Aberdeen's Asia chief defends antipathy to A shares

Hugh Young, Aberdeen AM's Asia head, says he remains averse to investing in China A shares because of what he sees as poor-quality firms. But he admits that sitting out the equity boom has hit returns.
Aberdeen's Asia chief defends antipathy to A shares

Aberdeen Asset Management has defended its continued antipathy to China A shares, despite seeing Shanghai equity prices more than double over the past year.

The asset manager’s Asia chief cited perceived poor quality of companies in the mainland A-share market, but said that sitting out the boom has hit its returns.

Meanwhile Aberdeen’s CEO has admitted that the fund house’s overall performance has been disappointing recently, but maintained his commitment to value stocks.

At a recent briefing in London, Hugh Young, Aberdeen’s Singapore-based managing director for Asia, conceded that sitting out the A-share boom had been frustrating.

“We have five or six mainland colleagues spending a lot of time in China, which is quite fruitful, but also quite frustrating from sorting out the good from the bad,” said Young.

But Young also admitted that Aberdeen’s value-oriented approach has had a detrimental effect on its returns in the momentum-driven market. Its Chinese equity fund, which invests only in non-mainland-listed companies, has returned only 5% over the past year, underperforming its MSCI Zhong Hua benchmark, which rallied 21% over the same period.

Some of its largest holdings, which Young justifies as having good corporate governance, value, and strong exposure to revenue from China, have been left out of the liquidity-rich rally. These stocks include including the likes of Jardine, Swire and AIA.

The poor performance has also been frustrating for some of Aberdeen’s investors, with Young admitting that they have questioned why its funds have not been riding the boom, although he was quick to say that “it’s not how we invest”.

“We try and educate our investors, before they give us money, as to how we invest and we do our homework and make sure our investments will be long-term winners over the 10-20 years,” he said.

However, Aberdeen has gone through worse periods of performance, which typically occur during rising markets that are driven by momentum with hot themes such as the dot-com bubbles of the late 1990s.

Young noted that the last time Aberdeen’s Chinese equity fund lagged the benchmark by as much was in September 2006, although that was recouped six months after the peak.

“Will that happen this time? One doesn’t know, but should the rational investor be dabbling in some of these dangerous markets – no I don’t think they should,” Young said.

“It’s a tough time for quality fundamental investors such as ourselves. We have not had a particularly good time but that is something we can guarantee to happen. Will we get through? Yes we will. We are very much a tortoise investor instead of a hare.”

Questions remain over the quality of some mainland Chinese companies. One problem is that a large chunk of listed-companies in China remain state-owned, leading to questions over shareholders’ control.

Likewise, there have been problems with some smaller private companies such as Hanergy Thin Film Power, the Hong Kong-listed mainland renewable energy group, which has seen unusual trading patterns over the past few months and gained the attention of the city’s Securities and Futures Commission.

The position taken by Aberdeen is not uncommon amongst UK fund houses, with M&G having previously cited corporate governance in China as one of the key reasons to avoid direct investment in the country.

Speaking separately at the recent London briefing, Aberdeen chief executive Martin Gilbert admitted that the fund house’s overall performance has not been strong recently, although he said he remained committed to its philosophy of investing in value stocks.

“We are performing really not well at the moment … rubbish floats in this liquidity market, so if you are a quality-driven asset manager like ourselves, you’re really going to struggle,” Gilbert said.

“We are struggling at the moment in terms of quality companies that have been left behind, but when the shake-out comes, we should outperform.

“The key thing is that in markets like this, you don’t have style drift. Whatever you do, you must not cut at the point of maximum pain and go for growth stocks or liquidity-driven stocks that are going up.”

From the six months to the end of March, the British fund manager, which prides itself on its Asia expertise, saw net outflows of £11.3 billion ($17.5 billion), compared to £8.8 billion over the same period a year earlier.

Despite having been left behind in the recent China rally, Aberdeen has profited handsomely from its India investments. Its Indian equity fund returned 34% during the 2014 calendar year, outperforming the S&P BSE Sensex index’s returns of 30% during the same period.

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