What Disney tells us about how we draw investment conclusions

Gabriel Sacks, Co-manager, abrdn Asia Focus plc

Walt Disney excelled in the art of fairytales. He first demonstrated a talent for them in the early 1920s, when he was still working at the humble Laugh-O-Gram studio, rattling out the likes of Little Red Riding Hood, Jack and the Beanstalk and Puss in Boots.

In the early 1930s, under the aegis of his Silly Symphony series, he produced classics such as The Ugly Duckling, Babes in the Wood and Three Little Pigs. Snow White and the Seven Dwarves, his first full-length animated feature, followed in 1937.

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Yet there was one significant area in which Disney did not deal in fairytales: business. He had a vision, and he fulfilled it. He moved on from Laugh-O-Gram, kept expanding and innovating and eventually used the profits from Snow White to establish an empire that remains a major force in film and television today.

This is the stuff of which investors dream. Show us a fledgling company that has a truly compelling strategic plan for long-term growth – and, better still, which is able to successfully carry it out – and we are as happy as Mickey Mouse in a cheese factory.

Unfortunately, such instances are rare. The business world is replete with compelling stories, but many of them turn out to be better suited to a golden-age Disney script than to a golden-age Disney investor relations presentation.

As a result, separating fact from fiction is a crucial challenge. It can be especially important when weighing up the pros and cons of smaller companies, whose narratives are almost invariably centred on long-term growth, and when surveying the opportunities in emerging markets (EMs), where competition for capital can be unusually intense.

So how does our fund, which specialises in smaller companies in Asia, go about distinguishing fact from fiction? Here are some of the tests, measures and guidelines we apply when searching for the region’s brightest investment opportunities and hidden gems.

Favouring reality over hyperbole

We first need to accept most Asian smaller companies are unlikely to have a tale as inherently eye-catching as, say, Apple’s or Microsoft’s. We also have to recognise they might not boast the storytelling skills of a mega-cap technology titan.

This being the case, our initial attention is most likely to be grabbed by a corporate narrative that is reasonably polished, makes sense and appears grounded in reality. One that fails to “hang together” and/or is clearly couched in hyperbole tends to fall at the first hurdle.

Taking a closer look

Businesses that pass the above test must still be treated with scepticism. This might sound unkind, but it is scepticism that underpins fully informed investment decisions. Nothing should be taken for granted.

A company’s financial statements are often the first port of call when scrutiny is applied in earnest. Quantitative research might show that the underlying data is vague or suspiciously selective and that the numbers simply do not add up. As we will see next, though, this level of analysis could be insufficiently revealing.

Bringing on-the-ground expertise to bear

Wherever in the world they may be, smaller companies are frequently under-researched. In a market such as Asia – and particularly in its EMs – many could be the subject of little or no coverage.

This is why we argue that there is huge merit in having an on-the-ground presence. Investment teams with local knowledge should be better positioned to differentiate between businesses that offer genuine promise and businesses whose appeal turns out to be strictly illusory.

Digging deeper through direct engagement

This brings us to the value of direct engagement. In our view, this is the most powerful means of seeing beyond the surface gloss of a company’s narrative and determining whether there is an authentic prospect of long-term growth and outperformance.

Face-to-face meetings with a business’s management allow us to dig much deeper into figures, claims and projections. Ideally, we want to hear a persuasive articulation of strengths, weaknesses and the proposed way ahead. In short: we want to find out what really makes a company tick.

Seeking reassurance in the face of uncertainty

Of course, there will be many instances when we choose to invest in a company and then encounter a situation in which the story we have bought into is challenged. Maybe the most obvious example is when growth expectations are not met.

What matters here is how management responds. Basically, we like to see a combination of optimism and pragmatism. Is there a straightforward, sensible explanation for what has happened? Are there solid grounds for believing the situation will improve? Will guidance be adjusted accordingly? This takes us back to where we started: we are looking for clarity and rationality, not obfuscation and make-believe.

Companies selected for illustrative purposes only to demonstrate the investment management style described herein and not as an investment recommendation or indication of future performance.

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.
• Investment in the Company may not be appropriate for investors who plan to withdraw their money within 5 years.
• The Company may borrow to finance further investment (gearing). The use of gearing is likely to lead to volatility in the Net Asset Value (NAV) meaning that any movement in the value of the company’s assets will result in a magnified movement in the NAV.
• The Company may accumulate investment positions which represent more than normal trading volumes which may make it difficult to realise investments and may lead to volatility in the market price of the Company’s shares.
• The Company may charge expenses to capital which may erode the capital value of the investment.
• The Company invests in smaller companies which are likely to carry a higher degree of risk than larger companies.
• Movements in exchange rates will impact on both the level of income received and the capital value of your investment.
• There is no guarantee that the market price of the Company’s shares will fully reflect their underlying Net Asset Value.
• As with all stock exchange investments the value of the Company’s shares purchased will immediately fall by the difference between the buying and selling prices, the bid-offer spread. If trading volumes fall, the bid-offer spread can widen.
• The Company invests in emerging markets which tend to be more volatile than mature markets and the value of your investment could move sharply up or down.
• Specialist funds which invest in small markets or sectors of industry are likely to be more volatile than more diversified trusts.
• Yields are estimated figures and may fluctuate, there are no guarantees that future dividends will match or exceed historic dividends and certain investors may be subject to further tax on dividends.

Other important information:

The details contained here are for information purposes only and should not be considered as an offer, investment recommendation, or solicitation to deal in any investments or funds and does not constitute investment research, investment recommendation or investment advice in any jurisdiction. Any data contained herein which is attributed to a third party ("Third Party Data") is the property of (a) third party supplier(s) (the “Owner”) and is licensed for use with Aberdeen. Third Party Data may not be copied or distributed. Third Party Data is provided “as is” and is not warranted to be accurate, complete or timely. To the extent permitted by applicable law, none of the Owner, Aberdeen, or any other third party (including any third party involved in providing and/or compiling Third Party Data) shall have any liability for Third Party Data or for any use made of Third Party Data. Neither the Owner nor any other third party sponsors, endorses or promotes the fund or product to which Third Party Data relates.

The abrdn Asia Focus plc Key Information Document can be obtained here.

Issued by abrdn 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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