PACIFIC FUND BAILLIE GIFFORD - OUR RESEARCH. YOUR SUCCESS - RSMR Research
←
→
Page content transcription
If your browser does not render page correctly, please read the page content below
UND PROFILE
BAILLIE GIFFORD
PACIFIC FUND
April 2020
OUR RESEARCH. YOUR SUCCESSCONTENTS
BAILLIE GIFFORD PACIFIC FUND___________________________________________4
IA ASIA PACIFIC (EXCLUDING JAPAN) SECTOR________________________________5
BAILLIE GIFFORD______________________________________________________6
Fund Management Team
BAILLIE GIFFORD PACIFIC FUND___________________________________________7
Fund Objectives & Targets
Investment Philosophy
Investment Process
PAST & CURRENT POSITIONING/STRATEGY__________________________________11
PERFORMANCE_______________________________________________________14
SUMMARY & EVALUATION_______________________________________________16
ABOUT US____________________________________________________________17
Working with advisers
Working with providers
Ratings
Page 3BAILLIE GIFFORD PACIFIC FUND
OUR FUND PROFILES provide an in-depth review of our leading rated funds and are designed to give advisers, paraplanners and analysts an ‘under
the bonnet’ view of the fund. In providing more detailed commentary than a standard fund factsheet we believe our fund profiles set the standard for
the next generation of research notes, aiding in fund selection and in meeting the ongoing suitability requirements expected by the FCA, and helping
ensure firms deliver good client outcomes.
All of our rated funds are subject to rigorous and ongoing scrutiny on both a qualitative and quantitative basis. Our fund methodology is available for
download from the RSMR Hub – www.rsmr.co.uk
The Baillie Gifford Pacific Fund has been one of our rated funds since June 2013. It is an unconstrained, high-conviction, long-only Asian (excluding
Japan) equity fund comprising 50 to 100 companies. The fund is differentiated from many other funds in the sector as it does not invest in Australia or
New Zealand and may hold companies which are not included in the benchmark – the MSCI AC Asia (excluding Japan) Index. The managers are also
willing to invest in mid and small cap companies. There is a strong growth bias focusing on companies that can generate annualised revenue growth
of between 10% and 15%. The opportunity set for such companies tends to be higher in the faster growth areas of the market including Information
Technology and Consumer Discretionary, where the fund has traditionally been overweight.
The fund has been managed by Roderick Snell since June 2010 with Ewan Markson-Brown joining as co-manager in May 2014. These two experienced
managers sit within the broader Emerging Market Equity Team, headed by Will Sutcliffe (from 1st May) who replaced Richard Sneller. The team comprises
eight investment professionals who divide country and sector research between them. The two managers have the ultimate responsibility for executing
decisions on this fund. They are long-term, bottom-up investors who are willing to take large position sizes based on their conviction. This approach,
combined with strong selection over the years, has resulted in the fund being one of the top performers in the sector since 2010.
The fund is a useful addition to an investor’s portfolio, offering something differentiated and backed by a strong investment philosophy that has been
proven by the success of the Emerging Market team at Baillie Gifford.
Graham O’Neill, Senior Investment Consultant, RSMR
Graham began his career in the investment industry over thirty years ago. After graduating from the University of
Kent with a Degree in Economic Analysis, History and Policy, he joined London & Manchester, later joining Phillips
Drew, then GRE as a UK based fund manager. He then moved to Abbey Life Ireland, where he held the position of
CIO running their Managed and large Equity funds. Graham joined RSMR in 2010.
Page 4IA ASIA PACIFIC (EXCLUDING JAPAN) SECTOR
The Baillie Gifford Pacific fund sits in the IA Asia Pacific (excluding Japan) to 52.0 in the month according to the National Bureau of Statistics. More
sector. Funds in this sector invest at least 80% of their assets in Asia Pacific than half of the surveyed enterprises have resumed work and resumed
equities excluding Japanese securities, however up to 5% of the total assets production. This comes after February saw a record low for a number
of these funds can be invested in Japanese equities to allow flexibility for of key economic indicators including a 17% year on year fall in exports.
corporate actions. When first quarter GDP data are released in mid-April they are expected
to show the first official decline in year on year output since 1976. China
The IA Asia Pacific (excluding Japan) sector contains over 100 funds
still has concerns of a resurgence of coronavirus and moves by some local
available for investors and financial advisers to choose from, covering a large
governments to ease restrictions by reopening movie theatres and tourist
variety of investment strategies and styles, including active, passive and
attractions have been reversed by the central government. At the time of
enhanced index funds. A number of funds adopt style or market-cap based
writing, virtually all of the new cases recorded in China have been non local
strategies including value and growth-biased themes, market cap focused
transmission by those returning from abroad.
or multi-cap strategies. The variation between the funds makes it difficult
for an investor to compare them as different strategies will clearly perform The dramatic fall in oil prices driven by the break-up of OPEC+ production
differently depending on market conditions. It is important to recognise this controls is an overall positive for Asia but not so for many other emerging
when looking at both absolute and relative performance numbers for funds regions. The strong US$ is also causing problems for countries with large
in the IA Asia Pacific (excluding Japan) sector, and this is particularly relevant current account deficits and estimates of outflows from EM debt funds of
for the Baillie Gifford Pacific fund, which has a distinct style of investing. $17bn in the 7 days to March 25 2020 demonstrate the problem. As a result
the cost of capital of many emerging market countries has risen although
Asia is becoming an increasingly important region for investors to consider
many emerging economies are less reliant on dollar financing than they
in a diversified equity portfolio. China and India, which account for one
were coming into the GFC in 2008. The strength of the US currency risks
third of the world’s population, are forecasted to account for around 40%
corporate defaults for business which have borrowed in US$, but have local
of global GDP growth by 2030. In China, consumption and services account
currency revenue streams.
for over half of GDP growth with fixed asset investment becoming much
less important. President Xi aims to become the ‘Great Rejuvenator’ and Overall within the broad emerging market region Asia looks better placed to
recognises that he will need to ease the debt burden and reform the come through the crisis faster and stronger than elsewhere and there are
country’s financial system in order to achieve his goal. arguments that Asia may well benefit, especially China, versus the rest of
the world. Many Asian economies have found imposing the lock down a lot
The position for Asian economies in has clearly deteriorated since the start
easier than in the west for both cultural and political reasons – in cultures
of 2020. The coronavirus first surfaced in China in late December 2019 and
where it is deemed unacceptable to engage in actions which harm others,
its impact quickly spread, shutting down Wuhan and Hubei province and
society has been better placed to fully embrace social distancing and other
restricting economic activity across the entire country. Over the past few
state imposed measures for the overall good.
weeks there has been increasing evidence that the success of the lockdown
in China has sufficiently reduced community transmission to allow at least
a partial reopening of economic and social activity. Data released at the
end of March showed China’s manufacturing index rebounded to record
an unexpected expansion in March having fallen sharply in February, rising
Page 5BAILLIE GIFFORD
Baillie Gifford & Co is an investment management firm regulated by the
UK’s Financial Conduct Authority (FCA). The company has funds under
management and advice of over £218bn (as at 31st December 2019) and
is headquartered in Edinburgh. It was established in 1908 making it one
of the UK’s largest independent active investment management firms,
employing over 1,200 people across the globe. Baillie Gifford is wholly
owned by its 43 partners – all of whom work for the firm full time.
In equities, the investment philosophy focuses on growth over the long
term with a view that sustained increases in company profits lead to
higher share prices over time. There is a preference for small teams
which are more dynamic in nature and with clear accountability. There is
also a collaborative culture across the firm where investment ideas are
discussed and debated across the investment teams.
Page 6BAILLIE GIFFORD PACIFIC FUND
Manager Roderick Snell & Ewan Markson-Brown Will Sutcliffe, Head of Emerging Markets Equity Team
Will joined Baillie Gifford in 1999 and is an Investment Manager in the
Structure OEIC
Emerging Markets Equity Team. He became a Partner of the firm in 2010.
IA Sector Asia Pacific (ex Japan)
He is the named manager of the Baillie Gifford Emerging Markets Leading
Launched 17 March 1989
Companies Fund, a member of the Positive Change Portfolio Construction
Fund Size £624M (31 December 2019) Group and has also spent time working in the UK and US Equities Teams.
In addition to his investment responsibilities, Will oversees Baillie Gifford’s
investment graduate recruitment programme, and is a member of the
Fund Management Team firm’s Diversity and Inclusion Group. Will graduated MA in History from the
The fund is jointly managed by Ewan Markson-Brown and Roderick Snell, University of Glasgow in 1996.
who are members of the broader Emerging Market Equity Team. This
Richard Sneller, Partner/Head of Department
team is headed by Will Sutcliffe, who took over from Richard Sneller on his
Richard graduated with a BSc (Econ) in Statistics from the London School
retirement in April 2020, and comprises eight investment professionals who
of Economics in 1993 and an MSc in Investment Analysis in 1994 from
have specific responsibility for country research and portfolio construction.
Stirling University. He joined Baillie Gifford in 1994 and became a Partner
Each person in the team is responsible for covering a number of holdings in
in 2004. With the exception of a year researching UK smaller companies,
the portfolio from a variety of industries. There are seven permanent ‘core’
he has spent his career at Baillie Gifford covering emerging markets and
members, each of which are Investment Managers, and one analyst.
is Head of the Emerging Markets Equity Team. Richard is a member of the
Ewan Markson-Brown, Co-Fund Manager Emerging Markets Product Group. Richard retires on 1st May 2020.
Ewan graduated with an MA in Politics, Philosophy and Economics from
Team Remuneration
Oxford University in 2000. Prior to joining Baillie Gifford in 2013, he was
a Senior Vice President in Emerging Markets at PIMCO. Ewan previously The partners are the sole owners of the firm and share directly in its
worked at Newton for five years, most recently as lead portfolio manager profits. In this respect, the compensation and incentive package of senior
on an Asian Pacific equity strategy, as well as segregated Asian income investment managers who are partners is directly related to both asset
and Japanese equity strategies. He also previously worked for Merrill growth and performance.
Lynch Investment Managers as a portfolio manager in the Asia Pacific Investment managers receive a basic salary and a performance
region for six years. Ewan is an Investment Manager in the Emerging related bonus which is linked to the profits of the firm. Performance for
Markets Equity Team. He is also lead Portfolio Manager of Pacific Horizon investment managers is measured in two ways – half of the bonus is
Investment Trust PLC. based on individual performance which is determined by the individual’s
Roderick Snell, Co-Fund Manager line manager at the annual appraisal where staff are assessed against
Roderick graduated with a BSc (Hons) in Biological Sciences in Medical Biology key competences and pre-agreed objectives. The remaining 50% is
from the University of Edinburgh in 2006. He joined Baillie Gifford in the same determined by the three or five-year investment performance of the
year and worked in the UK and European Equity Teams before joining the individual’s team, which ties in with the overarching long-term investment
Emerging Markets Equity Team where he is an Investment Manager. He is also philosophy of the company.
deputy Portfolio Manager of Pacific Horizon Investment Trust PLC.
Page 7Fund Objectives & Targets 2. Long-Term Investment Horizon
The objective of the fund is to produce attractive returns over the long The team are not influenced by the economic cycle and pay little attention
term through investing in any of the sectors or regions included in the to short term performance or market noise. They believe that most
MSCI AC Asia (excluding Japan) Index. The fund typically holds 50 to 100 investors overreact to short-term events which can leave companies
stocks excluding Australia and New Zealand which differentiates it from significantly undervalued. The managers aim to exploit these inefficiencies
some of the others in the sector. It is also one of the longest running funds by focusing on the long-term prospects of a company, typically three to five
in the sector with only six other managers able to claim a history as long years and beyond.
as this fund. It has a bottom-up, unconstrained, high conviction approach
where the active share is typically in excess of 80%. There is a strong 3. High Active Share
growth bias focusing on companies that can generate annualised revenue They believe that the fund must have a different composition to the index
growth of between 10% and 15%. The managers are also willing to move in order to beat it and therefore the fund typically has a high active share
down the market cap spectrum to find these companies resulting in the of approximately 80%. They also think that an index replication strategy
fund typically being skewed more towards mid and small cap stocks or a lower active share undermines the case for employing an active
relative to the index. manager and reduces the likelihood of producing outstanding investment
The managers are long-term investors which results in an average performance. Within the index roughly one quarter of the businesses are
turnover of 20% per annum. The maximum stock weight in the portfolio state owned enterprises whose interests may not be aligned with minority
is 10% while the industry and country limits are index +20% and index shareholders.
+25% respectively. Individual stocks are restricted to a maximum position 4. Embracing Uncertainty
size of 8% relative to the index. The managers have the ability to invest up
to (but no more than) 10% in collective investment schemes and deposits, The team embrace uncertainty in the search for underappreciated growth
although they are usually fully invested in equities. and the reward of superior returns. They believe that the acceptance of a
wide range of possible outcomes is necessary to deliver outperformance.
Investment Philosophy
The investment philosophy of the fund focuses on four key areas:
Investment Process
The investment universe predominantly comprises stocks listed on the
1. Growth Investing MSCI AC Asia ex Japan Index (which has over 940 constituent companies),
The team believe that those companies that can sustainably grow their although the team are prepared to invest in securities listed on other
business, while significantly increasing their earnings and cash flow, will exchanges that derive most of their revenues from, or have most of their
be best rewarded. They seek quality companies managed by trustworthy assets in, Asian markets. The team do not use quantitative screening in
people who act in the long-term interests of shareholders. In the last their investment process, instead they focus on qualitative aspects and
twenty years the top quintile of earnings growers were rewarded by a near on valuing the company relative to its long-term growth potential. Ideas
doubling of in share price and the focus of the managers is finding and may be generated in a variety of ways including research trips, contact
holding these companies. with companies in the same or related industries, apparent mispricing
of a stock relative to its peer group, or as a result of team discussions.
Page 8Each member of the team has analyst responsibilities with company to earnings and price to cash flow, with particular interest in free cash
research generally divided by geography. Team members usually visit the flow measures. Long-term forecasting often involves scenario analysis
region for which they have research responsibility at least once a year. and consideration of the potential upside in a bull and base case, or the
Typically, country coverage is rotated every two to three years to give team downside in a bear case. A minimum hurdle rate for any new holding to
members alternative investment perspectives which contribute to more enter the portfolio would be a belief that the company held the competitive
in-depth, far-reaching stock discussions. The Emerging Markets Equity advantage and managerial vision to see its growth potential through to
Team is also able to draw on the experience of the wider Baillie Gifford fruition. The team set a high bar in terms of the rate of growth they aspire
equity teams. to, focusing on identifying companies with the potential to double their
share price over the next five years. The opportunity and ability of the
Company meetings are an important part of the investment process,
company to execute on growth expectations is of paramount importance
although it is not mandatory before an investment. The team will typically
to the team while valuation is generally secondary.
meet between 300 and 450 companies per year with roughly two-thirds
of those meetings being on site. Other sources of information include Whilst there is an emphasis on bottom-up analysis for all the teams at
speaking to competitors, customers and suppliers, regulators, industry Baillie Gifford, macroeconomic factors are focused on to a greater extent
consultants and journalists. All research reports, once produced, will be by the Emerging Market Team as economic cycles in these markets tend
published to Baillie Gifford’s centralised in-house Research Library. This to be shorter. For example, the team consider future currency movements
is an electronic repository, accessible by all investment professionals when determining the potential hard currency returns from investments.
ensuring that research is readily available to those that need it. The team They will consider the impact of currency moves on a company’s revenue
use third party research to supplement the research produced in-house stream, costs and asset base and if a company has debt, they will consider
including a number of independent providers and consultants. All external the currency of the repayments and how future debt repayments might be
research and software is paid for directly by Baillie Gifford. affected by currency moves. The fund does not conduct currency hedging
as the team believe it is costly and difficult to implement. Also, they will
Each member of the team will conduct a fundamental analysis framework
never buy a stock just because they like the currency, it will be one of the
for each company they are researching. This includes a comprehensive
many factors taken into account during the company research.
assessment of the opportunity, the company’s ability to capitalise on the
opportunity and the valuation that the market has placed on its shares. Baillie Gifford have identified three specific and persistent inefficiencies:
They consider a company’s opportunity to deliver enhanced returns by
1. Under appreciated growth duration
assessing the industry or market in which it operates and whether the
company possesses any clear and sustainable competitive advantages. These are companies with excellent long-term earnings growth but where
They will then take a deeper dive into the characteristics of the company profits will be volatile from one quarter to the next, often as a result of
including its financial structure and whether it can fund growth from investment or product cycles. The culture of the team allows short term
internally generated cash flow. The track record of the management team volatility in a share price to be ignored. The focus is on long-term company
is important as is the incentive alignment with shareholders. The analyst earnings power.
will then determine the extent to which the market has already priced in
2. Under appreciated growth pace
the future growth of the business. Specific valuation measures depend
on the type of business being analysed. Relative measures include price The market consistently underestimates the likelihood of rapid growth for
Page 9a small number of businesses which the process looks to uncover. This Risk is monitored within the portfolio on an ongoing basis by the
means investors in the team focus on what can go right rather than what investment risk team. The key aim of the portfolio risk management
can go wrong. Ultimately stock markets are driven by a small handful of process is to ensure that the fund is managed with a level of risk
companies that do extremely well. consistent with performance expectations and they use a range of risk
models to add value to the investment monitoring process. They monitor
3. Under appreciated growth surprises
the fund on an ongoing basis with the performance attribution being
The final great inefficiency lies in the interaction between top-down and produced using the StatPro system. Daily stock level valuations are loaded
bottom up investing. In the region the long term earnings outlook can be onto StatPro and this information is used to produce attribution reports at
overtaken by exogenous factors beyond their control. A further area of various levels (i.e. stock, industry, sector and region etc.). There are regular
strong returns comes from identifying companies with poor profitability oversight meetings comprising senior investment managers and other
which can become high profit ones, which may include a stock re-rating. senior representatives at the firm and they will review from a ‘top-down’
perspective, considering broader macro and political issues, challenging
Baillie Gifford has a culture of information sharing and debate and so the
stock and sector positions and raising particular investment topics. They
full team has input into the idea generation process. They meet formally
also review and scrutinise the portfolio positioning in conjunction with the
on a weekly basis to debate the analyst research which can range from
investment parameters.
a new buy idea, a review of a current holding, or broader research into a
particular area of a business or industry. There are regular informal stock Liquidity analysis is conducted on an ongoing basis by the centralised
discussions where an investment case is explored, rather than a decision trading team and a formal liquidity report is produced on the fund holdings
being made on whether to buy or sell. The co-managers will make the final once a quarter. In these reports the traders analyse the projected costs of
decision on all transactions within the portfolio and construct the portfolio liquidating 100%, 30% and 10% of the mandate in question, and highlight
accordingly. They are trying to take advantage of the asymmetry of returns the specific difficulties of liquidating particular lines of stock within the
that pervades markets, and holding sizes reflect the potential upside of an portfolios based on average daily volumes. Additionally, the team will
investment and the likelihood of it being realised. The managers will sell limit the amount of the portfolio that can be held in stocks where they
a holding if there is an adverse change in the fundamentals of a business, hold more than eight days’ trading volume (based on the average of the
a loss of confidence in the management or where the company’s upside previous six months) at the time of purchase across the emerging markets
potential is diminishing. strategies.
A more recent development for Baillie Gifford has been the establishment
of its first non-Edinburgh location, with a local office in China where three
analysts from Edinburgh have relocated. Baillie Gifford have launched an
‘A’ share product for the Chinese domestic market but this is not within the
emerging markets team with Sophie Earnshaw working from this office.
The team have been looking at over one hundred ‘A’ shares stocks which
fit the quality and growth requirements for the past three years and have
been doing a lot of preliminary work. Unlike domestic managers within
China, there is a focus on longer term potential.
Page 10PAST & CURRENT POSITIONING/STRATEGY
The positioning of the fund has typically been skewed towards higher growth category include established fast growers such as Alibaba as well
growth sectors of the Asian market. Despite the sector weightings as more recent turnaround stories such as Li Ning and another Chinese
being a function of the bottom-up stock picking investment philosophy, listed name JD.com. It also includes some of the few banks in the fund
Information Technology has been the largest relative overweight position in such as Ping An Bank in China and ICICI Bank in India.
the fund in recent years with the weighting ranging from 25% in excess of
Within the earnings surprise category, Reliance Industries has transformed
the benchmark at the end of 2014 to 10% at the end of 2019. This sector
itself in three years by creating India’s largest telecoms company from
is the second largest weighting in the index at approximately 16.5%. The
scratch after a $70bn investment cycle which has allowed the business
Consumer Discretionary and Healthcare sectors are other areas of the
to move away from its dependence on oil and chemicals refining to
market where the managers have found suitable investment opportunities
become the largest retailer in the country in the e-commerce space. The
in the past. The average number of holdings in recent years has been
team expect rapid monetisation as the investment cycle passes its peak.
between 70 to 75 companies. A main feature of the positioning has been
Many managers underestimated the transformation within the company,
the high conviction position sizing towards the top five companies in the
even though it was acknowledged the business had world class refining
fund, which can typically comprise 25% of the overall fund.
facilities, and Reliance has used the cashflow from this to move into the
The portfolio can be looked at in terms of the three inefficiencies e-commerce space.
highlighted by Baillie Gifford – the duration of growth, earnings pace and
Since 2014, Tencent, Taiwan Semiconductor Manufacturing Company
earnings surprise. The first of these is duration of growth where the market
(TSMC), and Samsung Electronics have been three of the top five positions
does not expect the earnings growth of a company to continue over the
in the fund. Tencent, a Chinese multinational conglomerate, had been the
longer term. An example of this is Indian insurance where Baillie Gifford
largest holding in the fund in 2015 with its position size typically ranging
argue there is a multi-decade growth opportunity given India’s $8.5tr
between 7% and 10%, but the position has been trimmed back to around
protection gap. Leading private players have dominated bancassurance and
5% after strong performance. The managers believe that its strength has
agency distribution, combined with significant scale advantages. Returns
been underpinned by the operational results of the business and there
are impressive and will improve with the growth of protection products and
are still expanding growth opportunities for the company. Tencent was
ICICI Prudential is a favoured name. Other stocks falling into the duration
one of the few companies to see its gaming business pick up in usage
of growth category include HDFC, Ping An Insurance within India, Samsung
at this time. TSMC, the world’s largest semiconductor manufacturer,
Electronics, TSMC, and Dragon Capital in Vietnam.
continues to benefit from the increasing global demand for smartphone
Stocks such as Military Commercial in Vietnam and Brilliance China memory chips with Apple amongst its major customers. South Korean
Automotive fall into both the duration of growth category and the other multinational electronics company, Samsung Electronics, is another
categories. Within the earnings pace category SEA Ltd. the ASEAN’s enabler for hardware device companies with the company benefitting from
leading e-commerce platform, which is Tencent backed, has a world high barriers to entry as large capital expenditure and significant technical
leading emerging market online gaming platform. This is now a 4% expertise is required to compete in this area. Samsung SDI, a separately
holding in the fund which was purchased at its IPO when it was a digital listed subsidiary of the group which specialises in electric vehicle
platform in South East Asian gaming, looking to develop its e-commerce batteries, is another holding in the fund as the managers believe it is at the
platform. It now has a global hit game which produces $1bn in revenue in start of a long-term growth cycle as power companies demand storage for
a year and is number one in many markets. Other names in the pace of the rapid growth in renewable power.
Page 11Chinese internet names have been a dominant theme in the fund for have obtained diversified exposure to the region through Dragon Vietnam
some time with multinational conglomerate, Alibaba, holding a top five Enterprise Investments which is a closed-end fund trading on the London
position in the fund since 2015. The company continues to benefit from Stock Exchange. This vehicle provides access to some of Vietnam’s
the network effect with repeat customers driving earnings growth. It is leading blue-chip companies, many of which have reached their foreign
expanding its services outside of e-commerce and has now become a top ownership limit and it will also invest in a number of unquoted companies
cloud service provider and also a mobile search engine. JD.com, another with the potential for high growth. In India, Reliance Industries is the
e-commerce company, was a substantial holding in recent years but has biggest holding in the country and has numerous business lines including
become a lower weighting as the share price halved in the second half a refining petrochemical business, a telecom network and an internet
of 2018. The team have been engaging with the company through their distribution business. The managers are particularly excited about the
recent management restructuring and are encouraged by a number of telecoms part of the business, Reliance Jio, as it offers data retail services
developments on the governance side. Overall exposure to internet names and has the potential to substantially increase its market share in the
has reduced as business growth has slowed but the coronavirus outbreak online retail/entertainment industry over the coming years. India’s private
is likely to speed up this growth once again. sector banks should continue to gain market share at the expense of PSUs
with life assurance remaining very underpenetrated. Exposure here is
Financials, the largest sector in the index at approximately 24%, had
limited to domestic companies.
typically been a lower exposure in the fund but sector exposure is now
only marginally below the benchmark. Ping An Insurance, the world’s Since the last review there have been a number of portfolio changes with
top global insurance brand, has been the largest financial holding in the some of the biotech stocks that did not work being sold – 3SBio and Aslan
fund for some time. Ping An Bank was purchased in quarter one 2018 Pharmaceuticals. AVI China Industry and Tech disappointed on the orders
following a major organisational and management restructuring. In India, front whilst they feel the management of Medy-Tox, the botox business,
the managers believe that banking and life assurance remain significantly has failed to deliver. New purchases include Genius Electronic Optical, a
under-penetrated and so have invested in private sector banks such as camera company listed in Taiwan, which has new external management
IndusInd Bank, ICICI Bank and HDFC. Other financial holdings include who have revamped the manufacturing process and hugely increased
China Merchants Bank, Military Commercial Joint Bank in Vietnam and the investment in new equipment. As a result, there is a greatly enhanced
United Bank in Pakistan. product offering that is likely to open up a premium tier market. The
business benefits from a shift in the industry to add more lenses to smart
At a regional level, the high weightings towards the internet and
phones, and so there is a huge growth opportunity for this business.
technology names have typically resulted in large absolute positions in
China Taiwan and South Korea. On a relative basis, Vietnam and India Huayu Auto Systems is a China listed name and this auto parts
have been large overweight exposures as the managers have been manufacturer has strong growth potential through adding additional
optimistic on the future growth outlook for both economies. In Vietnam, product lines and extending its customer base. It has recent new
the managers are particularly bullish on the export growth driving the ventures with Johnson Controls and KSBG. Another Chinese auto parts
domestic economy as it is becoming a beneficiary of China’s transition manufacturer, Minth, is benefiting from new customer wins and has strong
from a low-cost manufacturing economy. Vietnam is also expected to relationships with most of the leading international auto manufacturers
be a trade war winner as there is substantial foreign direct investment in China. It has a strong R&D capability and cost advantages. Nexteer
flowing into the country led by both Korea and Japan. The managers Automotive in China is a Tier One global steering manufacturer with
Page 12the majority of sales from electric power steering which improves fuel
economy and reduces emissions. This business was spun out of Delphi
General Motors auto parts business and was partially acquired by the
Chinese Government. The new structure of ownership has given it access
to the Chinese market where its new independence from GM has resulted
in it acquiring BMW as a customer. Through its strong market position the
business is expected to generate double digit returns.
The impact of the coronavirus has been hitting certain sectors such as
commodities whilst the highest quality stocks have not suffered as much
– as an example Li Ning is 20% down from its peak. The team believes
GDP growth has imploded in the short-term but will bounce back in the
second half of the year, although at present there is a service sector
recession in many countries and globally interest rates will fall further.
This is an environment where growth stocks should remain in favour and
value names such as the Thai banks will continue to see ROE falling as
rates continue to decline. Good quality companies remain better value than
western counterparts.
The portfolio has displayed consistent characteristics over the past five
years in that forecast earnings and returns on equity have been higher than
the market. As a result the valuation of the portfolio is ahead of the market.
Page 13PERFORMANCE
140
130
120
110
100
90
80
7
7
7
17
17
18
18
18
18
18
18
19
19
19
19
19
19
20
20
/1
/1
/1
9/
1/
1/
3/
5/
7/
9/
1/
1/
3/
5/
7/
9/
1/
1/
3/
3
5
7
/1
/0
/1
/0
/1
/0
/0
/0
/0
/0
/0
/0
/0
/0
/0
/0
/0
/0
/0
01
01
01
01
01
01
01
01
01
01
01
01
01
01
01
01
01
01
01
Baillie Gifford - Pacific B Acc TR in GB IA Asia Pacific Excluding Japan TR in GB
Data supplied by Baillie Gifford, sourced from FE Analytics
Roderick Snell has been a named manager on the fund since June 2010 Looking at the top performers over the last 12 months, SEA Ltd. was the top
and the fund has been one of the top performing funds in the sector over contributor to the fund, whilst Li Ning has seen a turnaround of the business
his tenure to the end of February 2020. This outperformance has largely since the old management came back and revamped the business model
been driven by strong stock selection within higher growth areas of the and significantly increased its brand awareness in China, – even when
market. Position sizing has also contributed to the outperformance with the the company was struggling on the sales front, it was still viewed as the
manager taking high conviction exposure to a number of companies which number three brand behind Nike and Adidas. It has benefited from the move
have generated strong returns. This approach has resulted in the fund to lifestyle sportswear following the trend that has occurred in the States
exhibiting a higher level of volatility over this time frame. Ewan Markson- and has developed a strong presence in the e-commerce market. The stock
Brown joined as co-manager in May 2014. was purchased when it was out of favour three years ago and Baillie Gifford
noted it had recruited from Alibaba to develop its online business. The
The fund had a very strong 12 months in the year to 31st December 2019
company has not only seen growth in revenue and earnings, but has also
returning 25.0%. Three year numbers are also strong with an annualised
re-rated, and the managers have now started to trim the position. In the
return of 15.8% p.a. The team want the performance focus to be on the
short-term the stock has traded off due to the coronavirus.
longer term and the fund delivered 12.2% p.a. over five years. An approach
such as this will be volatile versus the market over the shorter term and Accton Technology makes widgets for big data centres and had invested
there will always be relative down years as was the case in 2018. Whilst continuously in R&D, even during more difficult times. This is recognised as
performance was much stronger in 2019 this was not the result of any a cyclical business which will see its weighting reduced within the portfolio.
dramatic turnover in the portfolio, in fact the portfolio changes were The team recognise that there are some structural growth businesses
relatively small. where they would be happy to hold stocks as long as valuation remains
Page 14reasonable over the longer term which includes Sea Ltd, whilst other Reliance Industries has been a long-term winner over the last five years
businesses are more cyclical in nature. Last year Jadestone, the small in the fund with the team recognising early this business was moving
exploration and production company, performed strongly and this business to become a significant player within e-commerce. Looking at five year
has been able to buy assets relatively cheaply. attribution to 31st December 2019 Tencent has contributed 3.2%, Li Ning
2.8%, Geely Automobile 2.6%, SEA 2.2% and Accton Technology 2.1%. The
Baillie Gifford are happy to take on risk, so there will always be some
largest detractors have been Finetex at 1.3%, Sarine Technologies at 1.2%
negatives in the fund, with the managers believing that over the longer
and Naturlaendo Tech at 0.9%, so the winners have clearly outstripped the
term the largest winners in the portfolio will comfortably outstrip the losses
losers in the fund.
from the largest losers. In 2019 the largest detractor was Café24 which is a
South Korean e-commerce company which has not worked. One of the key
points to the portfolio construction is not to add more to businesses which
are going into a downward spiral as then more than 100% of the original
capital can be lost. This business has suffered as the Korean listed large
cap Internet stock Naver has gone into similar markets.
Areas that have not been as successful include India. Mahindra & Mahindra
has exposure to the Indian auto sector which has taken a hammering
during the economic slowdown and credit crunch in that country. India is
now seeing a dramatic slowdown with the anti-corruption drive having hit
a lot of entrepreneurs who have made money by dubious means, and in the
short-term a crackdown on corruption stopped some of the activity within
the economy as some of the less scrupulous entrepreneurs have suffered.
Non-bank financials which are often run by mafia type figures have also
suffered significantly but in contrast higher quality Indian financials such as
ICICI Bank and HDFC have held up relatively well. Modi’s actions have hit
growth in the short-term and the team believe it is necessary to separate
his more authoritarian domestic policies from the generally pro-business
environment in that country. Whilst the liberal elite have been critical of the
crackdowns on freedom, the team believe that Modi remains popular with
the electorate.
Page 15SUMMARY & EVALUATION
This is a very distinctive Asian equity portfolio investing in secular time which can lead to a significant re-rating of these stocks.
growth companies and those with the potential for significant earnings
The holding period for stocks is longer than for many managers of Asia
surprise. The managers take a high conviction, bottom-up ‘best-ideas’
Pacific equities with 36% of the portfolio having been held for in excess
approach focusing on companies which they believe will benefit from
of five years, and 38% of the portfolio has been held for between two and
the technological change and disruption driving the world today. They
five years. When looking at companies, the team continue to focus on the
are aiming to identify these companies early and hold them for the long
business potential over five years and to look for companies which have
term so that they can accelerate revenue growth by scale and network
the potential to double either revenue or earnings and expect the share
effects. Owner-managed companies are preferred where there is better
price to follow suit. There is a focus on sustainable long-term growth
long-term stewardship and alignment with shareholder interest. Domestic
which the team argue is ultimately rewarded by the markets.
Asia exposure is focused on India, where the long-term structural reform
is ongoing and Vietnam, where export growth is driving the economy An approach such as this is likely to result in lumpy performance and the
with the country becoming a leading low-cost manufacturing base. Many team are not trying to deliver consistent incremental index outperformance
investors look to Asia to provide growth in their equity portfolios and this on a year by year basis. They believe that their approach will benefit
fund is heavily focused on companies which are expected to deliver above long-term investors, capitalising on the strongest long-term growth
average and sustainable earnings growth over a multi-year time horizon. opportunities in the region through a willingness to ignore short-term
market noise.
The fund is co-managed by Roderick Snell and Ewan Markson-Brown
who are part of the well-resourced Emerging Markets desk headed by Will
Sutcliffe. There are seven permanent ‘core’ members, each of which are
Investment Managers, and one analyst. Both co-managers have extensive
experience covering various regions across the Asian region. The fund has
been one of the top performers in the sector since the refinement of the
approach in 2010.
Unsurprisingly, the investment process remains unchanged. There is
a fundamental belief that returns in the Asia Pacific region will follow
earnings over the long-term with the top two earnings growth quintiles
having significantly outperformed the lowest earnings growth quintiles
over the last 20 years. The team managing the fund are long-term growth
investors focused on three under-appreciated growth opportunities:
duration of growth which takes in stocks such as TSMC and Ping An
Insurance, pace of growth which takes in names such as Alibaba and more
recently SEA Ltd together with earning surprise stocks which includes Vale
Indonesia and CNOOC. In this latter category the market expects earnings
in a company to remain on a plateau, whilst the team believe that in reality
there are factors which would drive a spike in earnings in a few years’
Page 16ABOUT US
Established in 2004 RSMR provides research and analysis to firms working Ratings
across the UK’s personal financial services marketplace.
Our innovative ratings are now recognised as market leading and cover
Our work is completed with total impartiality, without any conflict of a broad area of investment solutions including single strategy funds, SRI
interest and delivered to a high professional standard by a team of funds, Multimanager and multi-asset funds, DFMs and investment trusts.
experienced and highly qualified people. Our familiar ‘R’ logo is now recognised as a trusted badge of quality by
advisers and providers alike and a ‘must-have’ when selecting funds. Our
Working with advisers ratings are founded on a strict methodology that considers performance
We provide specialist research, analysis and support to a diverse range and risk measures but places a greater emphasis on the ability of fund
of financial advisers and planners helping them to deliver sound advice managers to continue to deliver performance in the years ahead. based on
to their clients, backed by rigorous and structured research and due our in-depth face-to-face meetings with fund managers across the globe.
diligence. We understand financial services and we will work alongside you to deliver
The main regulatory body in the UK, the FCA, states that personal tailored solutions that are right for your clients and your business.
recommendations made by advisers should be ‘based on a comprehensive Our research. Your success.
and fair analysis of the relevant market’ and this has led to closer scrutiny
of the whole advice process. Our solutions are designed to help advisers
meet these challenges whilst recognising that advisory firms require a
range of flexible options that best meet their own business needs and
those of their clients.
Working with providers The data and information in this document does not constitute advice
or recommendation. We do not warrant that any data collected by us,
We work with all the leading fund groups, life and pension companies
or supplied by any third party is wholly accurate or complete and we
and platform operators across the financial services sector offering will not be liable for any actions taken on the basis of the content or
straight forward and pragmatic advice to help add value and improve their for any errors or omissions in the content supplied.
business performance and efficiency whilst treating customers fairly in line All opinions included in this document and/or associated documents
with FCA requirements. constitute our judgement as at the date indicated and may be changed
at any time without notice and do not establish suitability in any
individual regard.
©RSMR 2020. All rights reserved.
Page 17NOTES
_______________________________________________________ ______________________________________________________
_______________________________________________________ ______________________________________________________
_______________________________________________________ _______________________________________________________
_______________________________________________________ _______________________________________________________
_______________________________________________________ _______________________________________________________
_______________________________________________________ _______________________________________________________
_______________________________________________________ _______________________________________________________
_______________________________________________________ _______________________________________________________
_______________________________________________________ _______________________________________________________
_______________________________________________________ _______________________________________________________
_______________________________________________________ _______________________________________________________
_______________________________________________________ _______________________________________________________
_______________________________________________________ _______________________________________________________
_______________________________________________________ _______________________________________________________
_______________________________________________________ _______________________________________________________
_______________________________________________________ _______________________________________________________
_______________________________________________________ _______________________________________________________
_______________________________________________________ _______________________________________________________
_______________________________________________________ _______________________________________________________
_______________________________________________________ _______________________________________________________
_______________________________________________________ _______________________________________________________
_______________________________________________________ _______________________________________________________
_______________________________________________________ _______________________________________________________
_______________________________________________________ _______________________________________________________
_______________________________________________________ _______________________________________________________
_______________________________________________________ _______________________________________________________
_______________________________________________________ _______________________________________________________
_______________________________________________________ _______________________________________________________
Page 18Number 20 Ryefield Business Park Belton Road Silsden West Yorkshire BD20 0EE Tel: 01535 656 555 Email: enquiries@rsmgroup.co.uk www.rsmr.co.uk OUR RESEARCH. YOUR SUCCESS Rayner Spencer Mills Research Limited is a limited company registered in England and Wales under Company Registration Number 5227656. Registered Office: Number 20, Ryefield Business Park, Belton Road, Silsden, BD20 0EE. RSMR is a registered trademark.
You can also read
