Ethical investments

Expectations for US interest rates tightening cycle to come to an end seems to have turned around sentiments somewhat since last month. Despite potential for higher rates in Japan (which in my view is a laggard in any event), investor’s expectations are for rates in general to be peaking, which has provided a little bit of a relief rally for markets in general for July. Although the Fed has been concerned with inflation, deflation in my view, should be a bigger potential concern, with inflated asset prices (house prices) ready to burst. Given how high the US economy has flown (consumers are leveraged to their eyeballs in debt), the risks are significantly higher for a hard landing than a soft landing. A 30% retracement on 100 points versus 1000 points may be the same in percentage terms, but 300 points is going to hurt more than 30 points. The bigger you are, the more you have to lose. It’s simple mathematics.

Although we invest on a bottoms up basis, it just doesn’t hurt to be invested in the right broad themes. If I am wrong, and US economy soft lands, then we are likely to underperform funds with higher beta than us, but will still ‘rise with the tide’. If we are right, we could do a lot worse than holding exposure to companies earning their keep from Europe/Asian domestic economies. Either way, I’m still a US$ bear and will probably be for the next few years. As such, we have tried to ensure that the fund invests in small/mid cap names lying within the following broad themes:-
• High(er) proportion of earnings from Europe/Asia vs US
• Companies moving from OEM to ODM to own branded products, or companies with already established brands in Asia/Europe
• Companies importing in US$ and selling domestically in Asia/Europe

As I had noted in an earlier memoir, I believe strongly in the power of branding. The better known the brand, the more resilient it is. A good example is my old firm, Barings. Barings research was so well known in Asia in the early 80’s that even today, 25 years on, after going under and being bought over, companies in Asia still know the name, despite the fact that the name was dropped several years ago. Despite having been in Thailand for only a short period of time, the recognition for the Rotiboy name is enough to secure prime locations (otherwise not available to a no name bakery), secure favourable lease terms from landlords and price its buns at a premium to competition. How do you put a value on that?

Ethical investments
I always believe the fund’s characteristics and personality is determined as much by the type of investments it holds as the investments it doesn’t. Most investors will only see the investments that actually make it into the portfolio but not the investments that did not, despite offering perhaps similar or sometimes even better risk return characteristics as those that made it into the portfolio. Having clocked up 182 company visits across the region year to date, there have certainly been some tough choices.

Although we do not preclude such investments in our prospectus, I believe we still need to draw a line on some investments. We DO want to make money, but not at any price.

Despite some ‘obvious money makers’, we have passed on some of these investments partly because we did not feel that the businesses were ‘ethical’. How do we define ethical in this case? For me, I have very simple guideline, it’s something that I wouldn’t be proud telling my kids I did. And from the fund point of view, we invest in the business, not the shares, so we better be proud of the businesses we invest in. However, for someone who likes to dice with vice, give me a call, I might have an investment you might be interested in, 5x PER, 100+% growth over next couple of years (and no, it’s not a private equity investment in Bangkok)…otherwise, you’re very welcome to put some (more) money into our fund. At 7x FY06 vs EPS growth of 30%, we may take a few 1-2 years more to achieve the same returns, but at least we’re legal.