Star fund manager Hugh Young has just been watching his seven-year-old son play the Tin Man in a Singapore school production of The Wizard of Oz, and he says it was a good performance.
While he professes to have no theatrical tendencies himself and, laughing, even claims to be “useless at most things”, Young, 55, is certainly entertaining to talk to and one of the most highly regarded managers of Asia money with his flagship Asia Pacific Equity Fund.
Of the three decades plus he has spent in fund management – the bulk of it, from 1985, has been with Aberdeen Asset Management. Since 1992 he has based himself in Singapore as managing director of Aberdeen Asia.
Asia opens up
“Most people thought we were mad, going to Singapore initially. They said ‘it’s boring, and the regulator is horrid and tough’. The regulator is tough here, but not horrid, and well, that was one of the reasons we went.”
But Singapore has since liberalised and the domestic financial industry has opened up faster than most people were expecting, although that was never the reason for going there, he says: “That’s more the icing on the cake. We came to manage the money we already had better, and I like to think we’ve done that, and built a local business in Singapore, and indeed a regional business 20 years on. So, from a business perspective, it has been far better than we ever dreamt.”
Most people thought we were mad, going to Singapore initially. They said ‘it’s boring, and the regulator is horrid and tough.
Hugh Young, managing director, Aberdeen Asset Management Asia
The absence of jet lag or having to combat hangovers from high octane business trips means “it’s not all a party, because you’re already living in Asia, and you get far closer to the companies in which you’re investing. That was the theory, and amazingly enough, it has proved to be the practise as well”.
There are now around 200 staff at Aberdeen Asia’s Singapore headquarters, of which the large equity investment team comprise 13 who are working on the Asia funds, and groups of between four and six variously based each in Bangkok, Hong Kong, Malaysia, Australia, and Japan.
“They’ve all worked together for ages. The guy who runs Australia used to work in Singapore, and for us in Bangkok. The guy in Hong Kong used to work in Singapore. The guy in Tokyo used to work in Singapore, so they’re all born and bred Aberdeen type investors.”
The first graduate trainee is still on board 17 years on, though one of the first three employees, Peter Haynes, retired three years ago much to Young’s chagrin. “Younger than me, which is very upsetting (laughs), and our first local employee is still with us”.
Soft options
Before drilling down into the $10.2bn portfolio of the Luxembourg Sicav Asia Pacific Equity Fund, I raise the issue of whether this huge fund might face soft closure.
Aberdeen has already soft closed its Global Emerging Markets Fund, in April, by introducing a 2% entry fee which goes to the existing holders of the fund, rather than into the coffers of the fund management group.
Young says the Asia Pacific fund received “hot but manageable” inflows earlier in the year, but these have slowed down quite nicely and naturally.
“It’s not so much what happens to any one fund alone. It’s more a matter of how much goes into the strategy as a whole.
“Short term we wouldn’t be keen on having $5bn flood through the door as we see things today. But markets can be very funny – there might be a calamity or something happens and then we would be saying ‘yes please’.”
The soft closure of the Global Emerging Markets Fund “slowed the inflows dramatically in exactly the way we wanted,” Young said, pointing out the flows are now about flat, with inflows matching outflows.
“It was coming in in hundreds of millions a month, and some months would have seen a billion. We can manage the odd hundred here or there but if you have a flood of money coming in – these markets are not necessarily the most liquid – you then start damaging your existing investors.”
The danger with soft-closing, he explains, is that “you stop the inflows but the outflows continue so you end up not quite cutting off your nose to spite your face, but it can have the reverse effect of what you intend. So it’s been about right, and hopefully our investors are happy”.
Setting a precedent
The group’s policy for the global emerging market funds is now a role model for what it would do anywhere else if it had those tremendous inflows.
“One of the most likely areas is Asia Pacific. We are not seeing horrendous inflows but that could change tomorrow. Suddenly you have billions in and you are not being fair to investors,” Young concluded.
The Asia Pacific funds have been closed to new segregated business for over five years, well ahead of the soft close move on the emerging markets funds in 2013.
Focusing on the geographical split of the Asia Pacific Equity Fund, around 45% is in Hong Kong (25%) and Singapore (19%), which Young says has stayed roughly even in recent years and may come across as a “bit strange because if you add up the people in both of these countries that’s about ten million people in a region of three billion”.
But this goes to show that where companies are listed or incorporated is pretty irrelevant to where their businesses are, he says. Many with a global spread, virtually all the Hong Kong companies have gone into China and Singapore businesses have more of an emphasis on South East Asia, some with even bigger operations in the US.
“They’re sort of multi-national type companies. So it’s a bit like looking at a Nestle or Unilever, and thinking, ‘Oh gosh, why do you want a boring Swiss company, or a boring Dutch company.’”
These companies play by the rules, and have been around a long time but China is a different story: “You’ve got some really big companies in mainland China but they don’t necessarily know what the rules are. They certainly don’t necessarily play by them, and they’re very new at running a publicly listed company. To be fair to them, they learn pretty fast, but they’re still new.”
State of play
So that explains the 5.9% direct exposure to China? Not quite, because Young says the other reason is that all the large Chinese companies are effectively arms of the State, so you are a minority shareholder, and they will do what is good for the State. As an example, banks in China that are on paper the world’s biggest banks by market cap will do exactly what the Chinese Finance Ministry tells them to do, such as lending money to a project, irrespective of whether it makes money or not.
I’d have to say I’m more cautious than optimistic over the short term, but that’s not really how we invest. All my investments are in these funds, and I’m fine, I’m happy, but could they be 20% lower in 12 months’ time? Yes.
“We’d dearly love, if we found some great Chinese companies that we really knew and trusted, to move 10% direct into China. Is there much sign of it? No, not really.”
Surprisingly, the number one holding in the Asia Pacific Equity Fund is the Aberdeen Global Indian Equity Fund.
Young admits that it always raises a few eyebrows when you see another fund in there, but the explanation is that the India fund is structured through Mauritius, so it takes advantage of the double tax treaty that Mauritius has with India.
“It’s a tax-efficient way of investing in India, and exactly the same team manage that as manage the overall Asia Pacific fund. So it’s all companies that pass the same tests that we have elsewhere. And even more importantly, we don’t double charge.”
One country that is doing better than Young expected is the Philippines, a small country to which the fund has limited exposure but which has delivered a better return than Japan “so sadly it’s not particularly cheap as a consequence”.
“We’ve been invested in the Philippines in the same companies for 20 years, but the country hasn’t done as well as it should have done, because the politicians were fighting each other, stealing the money, and doing all sorts of stupid things. This time around, fingers crossed, they’re a lot more honest, putting in some proper institutional controls.”
Global impacts
In general, he is concerned about the amount of monetary easing around the world and “falsely low interest rates” which has created a lot of distortions in markets.
“It’s not just Asia, and global emerging markets, it’s everywhere, and it has driven prices up. Not to a horrendous level, but then I think we’re all rather mean and Scottish at the end of the day, so we are not table thumping about the prices we’re seeing.”
Luckily, Asia has fewer problems than most, Young says, so on a longer term view his outlook is rosy. But over the next year, a lot is out of Asia’s hands: “I’d have to say I’m more cautious than optimistic over the short term, but that’s not really how we invest. All my investments are in these funds, and I’m fine, I’m happy, but could they be 20% lower in 12 months’ time? Yes. Would I worry? No. It’d be an opportunity to buy more.”
