Despite being Australia’s most important trading partner and closest neighbour, Asia remains largely undiscovered and under-appreciated by Australian investors. The region now represents 60 per cent of the global population, has 50 per cent of all consumers and contributes 70 per cent to GDP growth. The immediate Asian growth trend is expected to accelerate as a second wave of Coronavirus cases hits the US and Europe. Asia’s generally more successful containment policy will likely result in a faster economic recovery.
Yet, for the Australian investor (and financial adviser, for that matter) access to Asia has been limited to just a few names almost at the periphery of their core international strategy of global equities. There is little doubt that the well-known names making up the traditional ‘Asia’ funds, from Alibaba to Tencent to JD.com, are high-quality companies, but the issue is that they represent just 10 per cent of the 15,000 companies listed in Asia. Much of this has been driven by traditional benchmark allocations and the sheer size of these companies but, not unlike Australia or the US, the real opportunities lie in the smaller names. For some context, a smaller Asian (or US) company, has a market capitalisation of up to US$1.5 billion ($2.1 billion), the equivalent of a company like Netwealth Group (ASX: NWL) in Australia.
While Asia is by no means the ‘wild west’ of sharemarkets that it may have been in the 1990s, investors must still tread carefully. If there was ever a region with so many different and overlapping cultures, that warranted ‘feet on the ground’ when it comes to investing, Asia is it. Unfortunately, most strategies available in Australia are managed from home, the US or Europe, with limited on-the-ground resources apart from sell-side research. Enter PineBridge Investments and the respected Elizabeth Soon, head of the region’s smaller-companies strategy.
Beyond ‘Made in China’
PineBridge is a name synonymous with investing in Asia. More than half the firm’s US$105 billion ($146 billion) in assets comes from the region, supporting 700 staff across 21 locations. This includes an on-the-ground presence in the most important countries within the booming Asian region, from Singapore and Malaysia to India, Hong Kong and Taiwan. It is through this network, unheard-of for most managers, that the firm has been able to deliver industry-leading returns over many years.
The days of mass-produced cheap Chinese or Indian products being exported around the world are gone. They have been replaced by a technologically advanced, innovation-driven culture. The region and businesses within it have been taking the opportunity from President Trump’s trade war to move up the supply chain and become a global leader; something even Australia has struggled to achieve.
PineBridge defines the opportunity set in Asia simply, like in pre-school, as ‘A E I O U’. The initials standing for: Automation, Energy/Environment, Information Technology, Order and Urbanisation. These are the most powerful global themes and the areas where Asian companies are set to lead the way.
Take the semi-conductor industry, for example, with manufacturing power increasingly held in the hands of just a few companies. The Chinese have sought to localise production, but, most importantly, skills. They are not seeking to challenge the leaders like NVIDIA (NASDAQ: NVDA) head-on, rather identifying parts of the supply chain where they can lead and leveraging their knowledge. Chip design and wafer manufacturer Alchip is a case in point and a core holding within the group’s Asian ex-Japan small-cap strategy.
Neither value nor growth – it’s lifecycle
Led by Soon, who has more than 30 years’ experience, the small-cap strategy has delivered sustained alpha, or outperformance, of close to 5 per cent a year above its benchmark since 1994. This has been achieved through an investment approach uniquely suited to the Asian region, called ‘Lifecycle Categorisation’. Soon says that determining the stage of a company’s lifecycle should be the first priority, not seeking to understand valuation or profitability.
As she puts it: you wouldn’t ask an exceptional growth company about valuations, rather you’d ask about the viability of the business model and over what period it would likely become sustainably profitable. Every question and valuation model must be adjusted for each company’s stage in that lifecycle. Applying the wrong lens to the wrong business would make most opportunities around the world uninvestable – something all-too-familiar to traditional ‘value’ investors over the last decade.
Asked about her approach to investing, Soon puts it simply as “we get down to basics, which is understanding companies,” not on value or growth styles. This focus on companies has only magnified during the COVID-19 shutdown, with the importance of transparency and access to management mainly afforded to domestic managers in the age of social distancing and travel bans. On the impacts of the pandemic for companies, she questions the value of earnings forecasts in understanding the unique conditions we find ourselves in, and the struggles facing businesses of all kinds. It is pointless to ask “what is the visibility of your orders?”, she says, in an environment where no management team anywhere in the world could provide an accurate answer.
Market share gains – the strong get stronger
Nothing prepares a portfolio manager for a global pandemic, but Soon and her team have been concentrating their expertise on understanding at what points to buy a company, she says, seeking out those which are using the opportunity to become stronger, not by benefitting from the pandemic – as this won’t last – but by gaining market share. Further, PineBridge looks to cash-rich companies which are able to buy weaker players to strengthen their position at a time of pain.
The Asia small-cap strategy, which excludes Japan, is tilted towards the 90 per cent of Asia’s 15,000 companies that lie outside the purview of most global equity managers. Mandated to invest 50 per cent of the capital into stocks with a market capitalisation of less than US$1.5 billion ($2.1 billion), but with the flexibility to ride these global leaders into the future. Coined the “acorns to oak trees strategy,” the fund offers a unique diversifying opportunity for Australian investors faced with either ex-growth domestic shares, or strongly valued global large caps.