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Arisaig Asia Diary
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December 2009
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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. |
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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. |
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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. |
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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. |
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ARISAIG PARTNERS
7A Lorong Telok, Singapore 049019 Tel (65) 6532 3378 / Fax
(65) 6532 6618 |
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