Is your portfolio as strong as the Great Wall of China?
I read once that that the secret of the strength and longevity of the Great Wall of China lies in...
The trouble with many developed world company executives today, is that they are becoming like football managers. Shareholders, like fans, demand immediate results. As a result, a CEO with little personal stake in the underlying business will often over-focus on the short term. Like a football manager who leaves his younger players languishing on the sidelines, a CEO may under-invest in the business.
They might slash costs, undertake a share buyback or load up with debt to pay higher dividends. This might all help boost share prices in the short term but it could fatally damage long-term growth. This situation has become progressively worse, as institutional investors’ holding periods have become shorter and shorter.
The opposite is the case in Asia, where approximately two-thirds of listed companies are controlled by families or their foundations. From Sri Lanka to Singapore to South Korea, the family-run firm is perhaps the one common feature than binds Asia together.
The great advantage of a well-run family business is that they can take a much longer-term view and can therefore plan effectively for the future. Given they control the business, they are not under the same pressure from shareholders to deliver immediate profits or dividends. So, if the best long-term decision is to re-invest cash into new opportunities, they can do just that.
According to David Gait, fund manager of Elite Rated Stewart Asia Pacific Leaders, “having a patient owner is perhaps the greatest competitive advantage of them all”. Two stocks David highlights as examples of this are Hong Kong and China Gas – Hong Kong’s largest public utility – and Vitasoy – a soya milk company also based in Hong Kong. Both of these companies made very early investments in China. These investments took years to develop, but now account for a very large part of the companies’ profits. David doesn’t believe this would have happened if they weren’t family run. This “crossing the river by feeling the stones” approach has been particularly rewarding for companies entering large, untested markets, such as China, India and Indonesia. Companies trying to rush have tended to fail.
Another advantage of family-run businesses is their ability to look backwards. Families can draw on their experience of past crashes and mistakes. This can help them to effectively manage risk and protect their investors at the most important time. David gives the example of Singapore’s OCBC, a family-run bank that traces its roots to the early 1900s. It has experienced a number of ‘black swan’ events including Japanese occupation closing its Indonesian banks and having to relocate to India in the Second World War, through to the Asian crisis in 1997.
There are of course, potentially disadvantages of investing in family-controlled companies. For one, minority shareholders are reliant on the family to treat all shareholders equally and not only look after their own interests. This makes corporate governance considerations all the more important.
Another point is that they can be slow to modernise: the Chinese adage that states “wealth never survives more than three generations” is sometimes proved true. Good succession planning is vital, as father’s or mother’s pass on the management of the business, they need to make sure that the right son or daughter – or other family member takes over. The new CEO needs the right skill set – just having the same bloodline is not enough.
In both of these instances, good active fund managers will take a keen interest in developments and will judge if the family is controlling the business in the right way. A ‘family steward’ is no guarantee of success, but it can give a company stability and a long-term competitive advantage, rather than just one good season at the top before heading straight for relegation.
This fund truly focuses on long-term investing and sustainability. The fund has delivered outstanding returns of 594% since its launch in 2003. That compares with returns of 381% for the IA Asia Pacific ex Japan sector.*
These Asian specialists are focused on making long-term investments in high quality Asian companies. They have expert local knowledge and undertake numerous company meetings every year. Since May 2010 the fund has returned 107% versus 84% for the IA Asia Pacific ex Japan sector.**
This fund is run by Singapore-based Samir Mehta and Cho-Yu Kooi. At least 75% of the fund is made up of high quality sustainable growth stocks. They particularly look for stocks which are generating consistently high returns on capital. Since launch in September 2011 the fund has returned 128% versus 102% for the IA Asia Pacific ex Japan sector.***
*FE Analytics, 1 December 2003 to 19 October 2017, total returns in sterling.
**FE Analytics, 30 April 2010 to 19 October 2017, total returns in sterling.
***FE Analytics, 30 September 2011 to 19 October 2017, total returns in sterling.