A professional investor tells us where he’d put his money. This week: Nitin Bajaj, Fidelity Asian Values.
My investment philosophy is inspired by Seth Klarman’s and Warren Buffett’s school of value investing, which advocates investing in good businesses run by a trustworthy management team, and buying them at the best possible price. These are the characteristics I would look for when buying a business for myself, and I do not think it should be any different if I am buying businesses on behalf of my clients. This approach often leads me to the world of small- and mid-cap stocks, which are not widely followed by professional investors and so offer a higher chance of finding mispriced businesses. It also provides opportunities to invest in the winners of tomorrow before they become well known. And with more than 17,000 listed companies in the Asia/Pacific region excluding Japan, there is a lot to choose from.
To give you a flavour of the kind of businesses I look for, the fund holds a position in BFI Finance (Jakarta: BFIN), a second-hand commercial vehicles financier in Indonesia. Commercial banks find it hard to value an old truck because its value can vary massively depending on factors such as the kind of goods it carried in the last five years, the terrain it was driven over, whether it was part of a large fleet or driven by an individual operator, and so on. BFI Finance has created a niche in valuing such trucks, and it can charge a higher interest rate for this knowhow because it competes with local money-lenders. The business generates strong returns on equity, is very well capitalised, and offers about a 9% dividend yield.
Another example is Australia-based G8 Education (Sydney: GEM), which owns and operates about 460 childcare centres. This is a typical market consolidation story – the company acquires childcare centres in a highly fragmented market, and uses its expertise, brand and scale to lift up margins. Also hiring a helper is expensive in Australia, and women’s participation in the workforce is low compared with other OECD countries. The government is looking to correct this through various financial incentives and changes in childcare policy. This is positive for G8 Education as these measures should increase demand for childcare by making it more affordable. The stock offers about a 7% dividend yield and has strong growth prospects.
Taiwan-based WPG Holdings (Taipei: 3702) and WT Microelectronics (Taipei: 3036) are the largest distributors of semiconductors in Asia. To me, they are the best proxies of the sustained growth in demand for smart devices. Typically, an investor looking to benefit from this trend would choose between the likes of Apple and Samsung. My view is that these companies are highly driven by innovation, making it hard to predict the next winner. I am reasonably sure that WPG and WT will be distributing the products of whichever company is winning this race and would benefit from industry growth without taking technology, obsolescence or price risk.