Richard Evans, co-fund manager of Martin Currie's $445 mn Asia Pacific fund, talks about the peculiarities of the markets he works in and how he chooses his investments
Over-borrowed western consumers, a plunging stock market plus a rocky property market – residential and commercial – means safe havens are in demand. Could Asia be one? Compared with the current occidental disarray, Asian companies are often profitable, carry little debt and look set to gain from a fastgrowing and increasingly status-conscious middle class. Follow this argument to its logical conclusion and you could even argue that some Asian economies are, or are close to, decoupling entirely from the US. In other words: US recession? What do we care?
It’s an attractive idea, but not one Richard Evans has signed up to fully yet. Evans is co-fund manager of Martin Currie’s $445 mn Asia Pacific Fund – up almost 60 percent by the third quarter of 2007 against the IMA Asia Pacific ex-Japan benchmark. ‘At country level, corporate balance sheets are very healthy – much less fragile than they were in the past,’ he explains. ‘Even if we do get a slowdown in the external conditions, sensitivity is much reduced.’
Sensitivity is the word. Oxford-educated Evans, who read Oriental studies and is a fluent Japanese speaker, says the aftermath of the 1997 Asian crisis, when several companies overloaded on debt and eventually defaulted, is a trauma that still runs deep more than 10 years on. Taking on risk and debt is a real issue.
‘Often we have to go in and say to a company, You’re carrying a lot of cash and you’ve got a lot of non-core investments we want clarity on. Why not pay cash back to shareholders?’ Evans says. ‘If companies are carrying $2 bn-$3 bn in cash, that dilutes their return on equity. We don’t want overborrowing, but running down the cash can be highly beneficial.’
When it comes to governance, many Asian companies are now worlds away from their dismal showing of 10 years ago. ‘People are paying more attention to good governance and investor relations,’ Evans notes. ‘In the past 10 years, the improvement has been enormous in terms of quality of data consistency. Large companies, especially IT companies from Korea and Taiwan, increasingly have a good grip on governance. TSMC, for example, has done a very good job at addressing minority shareholder rights issues. On the other side of the coin, there are companies purely paying lip service to the issue.’
Family affairs
Part of the problem, says 35-yearold Evans, is ages-old: persuading family-controlled companies to stop dipping into balance sheet cash for their own ends. ‘There are some great companies out there but with terrible balance sheet management,’ he explains. ‘We challenge this all the time, but you have to have some sensitivity to the controlling families. Those people may have built up the business over 30 years and still behave like owner-managers, even if they’re minority shareholders.’
Evans’ interest in balance sheet fundamentals certainly applies to direct contact with IROs. ‘We want to know how cash is used, the intentions of non-core investments versus core investments and what constitutes a sustainable rate of investment,’ he says. Companies that fail to generate reasonable cash flow – or provide a detailed explanation about it – simply don’t make it onto Evans’ map.
But even highly successful companies with plenty of liquidity can create self-inflicted problems if they’re tempted to stray from their core strengths. Evans cites Korea’s Posco, the world’s fourth-largest steel producer, which recently announced a 20 percent fall in Q4 profits following a plunge in stainless steel demand and rising raw material costs.
‘It’s a fantastic company, very efficient, but it generates a lot of cash as a result, and in the past it has diversified into areas like bio-tech and telecommunications,’ Evans says. ‘Some of these diversifications have been unsuccessful and damaged investor trust. It’s a shame because the core business is so good.’
Another company Evans rates highly is Hana Tour from South Korea, a business run by its owner manager that has steadily built up a strong international tour business for South Koreans. ‘It’s modelled on how Japanese tours were organized 30 years ago. There’s a huge demand for it, but in a safe environment as there’s still reluctance to travel on an independent basis. Hana has really led the industry; it’s been done with a balance sheet under control, no under-gearing and employees being rewarded with share options – reward via equity is not commonplace in Asia.’
Going up down under
Despite being some distance from the Asia-Pacific region, Edinburgh-based Evans and his team undergo 500 or so on-site company visits a year – highly intense forays packing in up to six meetings a day.
One region Evans and his team increasingly rate is Australia. ‘Many mangers often look at Australia only as a place to hide when things get rough,’ Evans comments. ‘We don’t. Australia has a very interesting pool of businesses, way beyond resource stocks. There are pharma and oil services, with many other sectors having outstanding franchises. Australia also has a nice combination of quality earnings going back into the business to be invested. And it has a superannuation scheme where there is mandatory reinvestment of 9 percent of employees’ pay back into their own pension fund.’ This latter move, introduced by the Paul Keating Labor government in 1992, provides a virtuous circle: good cash flow, good dividends and a support for turnover.
Phenomenal growth
But it’s the Asian economic growth story that really compels: China alone creates 30,000 millionaires every year, and countries like India, Taiwan and South Korea aren’t far behind. Lurking under this furious activity and wealth creation, though, is a more troubling side: huge wealth inequality exerts massive strain on the system – and dealing with government can drown you.
Look at the difficulty Lone Star Funds, a private equity operation that bought the Korea Exchange Bank in 2003, is still experiencing, says Evans. ‘There have been some very bad-tempered discussions with the government that are still going on,’ he points out. ‘It’s one thing seeing the value in a business, and another digging it out. Government controls and bureaucracy can drive people mad! You have to pick with care.’
