China and India are now seen as distinct investment areas, rather than just another part of an emerging-market whole. But this isn’t true of Southeast Asia.
Few investors think about this region in its own right. And there are very few dedicated Southeast Asia funds. Even some that are supposed to focus on the region have drifted into investing in Korea, Taiwan and China.
Yet, this is a major part of the emerging world and it deserves far more attention than it gets. So this week, I’m going to look at why investors should pay more attention to Southeast Asia, as well as running through a few investment ideas from a new and unusual regional fund.
The case for Southeast Asia
From an investment viewpoint, the best way to assess Southeast Asia, is to look at the ASEAN countries collectively, rather than as individual economies. The ten-member ASEAN bloc (Association of South East Asian Nations) consists of founders Indonesia, Malaysia, Philippines, Singapore and Thailand, as well as later entrants Brunei, Vietnam, Laos, Myanmar and Cambodia.
And there are seveal reasons why the region is well worth a look. First, ASEAN is slowly morphing from a talking shop, into what could be a meaningful economic bloc.
ASEAN has been around for a long time – the first five members joined in 1967. For much of that time it was largely meaningless, with little real cooperation between most of these members. But events of the last decade – such as the global financial crisis and the growing clout of China and India – have made Southeast Asia governments aware that they could benefit a great deal from pulling together.
So ASEAN is now working towards the ASEAN Economic Community (AEC). This is a EU-style project to free-up movement of goods, capital and labour across the region. Whether some of the loftier goals for the AEC will be achieved isn’t clear. But when it comes into force in 2015, there should be very large cuts in tariffs and other barriers to trade and cooperation.
Second, a unified ASEAN is a significant marketplace by any standards. It has a population of almost 600 million, with better demographics than China, Europe or the US. Most people within ASEAN remain relatively poor, but most countries have an expanding middle class. If development continues successfully, it promises strong consumption growth for many years to come.
The third positive, is that there are few financial barriers to consumption and investment growth in the future. ASEAN learned a hard lesson from the 1997 Asian crisis and today local finances are in pretty good shape. Debt levels generally remain low for governments, households and corporates, while ASEAN banks are mostly well capitalised with good balance sheets. While most of the world must deleverage, ASEAN is on the right side of the credit cycle.
Fourth, ASEAN is diverse. It spans the entire range from wealthy, developed Singapore to poor, authoritarian Burma. This means it offers a wide range of investment opportunities. It’s well provided with natural resources, without suffering the ‘resource curse’ where unbalanced economies become too dependent on oil or mining. Even being often overlooked by investors can be an advantage, since there are plenty of under-researched companies where an active investor can find value.
In case this sounds too Panglossian, ASEAN is obviously not immune to troubles in the rest of the world. It’s geared to export demand from the US, Europe and China, so recessions or slowdowns in these will definitely be noticed in Southeast Asia.
What’s more, financial ties in the form of European bank lending to the region means it will feel the impact of a European banking crisis. It’s worth noting though, that ASEAN is probably better placed than most of the emerging world, as most European lending to Asia is trade finance where the gap can more easily be filled by loans from governments and multilateral institutions such as the Asian Development Bank.
But I believe that ASEAN deserves more attention than it’s yet getting – and that there are some very attractive long-term opportunities here. So I was extremely interested to hear about a new ASEAN-focused fund that will concentrate on these long-run themes through my preferred high-conviction strategy.
I met the manager on a marketing trip last week and was impressed with what I heard. However, there is currently a snag. The fund only opened in March 2011 and remains small, with just US$8m in assets under management. So for cost reasons, it’s restricted to professional investors with a US$100,000 minimum investment.
But once the fund’s assets rise to the point where meeting regulatory requirements is cost effective (ie, probably around US$20m), the manager intends to open it to UK retail investors. So while this fund is presently only available to a minority of MoneyWeek Asia readers, I’ve decided to profile it this week. Those of you who are interested in ASEAN and like the sound of it may want to take another look when it becomes more widely available.
From Europe to Asia
The fund in question is the Senhouse Southeast Asian Focus Fund. And it’s the second launch under the banner of Senhouse Capital, a boutique fund manager set up in 2008. Regular MoneyWeek readers may already be aware of Senhouse’s European Focus Fund, managed by Julian Pendock who is a frequent contributor to the magazine’s roundtable discussions.
Although Europe is not my area, I’ve always liked the approach that Julian follows. And I’ve suggested his fund to a few investors in the past. The portfolio is very concentrated with a maximum of 25 stocks, and focuses on straightforward, high quality businesses that generate cash while offering reasonably priced growth. Typical investments are stocks such as Nestlé, Piaggio and Telefonica.
The track record so far has been good. Against a fall of 7.5% in the FTSE Europe ex-UK index, the fund has returned 4.9% since inception. But that includes extremely high initial costs due to a very low level of assets under management at the start. The return since inception before costs has been around 20%.
This strategy should be well suited to market conditions we’ll be seeing for a long time to come. If you’re looking for a European fund – and I’d say there is clearly value among good European companies at present – I would certainly investigate this one. It’s a UK-regulated fund open to retail investors with a minimum investment of £10,000, an annual management charge of 1.25% and a total expense ratio of 1.75%.
The new Senhouse Southeast Asian fund has a different manager, Bangkok-based Brook Tellwright, who’s been investing in the region since the early 1990s. But it shares the same philosophy of a concentrated portfolio, well-positioned companies and low turnover.
A concentrated, consistent portfolio
The fund was set up in March 2011 and at this stage is still only partly invested. It holds 16 positions with around 30% in cash because Brook believes that there will be chances to buy other target stocks more cheaply as 2012’s problems unfold.
The portfolio is also weighted heavily towards Singapore because that market has performed exceptionally poorly over the last year and has presented better value than some others. But the fund approach is based on buying well-run, well-placed businesses that can provide consistent growth over the long term.
Several core holdings are stable large caps that generate plenty of cash, offer attractive dividends and have a strong or monopoly position in their core markets. They should be able to deliver steadily rising earnings and dividends as demand for their services increases. Stocks in this category include Philippine Long Distance Telecom, Singapore Telecom and Manila Water.
Meanwhile, Malaysia’s Genting and Singapore’s Fraser & Neave are conglomerates whose strengths essentially revolve around one very well placed core business. For Genting, that’s casinos, while for Fraser & Neave, it’s food and beverages. These industries should be long-term beneficiaries of rising incomes and consumer spending across Asia.
However, both also have a range of other interests that have few links with these core businesses. And both would probably be worth more than their current market value if they were restructured and some of these assets spun off, leaving them as pure plays in these consumer sectors. So while their consumer operations are attractive enough in their own right, there’s also the possibility of unlocking additional value for shareholders through a break-up or other changes.
The fund also has substantial positions in much more obscure stocks. One that immediately caught my eye was Malaysia’s Silverlake Axis. This Singapore-listed firm is a software developer specialising in banking and finance systems. And it has a very solid position among Southeast Asian banks.
From a growth perspective, Silverlake Axis is well placed to benefit from any expansion of banking and financial services in these economies. More M&A (merger and acquision) activity among ASEAN banks would be good news – many of the most acquisitive regional banks are long-standing clients. It also has some potential in a cloud computing and enterprise software joint venture in China.
But there is also a long-term restructuring story here. The founder remains the controlling shareholder with around 75%, meaning that liquidity and institutional interest in limited. But in the last couple of years, he’s taken steps to make the firm more attractive by injecting other assets and selling part of his stake. Further, the market quote has been moved from the small cap board to a full listing on the Singapore exchange. In the long run, there’s a good chance that the firm will be bought out by a competitor when the founder decides he wants to exit.
Another intriguing smaller company that I didn’t already know is Thai Union Frozen Products, a seafood producer and exporter. This may not sound terribly exciting, but the firm has ambitious plans, hoping to raise revenue from US$3bn at present to US$8bn by the end of the decade.
It’s already the world’s largest producer of canned tuna. And importantly, the management appreciates that the key to getting more pricing power and boosting margins is through owning consumer brands (branding remains an area in which most Southeast Asian companies are lagging). Thai Union has owned US tuna brand Chicken of the Sea for a decade, while in 2010 it bought MW Brands, which owns leading UK brand John West.
This is the kind of unconstrained portfolio that I prefer to see in an active fund. Most managers overdiversify and hug the benchmark, which reduces their risk of underperforming and improves their career security. But it’s only by concentrating your investments in a small number of high conviction stocks that you can hope to deliver returns significantly better than the overall market.
To recap: there’s no track record to assess this fund. But the strategy is an attractive one. And the portfolio is far more consistent than most ASEAN funds, which tend to hold too many low quality stocks (many large Southeast Asian companies are poor quality). I will definitely be watching it to see how things develop and hopefully the fund will become available to UK investors sooner rather than later.