Henderson TR Pacific Investment Trusts like to put other people’s money into Asia at times when others wouldn’t dare. But their investors don’t have regrets. Many of them are institutions that rely on Henderson’s expertise to maintain investments in countries where they lack in-house analytical capacity themselves.
Henderson’s far-flung financial empire is run from both London and Singapore, and involves serious frequent flier miles. They favor investments in China, Hong Kong, Taiwan, Indonesia, Malaysia, the Philippines, Thailand, Vietnam and South Korea. With the exception of South Korea, those countries house one of the great trading blocs of the world, that of the overseas Chinese trading families. These families typically have a network of kin connections that make for prosperity and growth, but whose familial outlook may occasionally leave little consideration for the sensibilities of minority shareholders.
Both the region and Henderson, after delivering outstanding growth for many years, suffered a double whammy in the last several. Firstly the Asian currency crisis dropped the fund’s asset value from £224 mn ($320 mn) to £140 mn ($200 mn) in 1997. It recovered quickly, and with a lot of help from technology stocks, reached a new height of almost £260 mn ($372 mn) in 2000 only to be pulled down by the bursting Nasdaq bubble and the looming US recession. Assets under management in 2001 stood at £176 mn ($252 mn), which is still a considerable gain on the £44 mn ($63 mn) they started with a decade ago. A self-declared growth fund listed on the London and New Zealand stock exchanges, Henderson has generally managed to deliver the results it hoped for.
There is also the Henderson FE Income Trust (Henderson Trust), which invests in Australasia. Because of its focus on cash flow, it has a very low exposure to technology stocks and so escaped some the vicissitudes of the past year or two.
The Asian lure
Michael Watt, portfolio manager and company director of both Henderson and Henderson Trust, spoke to Investor Relations magazine having just delivered last summer’s interim results. He admits to a bad year but says it was in line with the benchmark index. ‘The picture,’ he says, ‘is one of stability or consolidation from a period of significant weaknesses as people were worrying about the effect of the looming US recession on the Asian markets – which were, of course, just recovering from their own crisis.’
Watt adds philosophically that the Asian markets, like all emerging markets, really need a fair wind behind them to show off their best. ‘When they do, they show outstanding returns, and if you get the timing right, it can be extremely profitable,’ he says. From his London base, his is the final voice in investment decisions, although his deputy, three investment managers, two assistants and major research efforts are all based in Singapore. ‘Normally I’m in Asia about four times a year, and stay three weeks for each visit. The Singapore team visits our companies on a regular basis to focus on sector and company reports.’
Watt began with Henderson back in 1979 and has been tending this particular paddy field ever since. ‘In those days it was more Japan than the rest of Asia, which, apart from Hong Kong hadn’t really opened up to any great extent to international investments. Since then it has become increasingly a story of the non-Japan, non-Australian markets for us.’
Starting in 1987, a lot of institutions began to establish their own analysis and expertise in Tokyo, which crowded Henderson out of its niche. ‘By folding into the developing Asian markets we went to another level in terms of specialization, which is something our institutional shareholders supported because they were feeling they could cover Japan themselves.’
Since then, private investor interest in the fund has overtaken the institutional side. Northeast Asia accounts for about 84 percent of the portfolio’s value, with a majority of the investments in China, Hong Kong, South Korea and Taiwan. ‘They are all very US economy sensitive and we are banking on the US recovery. Our strategists are fairly confident that we are at the trough of the US economy and we should be on the recovery track by the end of the year,’ he says.
When asked on which set of runes he reads the impending recovery, he cites ‘lead indicators that are fairly uniform in their conclusions.’ However, he admits, ‘It would be really nice to have that proved since it has been quite debilitating to watch corporate profitability weaken progressively and the Far Eastern export economy weaken progressively as well.’ He does not need to read tea leaves to conclude, however, ‘If the US does not turn round, then we are not going to get our recovery in the Far East.’
So what positions did they hold that took such a toll on results in 2000-2001? ‘In fact, we never had much in the dot-coms. We had about 30 percent in technology, on par with the benchmark index. Back in 1999, it was 50 percent-plus and we outperformed very strongly that year. Since then we’ve pulled it back to neutral and left it there.
We are really waiting for another growth opportunity, and haven’t moved back into an overweight position in technology.’
However, Watt still sees hope in some tech areas: ‘Telecoms companies are not the same as in the West. For example, there isn’t the degree of competition and there weren’t the big 3G payments made. They are very resilient with a growing band of telecoms consumers and strongly growing subscribers.’
The other ray of hope is the trend for big global brands to outsource their manufacturing. ‘Of course this goes beyond tech companies as brands take advantage of lower labor costs and a pool of expertise in particular processes.’ He cites Taiwan Semiconductor or TSMC (see How they do it at TSMC, Investor Relations, September 2001) as a prime example – and Taiwan itself as a major player. ‘The US has been a major outsourcer for years. It’s the model that’s been most successful over the last five years or so, so it is best industry practice and it’s only just beginning for Japanese and European companies.’
A fair proportion of Henderson’s portfolio is in real estate, a sector whose inflated values helped bring on the Asian crisis of 1997. ‘A lot of it fell apart and it got left with the banks, but they have returned to sensible levels.’ Meanwhile, Watt looks to the Singapore and Hong Kong real estate markets, which await an upturn in the regional and global economy. Even so, he comments, ‘It will be a long time before the real estate companies lead the economy. In fact we are more likely to go with the old cyclical companies to lead the next rally.’
He explains that the financial crisis exacerbated a crisis of under investment in Asia’s basic industries. ‘While there is still over-capacity in technology, it’s beginning to look as if there are supply bottlenecks in basic industries, and cement, energy, steel and chemicals sectors are likely to be fairly stretched if we get an economic upturn over the next year or so.’
Other investors in the region have often complained about bottlenecks in corporate governance and transparency, but Watt is fairly sanguine. ‘It’s very difficult to be as cut and dried as that about corporate governance in Asia. We wouldn’t change our investment policy for that reason at all. We do have quite a big team that works on corporate governance and social responsibility, analyzing the sensitive sectors, and if we did have concerns, then we would address that directly with the company rather than sell.’ He asserts, ‘Our board of directors is extremely clear that our major objective is the pursuit of capital growth.’
He further suggests that corporate governance and social responsibility still have some way to go even in the West. ‘It would possibly be counterproductive in the Asian context, where we are only halfway through the industrial revolution and families are the big drivers rather than professional management.’ A significant change is that the current generation tends to be US or UK educated. After university and business school, Watt says, ‘The second and third generations tend to be more professional managers than the owners are. They’re bound to have picked up some western outlooks on corporate governance.’
Rather than confrontation, ‘The main thing to do is to get to know them as well as you can and to stick with the companies that are shareholder friendly. You’re never going to get it 100 percent right. But even though it’s growing, there isn’t a big universe of companies in that category at the moment. There’s no reason why we shouldn’t find a lot of companies with those sorts of credentials over the next decade – even if you can’t put your hand on your heart and recite many of those you’ve seen deserving that accolade in the past.’
The quality of information is also not always an investor’s dream, Watt says. He pauses before commenting in measured tones about the message from managements: ‘It runs with the markets; everyone is very concerned and very optimistic at the same time, and it is usually the wrong way to be. I think it is mad to be aggressive sellers at this point in the stock market cycle. In fact I would want to be pretty fully invested as a long-term investor. We’re fairly fully invested at the moment, with about 6 percent gearing and the capacity to go up 12 percent. Some time in the next six months we are going to see our economic recovery. That’s going to be very well received by the region’s stock markets, and my portfolio is positioned to benefit from that above all.’
There are also national differences in the case of information extraction. For example, the current worst case scenario in the region is Vietnam where Henderson recently put £2 mn ($2.9 mn) into a fund issuing a new tranche of shares. ‘It is a country that is very difficult to find sensible information about. But there is quite high growth there with the new trade agreement with the US, and the new stock market opened last year [2000].’
Growth over governance
Does Henderson have IROs and CEOs banging on his door seeking capital? ‘Occasionally, but it doesn’t often happen. An article like this may inspire a letter or an e-mail from someone wanting to know what we do.’ Watt declares an extreme bias in favor of listed securities, though there is no absolute bar against private entrepreneurship, he assures. ‘But only in very special circumstances – for example, we were one of the first to invest in and to take advantage of opportunities in Vietnam and, similarly, in China.’
China has generally justified some of Henderson’s risks. ‘It has been a difficult market – a lot of enthusiasm but a lot of pain as well. Overall I think we’ve come out on top in China so far and I would hope to build on that in view of the strong growth prospects.’ He adds that the general caveats for minority shareholders throughout Asia should be reinforced when dealing in China, even for Hong Kong-listed stocks. As for the WTO accession, Watt says, ‘China has to put in the infrastructure for corporate governance and the rule of law. You have to take into account that it is not a developed economy at all.’
Watt reports that the quality of IR in his patch is very mixed, depending on the country and the company. ‘It’s improved a lot over the years, but it leaves a lot to be desired in most places. With family companies or government companies, it takes a long time for them to understand what the rights and privileges of other shareholders might be. They often have difficulty seeing the potential problems from the perspective of a minority shareholder.’
He doesn’t believe there has been a deliberate effort to disadvantage other shareholders. ‘It’s more a lack of understanding of their shareholders in that respect. Corporate governance is becoming more an issue for the regulators.’ He once again points out that corporate governance is ‘a science that the West has only just come to understand.’ In the meantime, he and Henderson will continue to work in what the old clichéd Confucian curse calls ‘interesting times’.
