Gabriel Sacks is Co-Manager of Abrdn Asia Focus plc
More so than ever before, data is regarded as the lifeblood of investment decisions. There is a a genuine superabundance of it, and cutting-edge technology means it can be processed with increasing speed and effectiveness.
Against this backdrop, the notion of direct engagement with investee companies may seem hopelessly passé. Why make some kind of personal pilgrimage to a business when enhanced disclosure and artificial intelligence can handle all the “heavy lifting”?
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Imagine, for example, a cab squeaking to a halt outside a rather shabby-looking factory in an emerging market (EM) country. Out steps a somewhat dishevelled figure who has travelled thousands of miles by plane, train and taxi to get here.
The character in question is a fund manager. He believes in having an on-the-ground presence in the region in which he and his colleagues invest, which is why he has journeyed to this out-of-the-way location and this vaguely delipidated facility.
Seriously, what does he hope to accomplish? How can he expect to learn anything that could not be more easily discerned by analysing the swathes of information this company must supply to anyone who expresses an interest?
Well, the somewhat dishevelled figure was me. And what I learnt was that behind the shabby façade was a business eminently capable of profiting from some of the most important economic and demographic long-term trends in Asia.
Such an experience is far from unusual. Equally, I have visited plenty of conspicuously plush offices and discovered the companies within them fall a long way short of such opulent surroundings and should therefore be avoided at all costs.
The point is that quantitative analysis can sometimes tell us only so much. The qualitative aspects of a business might prove every bit as significant in determining whether an investment is likely to succeed or fail.
There are numerous issues that could demand attention. They might include a company’s strategy, its inherent agility and adaptability, its capacity for continued innovation and even the strength of the relationships between its senior executives.
In the experience of our team, which operates throughout Asia, this is why “being there” can still have great value. The three overarching considerations below particularly lend themselves to favouring such an approach.
- Digging deeper
Wherever it may be, a company might not always project an image that mirrors the reality of its situation. We have already seen how this problem can manifest itself in a business’s premises, but it can apply much more widely.
Take financial statements – what we might think of as the corpuscles of the aforementioned lifeblood. Do accounting profits, often adjusted by the management team, translate to healthy cashflows? Even if they are perfectly accurate, they may not reveal the full story.
For instance, evidence of short-term underperformance might obscure the possibility of longer-term growth. On the other hand, page after page of jaw-dropping stats could disguise the underlying inadequacies of a management team that lacks a decent plan for the way forward. Face-to-face meetings provide a powerful means of digging deeper and discerning the whole truth.
- Appreciating each country’s uniqueness
Culture has long been acknowledged as a key driver of corporate performance. Yet it is vital to recognise it differs not just from company to company but from nation to nation.
Every country’s unique history, attitudes and even eccentricities can play a part in investment decisions. This is perhaps most notably the case in a region such as Asia, where many aspects of day-to-day life – not least in the professional sphere – are markedly dissimilar to those in the West.
Take South Korea, where business dealings generally entail a delicate synthesis of extreme politeness and strict observance of hierarchy. As investors, we need to understand the nuances of such “normals” and appreciate how they are reflected in what a company says and does.
- Exploring the unknown
Even though we live in an era of ever-improving governance and ever-accelerating technological progress, thousands of good businesses consistently escape the notice of the broader investment community. This is because transparency and processing power can count for little – and even for nothing – if a company is simply overlooked.
This is frequently the fate that awaits some of the brightest opportunities in Asia, as well as those in EMs around the globe. Maybe above all, promising smaller businesses routinely go unremarked. Most investment analysts are too bound up in the proven attractions of mega-cap organisations in the US and other major regions – or it may be that third-party research houses can afford to cover only the most liquid stocks in any given market.
As a consequence, the job of unearthing hidden gems is likely to lie with specialist teams. Their in-depth knowledge should stem from an extensive first-hand appreciation of the places, people, practices and policies that help shape genuinely informed investment choices in some of the world’s fastest-growing and most fascinating economies.
Important information
- The value of investments, and the income from them, can go down as well as up and investors may get back less than the amount invested.
- Past performance is not a guide to future results.
- Emerging markets tend to be more volatile than mature markets and the value of your investment could move sharply up or down.
Other important information:
Issued by Aberdeen Fund Managers Limited, registered in England and Wales (740118) at 280 Bishopsgate, London EC2M 4AG. The company is authorised and regulated by the Financial Conduct Authority in the UK.
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