Hugh Young: 10 golden rules for equity investing - Do they still hold true?
As Hugh Young, manager of Aberdeen Standard Asia Focus PLC, marks 35-years of managing Asian equities, he discusses whether his 10 golden rules for equity investing still hold true today, even as the world grapples with the ongoing Covid-19 pandemic.
These 10 golden rules, which Mr Young admits 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
- Think long term
- Benchmarks are just measuring devices
- Take advantage of irrational behaviour
- Do your own research
- Make sure that any competitive advantage is sustainable
Experience matters in investment management, with each crisis teaching something new about markets. The 10 golden rules I laid out a decade ago have stood the test of time during this latest turbulent period. 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, a strong balance sheet has been the difference between survival and failure. It has also allowed good companies to continue to invest and emerge stronger as their competitors have struggled.
Investment management is a business in which experience matters. Each cycle, crisis, boom or bust helps investors learn and prepare for the next one. While this pandemic has been unique in many ways, for financial markets, it shares many of the characteristics of previous crises. 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.
The risk to markets from the virus may be waning, potentially prompting a focus on more traditional risks such as the reversal of fiscal and monetary stimulus, higher interest rates, inflation and geopolitical tensions.
There is a lot to worry about, but, you could be paralysed and do nothing and keep your money under the bed. Instead, we look through at companies and try and find those businesses that can navigate these risks. 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.
A global perspective is useful. 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.
The recovery continues to throw up exciting opportunities among small cap companies but that companies will need ambition to emerge from this crisis. However, he stresses that investors will need to guard against management teams that appear to be over-diversifying and moving into areas where they have no expertise.
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, it is important to stay on top of change.
An example of this is how technology now accounts for around one-third of the trust’s 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. This has been one of the major beneficiaries of the pandemic with an acceleration of trends such as internet shopping.
As the world recovers, it will be the principle of ‘people not assets’ that 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 have 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 identifying those companies that emerge as winners.
I am still learning from every twist and turn of markets. 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.