Neil Martin Talks to Rahul Chadha from Mirae Asset About Growing Opportunities in China and Other Asian Economies
We would do well to look at the opportunities in Asia, says Rahul Chadha, co-Chief Investment Officer of Mirae Asset. That might come as no surprise, given that the Mirae Asset is a $65bn Korean asset manager which specialises in emerging markets. But, as Chadha reminds IFA Magazine, the Asian region is home to 45% of the world’s population – and he, and the 14-strong investment team who sit in Hong Kong, see a very strong and powerful mood of change.
Chadha is directly responsible for the Asia Sector Leader Fund, part of Mirae Asset’s flagship strategy which offers a thematic approach to emerging market equities – one that has a leading position by market share in their respective industry, products, or services.
“What we see in larger economies like India and Indonesia,” said Chadha, “is that for once people have gone beyond caste and religion, and gone for development. Whether it’s Modi in India or Jokowi in Indonesia, there has been a coming of age for these emerging markets, with the power of demographics being harnessed by good governance.”
The actual investment criterion for the fund is that companies should have over half of their activities coming from Asia. Chadha’s team of investment experts sit not only in Hong Kong but also around the region in Seoul, Shanghai, Mumbai and Taiwan. Being at ground level so close to the action gives them not only great insight, said Chadha, but also allows a cross-pollination of ideas. Whichever way you describe it, though, he says the team is there to spot the companies which are hot to trot.
Chadha has specific companies in mind. “We try and find scalable companies across the region, run by managements who have top leadership, who care about minority shareholders. They should also be businesses which have a high amount of ROI, which means that they have been funded for growth. So we’re looking to back managements who are not opportunistic, who stay focused.”
For Chadha, staying focused is fundamentally important. “I think that’s the toughest thing in emerging markets, there’s so much to do. Very often, entrepreneurs lose their focus and end up going nowhere, whereas people who are focused keep going the same way, build up a phenomenal franchise, and keep growing their businesses at a rate of about 20% to 25%.”
Chadha and his team are keen to catch a business before it comes to the attention of others. That way, they say, they can benefit from the ‘discovery’ process and catch a company when perhaps it’s on a rating of around ten times, but then climbs to nearer 25 times.
The fund’s current portfolio is quite diverse yet consists of fewer than 50 stocks, and it takes what’s described as ‘a long-term conviction portfolio approach’.
Chadha cites an example from the Philippines. Universal Robina Corporation (URC) is a branded convenience food and beverage company and is generally regarded as the country’s first ‘Philippine multinational.’ It claims to have the widest geographical footprint among local food manufacturers and is best known for brands such as Chippy, Nova and other snack foods under the Jack ‘n Jill mega brand.
It recently won a David and Goliath battle over branded coffee with food giant Nestlé, a story which excited the interest of a number of investors, and the company did experience a significant PE-rating.
The Asia Sector Leader Fund was launched in May 2012 and has outperformed the benchmark by over 20% – although actually the investment team are not that enamoured with the whole concept of benchmarks. In their view, benchmarks are backward looking, because they are constructed on yesterday’s stories.
Nor do they, in their eyes, reflect the rapid improvements which are taking place in the economies of India, Indonesia and Philippines, nor the consistent rise of China. Too many benchmarks are behind the curve, said Chadha, mirroring more what has happened in the past in Korea and Taiwan. The team prefer to focus on how benchmarks might look three years from now.
The Chinese Situation
Sitting in the heart of Hong Kong as he does, with a close view of the Asian markets, Chadha had some views on China and its relationship with the former British colony.
As regards China, Chadha said that not only has the country’s anti-corruption campaign lasted longer than most people expected, it’s only just starting to wind down now. But it has been more successful than first envisaged.
He sees China in two parts, regarding it as a split economy. In one half is the ‘bad’ part of China, including the heavy industry companies (steel, cement, coal etc), which are struggling, saddled as they are by huge levels of debt. But then you have the good part of the Chinese economy, with very successful companies that supply the world with the majority of consumer goods.
And, as Chadha points out, China does not face the same conditions that have stalled most European economies, including high fiscal and trade deficits. The challenge for China, as he sees it, is allowing for more accountability in the system and a greater encouragement of private sector competition.
In short, says Chadha, the anti-corruption policy has worked: China remains economically in a good place and job creation is healthy – partly because of the single-child policy which is shrinking the pool of future workers.
As for Hong Kong itself and its recent political unrest, Chadha took a few moments to answer, perhaps reflecting that nothing is straightforward in that part of the world, and describing it as a kind of disconnect.
Although China has been vitally important for the growth of Hong Kong in terms of growing urbanisation and industrialisation – it has made a lot of people wealthy says Chadha – there is still a simmering discontent in the city, because instinctively it’s European in outlook and it still remembers the advantages of British rule. People basically want the Chinese Government to move forward and not backwards. The recent protests may have cooled down he says, but the disconnect is still very much there.
Mirae Asset Global Investments Group is the international asset management business within the Mirae Asset Financial Group, one of Asia’s largest independent financial services groups. Based in Korea, it is one of the largest investors in emerging markets, with AUM in this sector totalling $22.71bn as of 31 December, 2013. Mirae Asset’s total AUM accumulated stands at $58.72 billion for the same period.