At First State Stewart Asia, the concept of stewardship isn’t just a buzzword; it is a deep-rooted belief that underpins investment across all of their funds. It has also has resulted in the firm picking up BENCHMARK House Awards for both India and Japan equities. Portfolio Manager, Sophia Li, explains how it works.
The team’s approach to risk – applied to both Japan and India equities – is straightforward and refreshing. They define risk in simple terms: the permanent loss of clients’ capital. Moreover, as Li points out, “we invest our clients’ money as if it were our own”. They are unconcerned with metrics such as tracking error or deviating from benchmark returns. Instead of relying on complex models or difficult valuation cases, the team studies the companies it invests in. This scrutiny is all-encompassing, spanning corporate history, competitive advantages and past track records. Moreover, the team has both the resource and experience to throw at the task. With 17 portfolio managers and analysts, First State Stewart Asia is one of the most experienced investment teams in Asia.
Uncovering Quality Companies
So, what type of company is likely to catch the team’s eye? Li explains that they seek out quality companies with sound growth prospects and strong management teams, then pay a sensible price to invest in them. Importantly, the team is likely to shun companies that do not look after their customers, employees, suppliers and the larger community. As she points out, “such companies are unlikely, in our view, to be rewarding long-term investments”.
Getting Under the Skin of a Company
The managers at First State Stewart Asia pride themselves on their long-term stance, which lets them get to know companies well over time. Li remarks that “as long-term investors, we strive to make investment decisions over a five-year time horizon”. Not only does this patient approach provide a valuable insight into investment decisions, it means the team is well placed to influence management on relevant Environmental, Social and Governance (ESG) issues.
As Li remarks, “We believe that we have a responsibility as investors to manage our clients’ money to the mutual benefit of all stakeholders and the wider community”. This sense of responsibility, to both clients and the broader community, is put into practice on a day-to-day basis. The wider team conducts over a thousand company visits per year, to generate investment ideas and check in with companies. And, the team engages with every company it is invested in, ensuring ESG practices are upheld. In turn, this helps to protect clients’ capital.
The themes of stewardship and capital preservation run through all of First State Stewart Asia’s offerings, contributing to the team’s success. One fund attracting notable accolades, however, is the First State Indian Subcontinent Fund, which can also invest in companies in Pakistan, Sri Lanka and Bangladesh.
As well as receiving an award for its Indian equity capabilities, the team won a Best-in-Class award from BENCHMARK, thanks to its impressive long-term track record. Summing up the team’s investment approach, the Fund’s manager, Vinay Agarwal explained that “when we make an investment, we regard ourselves as buying shares, on behalf of our clients, in a real business”. This echoes the ethos of stewardship and responsibility embedded across the firm.
Investing in India requires particular skill. Although Prime Minister Modi has made efforts to tackle corruption, it is a deep-seated issue that will take some time to resolve. Excessive red tape and bureaucracy is another hurdle facing investors in India. To overcome these challenges, Agarwal and his team search for quality, with a focus on the people, business and financials for each company. They want to see company management teams that recognize the broader consequences of their companies’ impact on society. Conversely, management teams that are preoccupied with short-term profits represent a red flag and are avoided.
Agarwal comments that “the companies we like often exhibit characteristics such as high cash flows, low debt levels and stable dividend yield. The softer aspects of a business, such as the alignment of interests, the corporate culture and succession planning are important to us too”. Ultimately, the team is looking for management whose interests are aligned with those of long-term shareholders.
Some companies in the wider investment universe are deemed unsuitable for inclusion in the Fund. A careful screening process precludes investment in companies engaged in the gambling, armaments and tobacco industries. While profitable on paper in the short term, Agarwal and his team believe that the high social costs will be reflected in these companies’ valuations, in the long run, mirroring their Western counterparts.
This approach to investment in India is cautious but effective – in the long term. Over time, the Fund has tended to perform better and preserve more capital in challenging markets conditions, while sometimes failing to keep up with the shooting stars when markets have been buoyant. However, as Agarwal points out, “That is an acceptable trade-off in our view. Short-term performance is far less relevant than ensuring the Fund is resilient over longer time periods”. This circumspection has paid dividends – the Fund has delivered stellar returns to investors from launch to date.
The Courage to Turn Away Money
Turning away money might seem a counter-intuitive strategy for an asset-management company. However, the First State Stewart Asia team did precisely that – closing the First State India Subcontinent Fund to new subscriptions for nearly five years. Because of the lower liquidity in the Indian equity market, the team deemed it prudent to keep the Fund size smaller than they would within developed markets. This decision reflects the team’s desire to ensure its ability to meet the Fund objectives is never compromised. Put simply; the team would rather run a smaller portfolio of quality businesses than allocate clients’ money to companies that were lower quality. In other words, stewardship. BM