Nigel Cayzer looks back on 20 years as Chairman of Aberdeen Asian Smaller Companies Investment Trust PLC.
In 1995, Aberdeen Asian Smaller Companies Investment Trust PLC was an idea that recognised the economic powerhouse that was emerging in Asia. The stock markets of the region were evolving and there was a huge opportunity to invest in companies that were focused on the local markets, had good management, strong balance sheets and excellent prospects.
I was fortunate to know Martin Gilbert, the CEO of Aberdeen Asset Management, as I had acquired an insurance business from Aberdeen in the early 1990s. At the time, Martin and his then small team were based in Smithfield Market, London. I was impressed by his decisive way of conducting business and his focused pursuit of investment returns for the clients of, what was then, a modest sized investment management business. It was, therefore, a very pleasant surprise when he asked me to become a director and then (two hours later) the Chairman of this, as yet, unformed company.
I was delighted to accept this role as Aberdeen Asian Smaller Companies Investment Trust had a very clear strategy in an area where there was great opportunity. We raised a modest £35 million at launch from predominantly institutional sources such as pension funds and the large life companies. This strategy has been amply rewarded with £35m growing to over £400 million at the start of this year.
In my, now, quite long and varied experiences of fund management, there is one lesson that I would commend and that is clarity and consistency of purpose. If a fund manager has a very clear understanding of what he wishes to achieve and is prepared to invest the time, the research and the patience to see the strategy through to its conclusion with little reference to the gyrations of the markets, then the investment management firm and its clients will be rewarded.
My own career had started by working for an old established merchant bank, who, from their offices in London, had lent money to the film industry. I used this experience to found my own business in Los Angeles insuring the completion of films throughout the world. Having sold the company in 1989, I returned to London to continue working in the world of insurance and investment management.
In 1986, I became a non-executive director of our family business, Caledonia Investments. Also, through contacts I had made in the insurance business, I had been asked by the Government of Oman to start the first investment fund to invest foreign money in the closed stock markets of the countries of the Gulf Cooperation Council. This led to the creation of the Oryx Investment Fund and its sister companies Oryx India Fund and the Oryx International Growth Fund. I remained Chairman of the Oryx Fund for 14 years, when the greatly enhanced funds were returned to the shareholders and I remain to this day Chairman of Oryx International, a highly successful company invested in special situations and managed throughout this period by Christopher Mills of Harwood Capital, previously JO Hambro.
Clear and consistent strategy
Hugh Young and the Aberdeen team in Singapore have always had a very clear and consistent strategy that is based on the strength of basic research. A characteristic of this is its emphasis on what the industry calls ‘company visits.’ To outsiders, this may give a slightly misleading impression of factory visits and hard hats, inspecting the production processes. While this may be part of the process, much of it involves detailed and forensic enquiries from the target organisation’s management and finance directors. Notes from these visits are carefully logged and re-examined during the multiple repeat visits both before investment, after deciding not to invest even and then for the few that make it through the screens, the resulting companies that make it into the portfolios.
I have also had a very long held view that the board has to be very careful to allow the manager to manage and to avoid any second guessing about stock selection. While the board receives very detailed reports on company visits as part of the board packs, this is sent for information only and as background so an informed discussion can take place over the broad direction of strategy, the setting of the level of gearing together with the myriad of details that go into the successful running of an Investment Trust. This allows the board to praise good performance while asking for explanations in the event that investments have not met expectations.
At an investment level, good corporate governance has become a key factor in helping managers decide on which companies make it into the portfolio. We have seen over the last 20 years a huge improvement across the markets in which we invest. One of the arts of a skilled manager is to avoid making bad decisions. These are easy to make, especially in the markets of Asia Pacific where minority shareholder interests can be ignored as many firms in Asia are owned by dominant families or governments and this can distort the interests of the shareholders as a group.
Much of the efforts of Hugh Young and his team when looking at companies is to see through and beyond the financials as to the types of organisations they are and how they manage their businesses in the interests of the owners. In many ways, the investment style of Aberdeen resembles those of private equity investors; they do not look at companies as tradable stocks but more as businesses which deliver sustainable earnings and growth. And I think that is the right approach as over the long term that is what investors seek: sustainable, reliable companies that can grow and offer returns over the longer term. Traders and speculative investments contribute volatility which does not build value for the longer term.
The effects of changes in Asia
The story of smaller companies is mirrored with changes that have affected the Asia Pacific region and its economy too, and the two decades have witnessed enormous changes that have been driven from outside Asia. There is still close correlation and interdependency with the developed worlds, but Asia learns well from its mistakes. The recent ups and downs in China is also affecting businesses in the region in its own way as capital flows out of the region have depressed prices and punished local market performance in sterling and dollar terms. This can challenge the belief of fundamental investing in particular, as the larger macro events, such as quantitative easing, can disrupt normal measures of valuation.
But beyond short term aberrations of short-term performance, as I have stated earlier, I think the important aspect from a fund management perspective is that of clarity and consistency of process. The worst thing a manager can do is change horses in midstream and abandon the tenets that underpins their philosophy. If the history of this company had anything to tell, it is that mean reversion will return and good companies will out and be revalued again if patient.
Twenty years of transformation: Asian smaller companies from 1995-2015
To celebrate the twenty years of Aberdeen Asian Smaller Companies Investment Trust PLC, we commissioned a history booklet reviewing the two decades. It is a story of successful investment in good companies, with strong balance sheets and prospects. Copies are available to Bulletin readers at no cost; please complete the reply card to receive one.
The next twenty years will bring its own challenges but Asia is still a hive of enterprise and growth. The strategy which Aberdeen has pursued so successfully for the last twenty years is as relevant today as it was in 1995. While other elements will change, I am confident that this approach will deliver excellent returns to the investor who is prepared to take a long term view.