Morningstar Awards 2012 Winner Feature - Aberdeen Global Asian Smaller Companies Fund

Christopher Wong

Christopher Wong is a senior investment manager in our Asian equities team now. He joined Aberdeen on the private equity desk in December 2001 and transferred to the Asian equities team in August 2002. Prior to Aberdeen, he was an associate director with Andersen Corporate Finance, advising clients on mergers & acquisitions in South East Asia.

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Morningstar: What is your economic outlook for 2012 specific to the markets you cover and how are you positioned to take advantage of opportunities and/or mitigate potential risks?

Wong: Liquidity injections by central banks around the world could continue to buoy asset prices in the near term but stock markets may have risen a little too quickly. Considerable uncertainty remains in the global environment: Europe’s debt problems are on-going; whether the US can maintain a self-sustaining recovery is an open question; and the high oil price could yet threaten the global economic recovery. Asia, despite its better fundamentals, cannot be insulated from global turmoil.

For the most part, however, policymakers have the wherewithal, both fiscal and monetary, to support growth. Furthermore, smaller companies tend to be domestically or regionally focused, and may be less susceptible to weakness at the global level.

Against such a backdrop and in an asset class that tends to be under-researched, we will keep our focus on identifying well-run companies with robust business models, sound finances and trustworthy management. We will also take advantage of market volatility to pick up our preferred holdings when prices weaken to attractive levels.

Morningstar: Could you highlight any major changes you made to the portfolio over the course of 2011? Were there any particular holding that drove the fund’s performance for the year?

Wong:  Significant portfolio activity in 2011 included the introduction of three new stocks: brewer Multi Bintang Indonesia because of its good long-term prospects and steady cashflow; Yingde Gases, a well-established industrial gas player in China; and lender Dah Sing Financial, as it is a cheaper alternative to Dah Sing Bank, which we currently hold.

Against this, we sold Austereo in the market after its shares rallied in the wake of Southern Cross’ takeover offer, and divested Hong Kong's Li & Fung, a large-cap trading company that was inherited via corporate activity.

Over the year, the fund, although showing a fall in absolute terms, outperformed the benchmark by 12.8 percentage points, a testament to the quality of our small cap holdings and our stock-picking approach. Consumer stocks did extremely well, outpacing the broader market given their defensive qualities. Among the best relative performers were Thai cash-and-carry retailer Siam Makro alongside superstore chain operator Aeon Co and palm oil producer United Plantations in Malaysia.

Morningstar: Can you comment on the risks facing the global economy, including the European debt crisis and the headwinds facing the Chinese economy? How do these risks affect your investment decisions?

Wong:  As noted above, there’s still plenty that can go wrong in the world. Recent actions by the ECB have averted a potentially damaging credit crunch and may buy yet more time. But strict austerity measures across the Continent to rein in fiscal deficits will depress growth and government revenue, creating a negative feedback loop. Meanwhile, voters are growing increasingly sceptical of the euro. So there is potential for significant further volatility into 2012.

Meanwhile, China’s domestic economy is weakening at a time when external demand is also slowing. Given the way China works, however, that may not be as bad as it sounds. The government has money to spend to keep up growth. There is room to ease monetary policy, too. The risks are more about what happens afterwards. State companies are lending unused cash to those that can’t get it, creating a huge potential debt problem, and the banks will probably need further re-capitalisation.

We do not try to predict economic conditions or the stock market, however. We prefer to spend time doing what we do best – focusing on companies’ strength and resilience, and whether they will be able to withstand whatever is thrown at them.

Morningstar: How is your investment team organized? Have there been or do you anticipate any changes to the investment team or structure over the course of the year? Do you anticipate adding to the team in the near future?

Wong:   We have a team approach where investment decisions are made collectively – we avoid cultivating ‘star’ fund managers. We believe cross-coverage of securities increases our objectivity and lessens reliance on individuals. Furthermore, our asset managers are based in the regions where we invest so investors can benefit from their local knowledge. In Asia, we have teams in Tokyo, Singapore, Hong Kong, Bangkok, Kuala Lumpur and Sydney. Our usual practice is to add a graduate trainee or two every year.

Morningstar: Can you highlight any areas where you feel that the investment team or the company can improve upon?

Wong:   We will not change our bottom-up, buy-and-hold strategy. However, while the core elements are in place – a team approach, cross-coverage of markets, two-step due diligence for quality then price – we are always looking to refine the investment process.

We try to incorporate checks and balances as we learn from mistakes, reflect on feedback from clients/consultants, and refine ideas as the legal, regulatory and industry environments change. This is best reflected in our company visit template, which has been improved as we have added screens for the likes of forex, governance, off-balance sheet items, etc.