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THE INVESTOR
IN YOUR INTEREST
Q&A
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THE INVESTOR
Chris Ralph:
An article I read recently
described the returns ofAsian equity markets
in 2013 as falling into two distinct categories:
Japan and the rest. Is that a fair assessment?
HughYoung:
Yes, it is. Japan has been light
years ahead of the rest ofAsia.The rest of
Asia hasn’t done badly, but compared to the
ride we’ve had out of Japan, it’s been a very
lacklustre year.
CR:
You’ve talked recently about the fund
being underweight in Japan. Do you think an
underweight position can still be justified?
HY:
I think it can.When we talk about having
an underweight or overweight position, that
is relative to a benchmark index. Japan is
around a quarter of the portfolio, but it is
about half the allocation of the benchmark.
Given the breadth of companies available in
theAsia Pacific region, to have 25% allocation
to Japanese companies is probably about right.
However, in any given period, and this is one
of those periods, it’s been wrong.
CR:
If we were to imagine that the market was
to go up another 50% this year, would you still
feel comfortable with that view?
HY:
We’re traditional fundamental investors,
looking at the best companies on a five- or
10-year basis. Japan has some super companies
and quite a few of our positions have done
extremely well. But would you want half of
your money inAsia in Japan? I don’t think
that’s a prudent way to invest.There are so
many good companies elsewhere inAsia.
CR:
You mentioned the performance of your
Japanese holdings; how have they performed
relative to the broader market in Japan?
HY:
In aggregate, compared to the market,
we’ve had a tough time. Some holdings have
done extremely well, for example Chugai
Pharmaceutical, JapanTobacco and household
names like Honda andToyota. Some, such as
Canon and the robotics specialist FANUC,
have not performed particularly well.
In aggregate, our Japanese holdings have
underperformed the market, but it has been
a market led by companies that we will not
invest in. One extreme example isTokyo
Electric Power, which made headlines in the
wake of the Fukushima disaster.The share
price has been extremely strong this year, but
it’s not a company in which we would invest.
CR:
Looking outside Japan, have there been
other areas where an underweight position has
detracted from overall performance?What
about positions in China and Korea?
HY:
China has been quite a good market, but
again, I’m afraid to say, it’s also been a relatively
poor performer for us. Holdings such asAIA
in Hong Kong have been extremely good, and
even the likes of HSBC have been not too bad.
Chinese internet stocks have done well, but we
don’t feel comfortable with them.You cannot
legally own a Chinese internet stock.They tend
to be structured through offshore investment
vehicles, so it’s a position hugely based on good
faith.Typically, investors have shied away from
countries that have current account deficits
– the likes of India and Indonesia – and gone
towards harder currency countries.Yet some
of the best companies, like Jardines – which
has big investments in Indonesia and has been a
superb performer over many years – have been
hit by their large exposure to those countries.
CR:
How do you feel about the prospects for
2014? Do you feel a sense of optimism?
HY:
For the companies in which we invest,
absolutely.They are doing all the right
things, their balance sheets are strong and
management continues to be focused. In terms
of valuation, they are slightly cheaper than they
were 12 months ago. Economically speaking,
the region is, by its traditional standards –
relatively sluggish with growth rates of 4-5%
– levels that European markets would dream
of, but slightly lower than average. Earnings per
share growth for the companies in the portfolio
is broadly 10% across the region. It’s solid
growth based on very strong balance sheets,
and with an average price/earnings multiple
of around 14 times – it’s among the best value
seen for many,many years.
rising japan
Asia’s equity markets sharply divided in 2013 between Japan and the rest of Asia.
HughYoung, head of equities for AberdeenAsset Management Asia, believes that
the performance of the Land of the Rising Sun has been ‘light years ahead’ of its
neighbours. Here, he talks to Chris Ralph, chief investment officer at St. James’s Place
