My investment strategy is built on diligence, discipline and patience. We look for good businesses run by competent management teams, available at a price that leaves us with a margin of safety. I focus on managing absolute risk and losing little money during market downturns, which should help compound returns at higher rates over the long term.
We therefore tend to avoid thematic investments, start-ups, highly geared companies, cyclical businesses earning peak margins, and stocks on high multiples to earnings. As a result of this approach, the trust has a high-quality, contrarian value tilt and is primarily invested in mispriced small- and medium-sized companies – the “winners of tomorrow”, before they become well known. Here are three examples.
Solid foundations in Indian housing
Repco Home Finance (Mumbai: REPCO) provides housing loans for the construction and purchase of affordable homes that on average are valued at 1.5 million rupees (£13,300). Its customers are usually based in smaller cities and towns in southern India and are mainly either self-employed or salaried employees in relatively poorly paid sectors with little job security.
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Even though 80% of Repco’s customers have a credit bureau score and more than 50% of its customers file taxes, this is a segment that large mortgage lenders and banks pay less attention to, creating a clear opportunity for lenders such as Repco to tap this market.
At the same time, Repco’s management is focused on maintaining the quality of its assets, and credit scores play an important role in determining how the loan is priced. The stock offers close to 3% return on assets, and trades on a price-to-book value (p/b) ratio of 0.6 times. It is a good-quality business managed by a good team.
Surya Pertiwi (Jakarta: SPTO) is the leading distributor and manufacturer of sanitary ware in Indonesia, with more than 3,000 dealers in its network. It is the exclusive distributor in Indonesia for the Japanese brand TOTO. The company has a 65%-70% domestic market share in sanitary ware and a 40%-50% share in sanitary fittings.
Given the nature of sanitary ware as a product (fragile and high volume, but low value), it is hard to transport over long distances. So this sector faces limited competition from Chinese peers. Our research estimates that the Indonesian sanitary ware market could expand by an annual 7%-8% in volume terms over the next few years, supported by improvements in affordability.
The current market penetration of sanitary ware in the country is 50%, which is quite low and provides a tailwind for demand. The stock offers a mid-teen percentage return on equity and is on a p/b ratio of less than one. The balance sheet has no debt.
Tuhu (Hong Kong: 9690) is a Chinese vehicle-parts retailer that uses its app to direct car owners to its network of franchisee car-repair shops. It is a difficult business, but it is also light on capital and scalable, so companies that find the winning formula have high returns on capital and healthy long-term growth prospects. Tuhu is the market leader in China, where organised vehicle-parts retailing is still in its infancy.
The management team is solid, and the firm should be able to grow significantly in the next ten years. It is not a traditional value investment as it is an early-stage company with a net-cash balance sheet, and the stock is on a forward price/earnings ratio of 15, but we feel comfortable with our position.
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