Asia: Playing the Long Game
In a world beset by an ever-expanding list of developmental, environmental and economic challenges, a long-term mind-set is crucial if companies are to not only survive, but contribute and benefit from the necessary changes required over the coming decades.Download PDF version
In the UK, Switzerland and EEA this document is a financial promotion for the Stewart Investors Asia Pacific Sustainability Strategy, intended for retail clients and professional clients in the UK, professional clients in Switzerland and the EEA only and professional investors elsewhere where lawful.
Investing involves certain risks including:
• The value of investments and any income from them may go down as well as up and are not guaranteed. Investors may get back significantly less than the original amount invested.
• Emerging market risk: Emerging markets tend to be more sensitive to economic and political conditions than developed markets. Other factors include greater liquidity risk, restrictions on investment or transfer of assets, failed/delayed settlement and difficulties valuing securities.
• Specific region risk: investing in a specific region may be riskier than investing in a number of different countries or regions. Investing in a larger number of countries or regions helps spread risk.
• Currency risk: The strategy referred to in this material invests in assets which are denominated in other currencies; changes in exchange rates will affect the value of the strategy and could create losses. Currency control decisions made by governments could affect the value of the strategy’s investments and could cause the strategy to defer or suspend redemptions of its shares.
Reference to specific securities (if any) is included for the purpose of illustration only and should not be construed as a recommendation to buy or sell. Reference to the names of any company is merely to explain the investment strategy and should not be construed as investment advice or a recommendation to invest in any of those companies.
If you are in any doubt as to the suitability of our strategies for your investment needs, please seek investment advice.
In a world beset by an ever-expanding list of developmental, environmental and economic challenges, a long-term mind-set is crucial if companies are to not only survive, but contribute and benefit from the necessary changes required over the coming decades. But with the average tenure of a CEO now close to five years1, and the average holding period for a stock less than six months2, time horizons are collapsing when they should be expanding. In 2020, lockdowns, loose monetary policy by central banks and stock market euphoria combined to create an environment plagued with short-term pressures. We believe being able to think and act for the long-term is one of the strongest, and rarest, assets a company can have today.
In the two hundred or so corporate meetings we conducted this year we focused more than ever on understanding where management teams were making long-term decisions that required sacrificing near-term profitability in order to improve value-creating opportunities in the years to come. These decisions tend to reflect time-horizon and sense of purpose, especially at a time of crisis. If time horizon is short and sense of purpose ambiguous then such tough, long-term decisions are near impossible to make and long-term success, and survival, is compromised.
It is for that reason that we believe, over the long term, stock prices closely match growth in underlying business value, and, over that time frame, it is the quality of the people that influence whether value is created or destroyed. Brand strength, technological lead or the attractiveness of a platform are essential but not sufficient ingredients of long-term success. For even unique assets that are not nurtured and invested in, will succumb to deterioration and see any associated excess profitability competed away.
In 2020, companies capable of looking through next quarter’s expectations and next year’s results, and continued making long-term decisions, have been able to compound their competitiveness relative to peers. We have seen many of our companies gain market share, launch new products and partake in opportunistic mergers and acquisitions (M&A).
The value of a long-term approach
Techtronic Industries provides an example of the benefits of being able to play the Long Game. We own the Hong-Kong listed manufacturer of power tools as we like their collection of brands, proven track record of innovation and leadership in an industry well-placed to deliver attractive long-term growth. The power tool market is relatively consolidated with Techtronic’s major competitor being a large US company (known for their black and yellow tools). Unlike Techtronic, which is majority owned by the Pudwill family, their US competitor has no long-term owner, or discernible culture, and so serves at the pleasure of short-term shareholders. Watching how these companies have managed themselves through 2020 provides a great insight into the outcomes of time-horizon and, in our eyes, quality.
During the depths of the COVID-induced panic, in line with their historic behaviour and true to their goal of achieving global leadership, Techtronic’s management made some important long-term decisions (see quote below).
In contrast, their competitor announced an ‘initiative’ to cut USD1bn in costs.4 We beleive that any business with that kind of excess has either been materially mismanaged or is cutting into muscle rather than fat. While the long-term impact on their brand and innovation capabilities are unquantifiable there is little doubt that key assets are being under-invested in to save this year’s bonus. Such behaviour tends to be the rule rather than the exception for companies with no mission, overriding purpose or long-term destination in mind.
We have since seen Techtronic continue to gain market share - a trend that is likely to continue as they remain focused on building long-term assets while peers focus on preserving their bottom-line. Another tangible outcome of Techtronic’s divergent approach, and a major reason why we like the company, is their unassailable leadership in battery technology. A relentless focus on research and development (R&D), where they spend twice as much as a percentage of sales versus competitors, has steadily compounded to a point where Techtronic are now one of the largest manufacturers of batteries globally. Their leading battery-powered range has improved safety and environmental outcomes for consumers, as well as improving franchise strength by locking users onto their platform, helping to ensure repeat purchases. The strength of their battery ecosystem and the attractive positioning of the franchise for sustainable development are outcomes of numerous decisions to forgo short-term profitability in order to build something great, and enduring, in the long-term.
We believe Techtronic’s long-term mind-set, innovative culture and competent management will continue to deliver long-term success. These enduring factors will not be evidenced in ESG scores or fit conveniently into a model but continues to be key to our conversations and analysis.
Culture as a competitive advantage
In our March letter – COVID-19 and Investment returns in Asia - we highlighted that our Indian IT companies had frustratingly failed to protect capital during the market sell-off. Tech Mahindra, Tata Consultancy Services (TCS), Cyient and Infosys all help corporates across the world to evolve and enhance their business models through the use of technology.5 These companies saw large portions of their market capitalisations wiped away in short order as the market assumed pressure exerted by large-scale lockdowns would force corporates to curtail investments and consequently reduce the Indian IT companies’ cash flows. We spoke with each of these companies throughout the depths of the sell-off. Like us, they had little idea of what lay ahead. All they could point to was the resilience and adaptability of their cultures as well as their determination to be reliable partners to customers.
We have watched these companies adapt and maintain their relevance to customers through many economic and technological cycles but it is only in the depths of a crisis where great cultures can truly be appreciated. Within a couple of weeks these companies had reengineered themselves from centralised structures housed in vast campuses to a form of extreme decentralisation, with hundreds of thousands of engineers not only working from home, but continuing to support customers’ mission-critical activities. Such change would have been impossible without cultures that empower employees and are genuinely focused on delighting customers.
We could also point to TCS’s industry-leading attrition levels as evidence of their quality: an outcome of loyal and empowered engineers. Such an employee base tends to be cheaper to maintain, more productive and capable of preserving long-term relationships with customers. We think it comes as no surprise that TCS can maintain industry-leading margins while also being voted one of the best places to work in both the US and India.6
Thanks to what they have learned this year, TCS has committed to a ‘25-by-25’ strategy which aims for only 25% of its workforce to be in an office by 2025.7 This model will likely prove both lucrative to margins and improve TCS’s access to a greater pool of high-quality talent with more working mothers able to enter, and remain in, the workforce. We hope to see more women enter the higher echelons of these businesses: a topic we continue to engage them on.
Rather than the envisioned pain, COVID-19 served as a catalyst in increasing the appreciation and urgency for all businesses to have technology at their core. We believe this has the potential to start a multi-year technology investment cycle of which Tech Mahindra, TCS and Infosys should be leaders, and major beneficiaries. Despite strong recoveries in share prices, we believe these businesses continue to be attractively valued for their quality and growth opportunities.
Time is on the side of our financial companies
With lockdowns destroying economic activity and central bankers holding rates low, now is certainly not a boon time for banks. With that, many of our financial holdings were detractors to performance last year. However, as with previous crises, we are seeing high quality financial institutions prosper and position themselves favourably for the eventual recovery.
Our four largest financial holdings HDFC, Kotak Mahindra, Bank Central Asia (BCA) and Sundaram Finance, have a cumulative two hundred years’ of experience under their belt.8 Surviving this long in such a cyclical, heavily-leveraged, industry is no easy feat and entirely the result of the quality of people.
Each of them continually sits in the highest ranks for asset quality – a function of patience and discipline. But despite the quality of underwriting, these lenders continually choose to hold more capital and build provisions far earlier and more aggressively than their peers. Such conservatism supresses short-term profitability but promotes long-term survival. Decisions like these can only be made with a mind-set that is intent on playing the Long Game.
Their hard-earned reputations for strength at time of crisis does not go unnoticed by depositors who race to hand over hard-earned savings at the expense of lower quality peers who consequently face capital withdrawals and see borrowing costs rise. Kotak, HDFC, BCA and Sundaram now sit on strong, low cost capital bases, and have improved their already strong relative competitiveness at the bottom of the cycle: a behaviour we have seen time and time again. We believe each of them should be able to compound at an attractive rate from here as they benefit from industry consolidation as well as the growing penetration of financial products in their respective economies.
2020 has proven that forecasting, especially over the short-term, is of little use and time is best spent on factors we can control. Growing political and environmental risks, combined with accelerating technological and consumption trends, mean time-horizons matter more than ever. We continue to allocate our clients’ capital to companies where we trust high-quality, aligned, long-term stewards to build enduring franchises capable of generating attractive amounts of cash-flow over the years, decades and generations to come.
Subscribe to our updates
To get regular updates and content from Stewart Investors, please register here.
View our list of investment terms to help you understand the terminology within this document.
This material is for general information purposes only. It does not constitute investment or financial advice and does not take into account any specific investment objectives, financial situation or needs. This is not an offer to provide asset management services, is not a recommendation or an offer or solicitation to buy, hold or sell any security or to execute any agreement for portfolio management or investment advisory services and this material has not been prepared in connection with any such offer. Before making any investment decision you should conduct your own due diligence and consider your individual investment needs, objectives and financial situation and read the relevant offering documents for details including the risk factors disclosure. Any person who acts upon, or changes their investment position in reliance on, the information contained in these materials does so entirely at their own risk.
We have taken reasonable care to ensure that this material is accurate, current, and complete and fit for its intended purpose and audience as at the date of publication but the information contained in the material may be subject to change thereafter without notice. No assurance is given or liability accepted regarding the accuracy, validity or completeness of this material.
To the extent this material contains any expression of opinion or forward-looking statements, such opinions and statements are based on assumptions, matters and sources believed to be true and reliable at the time of publication only. This material reflects the views of the individual writers only. Those views may change, may not prove to be valid and may not reflect the views of everyone at First Sentier Investors.
Past performance is not indicative of future performance. All investment involves risks and the value of investments and the income from them may go down as well as up and you may not get back your original investment. Actual outcomes or results may differ materially from those discussed. Readers must not place undue reliance on forward-looking statements as there is no certainty that conditions current at the time of publication will continue.
References to specific securities (if any) are included for the purpose of illustration only and should not be construed as a recommendation to buy or sell the same. Any securities referenced may or may not form part of the holdings of First Sentier Investors' portfolios at a certain point in time, and the holdings may change over time.
References to comparative benchmarks or indices (if any) are for illustrative and comparison purposes only, may not be available for direct investment, are unmanaged, assume reinvestment of income, and have limitations when used for comparison or other purposes because they may have volatility, credit, or other material characteristics (such as number and types of securities) that are different from the funds managed by First Sentier Investors.
Not all First Sentier Investors products are available in all jurisdictions.
This material is neither directed at nor intended to be accessed by persons resident in, or citizens of any country, or types or categories of individual where to allow such access would be unlawful or where it would require any registration, filing, application for any licence or approval or other steps to be taken by First Sentier Investors in order to comply with local laws or regulatory requirements in such country.
This material is intended for ‘professional clients’ (as defined by the UK Financial Conduct Authority, or under MiFID II), ‘wholesale clients’ (as defined under the Corporations Act 2001 (Cth) or Financial Markets Conduct Act 2013 (New Zealand) and ‘professional’ and ‘institutional’ investors as may be defined in the jurisdiction in which the material is received, including Hong Kong, Singapore, Japan and the United States, and should not be relied upon by or be passed to other persons.
The First Sentier Investors funds referenced in these materials are not registered for sale in the United States and this document is not an offer for sale of funds to US persons (as such term is used in Regulation S promulgated under the 1933 Act). Fund-specific information has been provided to illustrate First Sentier Investors’ expertise in the strategy. Differences between fund-specific constraints or fees and those of a similarly managed mandate would affect performance results.
About First Sentier Investors
References to ‘we’, ‘us’ or ‘our’ are references to First Sentier Investors, a global asset management business which is ultimately owned by Mitsubishi UFJ Financial Group, Inc (MUFG). Our investment team operates under the trading name of Stewart Investors which is part of the First Sentier Investors Group.
This material may not be copied or reproduced in whole or in part, and in any form or by any means circulated without the prior written consent of First Sentier Investors.
We communicate and conduct business through different legal entities in different locations. This material is communicated in:
- Australia and New Zealand by First Sentier Investors (Australia) IM Ltd, authorised and regulated in Australia by the Australian Securities and Investments Commission (AFSL 289017; ABN 89 114 194311)
- the European Economic Area by First Sentier Investors (Ireland) Limited, authorised and regulated in Ireland by the Central Bank of Ireland (CBI ref no. C182306; Registered office: 70 Sir John Rogerson’s Quay, Dublin 2, Ireland; Company no. 629188).
- Hong Kong by First Sentier Investors (Hong Kong) Limited and has not been reviewed by the Securities & Futures Commission in Hong Kong. First Sentier Investors and Stewart Investors are business names of First Sentier Investors (Hong Kong) Limited.
- Singapore by First Sentier Investors (Singapore) (Company no. 196900420D) and this advertisement or material has not been reviewed by the Monetary Authority of Singapore. First Sentier Investors (registration number 53236800B) and Stewart Investors (registration number 53310114W) are business divisions of First Sentier Investors (Singapore).
- Japan by First Sentier Investors (Japan) Limited, authorised and regulated by the Financial Service Agency (Director of Kanto Local Finance Bureau (Registered Financial Institutions) No.2611).
- the United Kingdom by First Sentier Investors (UK) Funds Limited, authorised and regulated by the Financial Conduct Authority (FCA ref no. 143359; Registered office: Finsbury Circus House, 15 Finsbury Circus, London EC2M 7EB; Company no. 2294743).
- the United States by First Sentier Investors (US) LLC, authorised and regulated by the Securities Exchange Commission (RIA 801-93167).
- other jurisdictions, where this document may lawfully be issued, by First Sentier Investors International IM Limited, authorised and regulated in the UK by the Financial Conduct Authority (FCA ref no. 122512; Registered office: 23 St. Andrew Square, Edinburgh, EH2 1BB; Company no. SC079063).
To the extent permitted by law, MUFG and its subsidiaries are not liable for any loss or damage as a result of reliance on any statement or information contained in this document. Neither MUFG nor any of its subsidiaries guarantee the performance of any investment products referred to in this document or the repayment of capital. Any investments referred to are not deposits or other liabilities of MUFG or its subsidiaries, and are subject to investment risk, including loss of income and capital invested.
© First Sentier Investors Group