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
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
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
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-toowilling
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:
target businesses which could grow and deploy capital
without diluting returns;
break from the confines of a market-index construct,
recasting risk as being a diminution of shareholder value
and permanent loss of capital;
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
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:
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
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
* 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.