ALTU story - The concept

29 May 2019

Asia’s role as an economic powerhouse is well established, so why does the stock market have such a chequered track record when it comes to delivering investment returns that reflect this growth?

Stock market indices have struggled to match Asian growth

Over the last few decades, Asia ex Japan economies have sustained higher growth than major developed market economies. For example, the 20-year annualised nominal GDP growth of Asia ex Japan is 10.7%, against 3.3% for the G7 nations*. While future growth is unlikely to be at the same pace, the region is expected to continue to grow at a rate comfortably in excess of that of the G7. On the face of it, investors might be somewhat surprised that high economic growth, combined with the operating leverage many businesses possess, has not resulted in a higher total return from the stock market over most periods.

However, looking at the 10-year annualised total return of the MSCI AC Asia ex Japan Index in Chart 1, in most periods the index has underperformed nominal GDP growth. This is hardly reflective of a region brimming with opportunity.

Chart 1. Nominal GDP versus the market (rolling 10-year annualised returns)

Past performance is not a guide to future returns. GDP data is subject to revision and historic numbers may change.
Source: Martin Currie, and IMF World Economic Outlook over periods shown to 31 December 2018. US$ GDP is based on the data published by the IMF in October 2018. Market is the MSCI AC Asia ex Japan, figures provided include the re-investment of dividends.

Bridging the gap between growth and returns

This disconnect between nominal GDP growth and stock market returns was the basis for launching ALTU; our objective was to create a strategy that would enable a clearer translation of nominal GDP growth into the investment returns we deliver for our clients – and one which delivered these returns with reduced volatility compared with the broader stock market.

There are many reasons for the stock market’s disappointing record in Asia, notably a persistent dilution of shareholder value. This is not only as a consequence of excessive share issuance, but also poor corporate capital allocation. Barriers to entry in many industries have been lowered by an abundance of capital, supplied by all-too willing lenders and investors. With companies free to invest, seemingly without limitation, marketplaces have tended to crowd quickly, with returns undershooting expectations. What might be great for economic growth and employment, is not necessarily so for the investor.

Over the last few decades, Asia ex Japan economies have sustained higher growth than major developed market economies.

When designing a new approach, it was clear any strategy needed to do three things:

  1. target businesses which could grow and deploy capital without diluting returns;
  2. break from the confines of a market-index construct, recasting risk as being a diminution of shareholder value and permanent loss of capital;
  3. take a genuinely long-term view on each investee company’s development prospects.

Taking a different approach

ALTU’s aim is to be a long-term owner of quality businesses which are genuinely able to grow their value over time.

Its premise, which has remained unchanged since inception, was founded on our view that companies generating above-average returns on capital, with modest amounts of leverage, provide a solid foundation to build a long-term investment strategy.

ALTU’s aim is to be a long-term owner of quality businesses which are genuinely able to grow their value over time.

There were a number of fundamental elements which we believed would provide long-term investor with an attractive return profile:

Growth potential

Businesses ideally have organic growth potential, so free cash flow can be reinvested back into the business without diluting returns. Where a business generates more capital than it can sensibly re-employ, we value disciplined use of this – either retention of a healthy balance to give management flexibility to make sensible acquisitions that don’t expose shareholders to excessive risk, or returning excess capital to shareholders.

Valuation

Overpaying for an attractive business destroys shareholder value – so purchase prices must compensate investors for a range of possible outcomes.

Genuinely long-term focus

Much of the ultra-competitive investment industry’s energy, we believe is focused on trying to accurately predict near-term business trends and earnings outlooks for the next three to 12 months. The stock market’s excessive short-term focus often results in meaningful mis-pricing of the ability of some companies to enjoy an extended period of high returns.

With this premise, we felt we had a powerful proposition for investors, more reflective of the Asian opportunity, which now needed to be tested in the marketplace.

* Past performance is not a guide to future returns. GDP data is subject to revision and historic numbers may change.
Source: Martin Currie, and IMF World Economic Outlook over periods shown to 31 December 2018. US$ GDP is based on the data published by the IMF in October 2018. G7 countries are Canada, France, Germany, Italy, Japan, United Kingdom, United States.