Arisaig Asia Diary
Latest Asia Diary
 
Past Issues:
Jan'09 Arisaig Asia Diary
Feb'09 Arisaig Asia Diary
Mar'09 Arisaig Asia Diary
Apr'09 Arisaig Asia Diary
May'09 Arisaig Asia Diary
Jun'09 Arisaig Asia Diary
Jul'09 Arisaig Asia Diary
Aug'09 Arisaig Asia Diary
Sep'09 Arisaig Asia Diary
Oct'09 Arisaig Asia Diary
Nov'09 Arisaig Asia Diary

 

Arisaig Africa Diary
Latest Africa Diary
 

 

Note: All downloads are in Adobe Acrobat PDF Format
Arisaig Asia Diary December 2009    
Performance
The Arisaig Asia Fund rose 3.1% in December and 64.8% in 2009. To justify our existence we need to do better than the main market indices over the long term. By way of comparison, the FTSE Asia Pacific Large Cap Index was up 68.3% in 2009.

Given the huge changes to the portfolio during the course of the year (from over 130 stocks to only 25) and the fact that we had no exposure to the higher beta financial, property and commodity sectors, this was arguably a reasonable outcome.

As usual with a concentrated portfolio, a small number of holdings did all the work - Uni-President, Hsu Fu Chi, Lianhua and Wumart rising 184%, 153%, 143% and 113% respectively. Meanwhile some positions, notably Britannia Industries, our largest holding in India at the start of the year, Ottogi and Convenience Retail barely got out of the starting blocks. This leaves something in the tank for 2010, which may prove to be less of a one-way bet than 2009.
 
Long Term Returns
Our Asia Fund has now returned 11.2% per annum over its thirteen year history. Although this is better than the FTSE's plus 3.5% we should have done a lot better given the 17% p.a. or so EPS growth that our universe of dominant consumer companies has delivered over this period. We have destroyed value by trying to be clever in micro caps and financial stocks.

Of course, our management fees and brokerage costs etc. have not helped. We estimate that these have amounted to about 3% per annum all told. We aim to significantly reduce this charge going forward: firstly, by reducing our management fee (we will be circulating full details shortly); and secondly, by reducing portfolio turnover to, we estimate, less than 10% per annum.

We will also be asking shareholders to vote in March on a proposal to merge our sub-regional funds (Greater China, India, ASEAN and Korea) into the Asia Fund. As over 95% of our clients are invested at the Asia Fund level it makes no sense to retain the cumbersome sub-fund structure. We will also be proposing that the name of the Fund be changed to the 'Arisaig Asia Consumer Fund'.

So what sort of returns should our investors expect going forward? Well, we see no reason for EPS growth to slow; in fact as our businesses mount the "S" curve of consumption we see growth more likely to accelerate. That's certainly the message we take from the coal face. The risk is in the valuations. At 19.2x forecast 2010 earnings our portfolio is on the rich side. That said, these top consumer companies have seldom come cheap.

What we can be sure of is the unexpected - be it trade wars, inflation, India/China hostility, etc. As a result, our portfolio is bound to be de-rated from time to time. But none of these events will stop people brushing their teeth or eating rice crackers. It's the higher beta sectors and the businesses that have no control over their destiny that will take a beating in downturns.

Indeed, we see our biggest challenge being to ensure that we are the first to pick up on the "emerging dominant consumer businesses". There are a number of consumer sectors across the region that are still tiny - be it supermarkets and fast food in India; beer in Vietnam; or convenience stores in Indonesia. We have our eye on several such businesses and are well advanced in negotiations to take blocks in one or two of them.
 
Benchmarks
We have done a lot of work of late on the issue of benchmarks. Our goal has been: (1) to prove that consumer stocks have outperformed in Asia, as they have in the developed world; (2) to verify that dominant consumer companies have done better than the consumer sector as a whole; and (3) to offer investors a way of measuring how we are performing. We won't be publishing the data but are happy to provide details to those that ask.

To this end we have created three internal indices: (1) an "Arisaig Asia Dominant Consumer Index" made up of the 54 stocks we regard as the leading businesses in the food and beverage, fast moving consumer goods and retail sectors - we own 20 of these; (2) an "Arisaig Wider Consumer Index" made up of all the listed businesses, large, mid and small cap, that make up this sector in Asia, of which, in our view, there are a total of 162; and (3) an "Arisaig All Comers Consumer Index" which includes other consumer-type sectors, such as education and health care - this adds up to a total of 463 constituents.

We have loaded the constituents of each of these three indices onto a recently launched "Alpha Bloomberg" software programme that works with data going back to 1st January 2007. The software calculates the performance of the indices on an equally weighted basis from the start of the sample period.

The conclusions of this exercise (see the attached table) support our central propositions. Over the last three years, the "Arisaig Asia Dominant Consumer Index" has significantly outperformed the FTSE Index (66.6% versus 16.5%), albeit as the latter is market cap weighted, this is not a strictly like-for-like comparison. Secondly, dominant consumer stocks have done better than both their smaller and more widely defined brethren over this period.

We have included in the table the performance of the MSCI Asia Consumer Staples and Consumer Discretionary Indices. Both have significantly outperformed the main market indices. By way of aside, it is worth noting that the MSCI excludes, on liquidity and market cap grounds, many of the best consumer names and yet includes a great number of pseudo consumer sectors such as plantations (20% of the Staples Index) and, in the case of the Discretionary Index, auto, textile and shoe producers etc.

This underlines why an "ETF" product in our space is a long way from being viable given how illiquid our stocks remain. The fact that we have cornered the free float in many of the key names further assuages any concerns we may harbour on this issue.
 
Sustainability

In our view, the Chinese should shoulder a large part of the responsibility for the failure of Copenhagen just as they should for the financial wipe-out of 2008. Their "one party" political system results in a "growth at all costs (to save our skins) mentality" and, as a result, distorted priorities, be it an inappropriate exchange rate or an unwillingness to have their carbon emissions verified. The next decade will be defined by the rise of China and its increasingly imperious strutting across the global stage.

Tragic though it is to say, questions of sustainability will become ever more important. As a business we take these issues seriously. We plan to become one of the first Asia-based fund managers to sign up to the UN's Principles for Responsible Investing (PRI) initiative. In practice this means: (1) putting our own house in order in terms of measuring our carbon footprint and organising appropriate offsets; and (2) incorporating the principles of the Environment, Sustainability and Governance (ESG) into our investment process.

This is more than just "bunny-hugging". Issues of sustainability can have a very real impact on the bottom line of consumer businesses. For instance, Coca-Cola has been involved in a high-profile, damaging row over the use of groundwater by its bottling plants in India, which resulted in plant closures and a significant loss of market share.

Food and beverage producers are particularly vulnerable to water scarcity issues. Although the direct manufacturing process in these sectors only accounts for about 10% of industrial water usage, the overall supply chain is extremely water intensive given that agriculture accounts for 70% of total global fresh water usage.

For example, it takes 16,000 litres of water to produce 1kg of beef, 900 litres for 1kg of maize and 140 litres for a cup of coffee. Incredibly, one litre of orange juice requires the input of almost 800 litres of water. Clearly water shortages can change the economics of any business at a stroke. Dairy companies in Australia suffered this fate in 2006 following severe droughts. One industry player termed it a "dry cancer". We expect similar issues to become an increasingly important part of the operating environment for many companies, especially in China and India.

For this reason, we are now investigating how best to integrate sustainability criteria into our analysis of companies, the aim being to use these findings to help management improve their record in this regard and, hopefully, avoid nasty surprises.

There is no reason to believe that there is a zero sum choice between preserving margins and preserving the environment. Energy efficiency is one of the most cost effective ways of cutting carbon emissions, and is usually achievable at a cost saving. Brazilian brewer, Ambev, one of the sector's most profitable operators, manages to produce one litre of beer with four litres of water. Smaller brewers in China, in contrast, consume 15 litres.

Fundamentally, sustainability is a question of making the most efficient use of resources - a cornerstone of any successful business. Admittedly, many of Asia's leading companies have yet to wake up to this issue. Those businesses that take the necessary steps early on will be best equipped to deal with the challenges that lie ahead. We will do our little bit to help in this endeavour.

 
ARISAIG PARTNERS
7A Lorong Telok, Singapore 049019 Tel (65) 6532 3378 / Fax (65) 6532 6618