, when the Taiwanese market had a greater volume than New York and Tokyo put together. The market was a bit like China, very restrictive. Foreigners couldn't participate.

"The market went up and up, and the Taiwanese government - and this is where it is uncannily similar to the Chinese government - then allowed the locals to invest overseas, which China has just started to do."

Young is happier with the situation in India. "Chinese companies are still learning but the guys in India have been managing public listed companies for three generations.

"We've been there early and in decent size. And we're still in there. We took out 1-2% out just on valuation grounds, but we've still got a big chunk in India. If you have a three-year and preferably a five-year view you can make decent money in India.

"In China the valuations have got grossly distorted, which is not the case in India. Yet it's still expensive and it would be great if it just marked time for a year to let the earnings catch up."

Generally markets in the region have remained steady wherever the local investor has stayed on the sideline, he says. "When you really start worrying is when things start happening as they are in China and you get all the taxi drivers leaving their taxis and playing the market."

The structural weakness of Asia lies in the absence of a proper bond market, he says, largely because Asian governments do not need to borrow. "Singapore, which is awash with money, has issued bonds to try to develop the local bond market. But they're taken up by insurance companies who just sit on them until they mature. So they're not very liquid bond markets that corporates can price their debt off.

"I think that's still a longer-term issue for Asia, and I don't know what the solution to that is."

As for the medium term, Young is both optimistic and realistic. "Looking ahead five years - which we do try to do and not get caught up with the day-to-day noise - everything looks pretty rosy. But in 12 months' time, who knows."

Aberdeen Asia - a history

1992

q Singapore office set up under Hugh Young to manage all Asian assets, including Japan (£170m/€245m).

1995

q Aberdeen Asian Smaller Companies Investment Trust launched.

1998

q Acquisition of investment management arm of Aetna Insurance, including Hong Kong office.

2000

q Acquisition of EquitiLink (Australia) based in Sydney.

2002

q Bangkok office opens as a joint venture with local partners.

2005