The golden rules for equity investing: do they still hold true?
3 Aug, 2021
Aberdeen Standard Investments
Investment management is a business in which experience matters. Each cycle, crisis, boom or bust helps investors learn and prepare for the next one. A decade ago Hugh Young, manager of Aberdeen Standard Asia Focus investment trust, sought to distil his experience into ’10 golden rules for equity investing’ to help investors benefit from the wisdom of his thirty-five year career. In a recent fireside chat, he revisited these principles, asking whether they hold true today as the world grapples with the pandemic.
The principles emerged from Hugh’s experience of managing capital across the globe. These 10 golden rules, which Hugh says have emerged as much from his mistakes as his successes, are:
Demand fair treatment of shareholders
Be mindful that companies are about people, not assets
Remember, balance sheet strength is critical
Understand what you’re buying
Be wary of over-ambition
Benchmarks are just measuring devices
Take advantage of irrational behaviour
Do your own research
Make sure that any competitive advantage is sustainable.
Hugh admits: “They’ve often come from things we’ve missed, things we had not focused on. They evolved over time and the finer detail continues to evolve, even if the principles themselves remain the same,” he says.
While the pandemic has been unique in many ways, for financial markets, it shares many of the characteristics of previous crises. Hugh says: “In detail, crises can be very different. In overall effect, however, they bear remarkable similarities. At the depths of despair, it’s often the time to be closing one’s eyes and investing, much the same as extremes of exuberance are often time to take a bit of money off the table… Broadly, crises tend to be similar, even if in detail they affect different sectors.”
As such, many of the principles that have guided the Aberdeen Standard Investments investment philosophy have proved important during the crisis. Balance sheet strength, for example, is “the rock on which businesses are built. It can be difficult to appreciate that until the waves come.” In many cases, Hugh says, a strong balance sheet has been the difference between survival and failure. It has also allowed good companies to continue investment and emerge stronger as their competitors have struggled.
As the world recovers, he believes the principle of ‘people not assets’ will help companies make the most of opportunities: “It’s easy in our business to distil everything down to numbers and avoid people or cultural issues as too difficult. We’ve held companies in our portfolio for 10, 20 even 30 years. We understand the motivations of the people behind the companies and their culture. That’s exceptionally important in long-term sustainability and those companies that emerge as winners.”
It is a similar consideration for corporate governance and sustainability. Hugh says that governance has improved vastly since he first started investing in Asia. However, it remains a young market and investors need to be wary. Asset management companies in general, and Aberdeen Standard Investments in particular, have become a lot more active over the years, adopting long-term investment principles and speaking out on issues such as governance.
Companies will need ambition to emerge from the crisis. However, he still believes investors need to guard against management teams that appear to be over-diversifying, moving into areas where they have no expertise. “It’s understanding the people, the talent and the skills behind this diversification.”
Equally, the pandemic has accelerated change and investors need to be alert to areas that are potentially challenged by new technology. While Aberdeen Standard Investments is fundamentally a long-term investor, believing that company management teams need to be given time for their ambitions to be realised, Hugh also emphasises the importance of staying on top of change.
A global perspective is useful Hugh says: “If you focus on one part of the world, the danger is that you miss what’s going on elsewhere. That’s what we’ve found useful about being joined up globally. Often you have warning bells – from the US or Europe, for example – that a business you thought was great in Thailand or Korea is in fact facing challenges from elsewhere.”
Technology is now around one-third of the Aberdeen Standard Asia Focus portfolio. There remains plenty of activity among Asian small cap technology companies with a buoyant IPO market and abundant innovation. This includes companies such as Momo, the “Amazon of Taiwan”, now the largest holding in the portfolio. Hugh says this has been one of the major beneficiaries of the pandemic with an acceleration of trends such as internet shopping.
The risk to markets from the virus may be waning, potentially prompting a focus on more traditional risks – and there are plenty of them: the reversal of fiscal and monetary stimulus, higher interest rates, inflation, geopolitical tensions. “There’s a lot to worry about, but, you could be paralysed and do nothing and keep your money under the bed. Instead we look thoroughly at companies and try and find those businesses that can navigate these risks,” Hugh says.
“Companies have survived the crisis better than we would have expected. Many have acted very responsibly. We are finding new ideas all the time, with small cap companies doing some great things. We still consider this the most exciting part of the market.”
Hugh emphasises that he is still learning from every twist and turn of markets. He says: “We want to identify companies with as wide and deep a moat as possible. As we know from history, moats can be breached, humans are ambitious and when they see strong returns, that’s where they go in to attack. Our process is as much about trying to avoid mistakes as picking all the winners.”
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