19 Dec 2022
When flying in from Ireland to Heathrow there is often a great view of the second main financial centre in the UK, Canary Wharf. There are many high-rise buildings and One Canada Square, which opened in 1991, dominates the skyline and is the third tallest building in the UK. Developed on the site of the former West India Docks, it now contains around 1.5m square metres of office and retail space and takes in the Isle of Dogs. This gritty but once vibrant area had fallen into decline after cargo became containerised and its port industry began to decline in the 1960s with all the docks closing by 1980. The British government adopted policies to stimulate redevelopment of the area and it is now an important part of London’s Financial Services industry.
I had an opportunity to catch up with one of the UK’s most experienced Asian equity managers, Jason Pidcock, who runs the Jupiter Asian Income franchise which has a transparent and easy to understand approach holding around 30 dividend paying names in the region, but only holding businesses that can capture growth and are often world leaders in their field. The fund is primarily large cap orientated so holds highly liquid shares. Management teams and business models have been proven over many cycles. Companies offer value in that they pay an attractive and usually growing dividend, while having characteristics that should deliver capital growth over the medium term in addition to the initial yield.
Jason Pidcock has been very cautious on China, fearing the political changes in the country may stifle debate and the move to a more state controlled system may limit the ability of entrepreneurs to grow private sector companies. India has been added to the fund this year with HDFC Bank a relatively new addition. HDFC is the largest private sector bank in India with over 70m customers and around 10% market share. It has 6,500 branches split 50/50 between urban and more rural areas. It is a very well managed bank with sector leading return on equity and strong cost to income ratios. It also has an extremely strong balance sheet with a loan mix diversified between retail, commercial, rural banking, and corporate banking. The company continues to grow its market share in an economy where banking remains highly under penetrated and has strong prospects for dividend growth and capital appreciation over the medium term.
One of the key contributors for the portfolio this year has been its energy holding Woodside Petroleum which has benefitted from acquiring the energy assets of BHP. Woodside is the largest holding in the portfolio and has 90% of its assets split between Australia and the Gulf of Mexico.
The fund has been a strong performer within its peer group and its focus on higher quality businesses, many of which are internationally orientated, has worked well in recent years. The fund with its yield discipline has avoided non-profitable companies. With the appointment of Sam Konrad, the succession issue is being addressed. The fund has developed a strong record under Jason Pidcock and is especially suitable for investors looking for higher levels of initial income which can grow at least in line with inflation.
I also had a chance to catch up with New York based Basak Yavuz virtually, together with London based Mithran Sudhir on the Goldman Sachs Emerging Markets Equity Portfolio Fund. The fund has a strong long-term record but has suffered in 2022 from the underperformance of the Chinese equity market with tech regulation and a downturn in the property market hitting returns. China has also seen its economic recovery slow down through its zero Covid-19 policy. Sentiment has now become very negative to China and Basak believes that there are opportunities with the fund overweight in the China domestic ‘A’ share market which is less well owned by foreign investors and therefore less vulnerable to negative sentiment.
To reflect the more difficult regulatory environment, the fund has reduced its exposure to e-commerce names and increased holdings in commodity and value type stocks together with industrials. India is now benefitting from its reform programme and ICICI Bank is a favoured position. The portfolio has been rebalanced to a new environment of higher inflation with higher energy costs and there is more optimism on Brazil after the election with hopes that President Lula will replicate his more moderate first presidential term when the focus was on improving economic growth rather than radical policy making. Brazil hiked interest rates early so is now coming to the end of its monetary tightening cycle. This is a fund with recovery potential going into 2023.
Another major market of the world that can be overlooked by investors is Japan which has been slow to exit from Covid-19 restrictions, but again has recovery potential in 2023. M&G brought in a team of experienced Asian equity managers in 2019 who look at stocks on a Pan Asian basis. Lead manager Carl Vine lived in Asia before returning to the UK to work. The investment process comes from a long-short background and tries to take a commercial approach to investment and risks with stock picking the driver of returns. Stock picking looks to balance creativity and conviction and utilises mental modelling to assess what risk is priced into current share prices. Favoured names have independently verifiable data points to ensure companies remain on track to deliver on the investment thesis identified by the Japan analyst team.
Fund manager Carl Vine believes that the critical elements of stock picking are conviction and creativity and looks for risk which is mispriced in stocks. They argue that when investing a person pays a price for future risk. The mental modelling aspect of the process looks at what companies do rather than say that is important or crucial about the business. Companies are sometimes reluctant to identify the key performance indicators that drive their success or failure, so Carl and his team look to identify these and work out what the drivers of these drivers of a business are. An example of how this works in practice is Nintendo which is within the portfolio today and has historically had two separate franchises, handheld and game consoles. Game consoles compete with PlayStation and Xbox. Nintendo’s version has had a chequered history in terms of market success. Nintendo changed its franchise by introducing a new dual-purpose console which was also a hand-held device and could, for example, be used on a train. The current business cycle is seeing Nintendo perform differently and Carl recognised the significant potential upside in the stock as it has increased customer spend from the old handheld $20 to $70 for the new console. The price point and economics of the business were changed by this innovative product and, despite it being well covered by analysts, few investors worked out that its future would be different from its past. In summary, Carl and the team look to deploy ways to look at stocks in a different way by asking the right questions and also looking to achieve large positive skews in the distribution of returns.
The team also take an active approach to company engagement and have appointed Dr. Ryohei Yanagi, voted best CFO in Japan’s Healthcare sector by Institutional Investor for four years in a row, as an exclusive consultant in this role. Dr. Yanagi was one of the drafting members of the Japanese version of the Kay Review which evolved into a Japanese corporate governance code and Carl and the team believe better governance results in a company being more effective stewards of capital, improving the risk/reward in stocks held.
Carl and his team took over the Japanese mandates at M&G just over three years ago and have delivered strong performance numbers since then by only buying companies where the risk reward is favourable. The team, through identifying key drivers of stocks held, ensure that they do not deviate from the original investment thesis when investing in a company and the fund can be viewed as a core holding within Japanese equities.
Travelling around London between meetings on foot allows time for sightseeing. The old fruit and veg market of Covent Garden has been lit up with its famous Christmas decorations, with the areas main piazza transformed into a magical Christmas village with food markets and pop-up retail stalls.
The first historical record of Covent Garden dates back to 1200 when it consisted of fields and was owned by Westminster Abbey and in 1540 the land was granted to John Russell, 1st Earl of Bedford, whose descendant was to transform it into an innovative new London neighbourhood a century later. It was the first ever experiment in urban planning in London and situated the first public square in the country. The original piazza was a watershed in English architecture and wealthy families moved into the arcaded houses designed to the north and east. After the Great Fire of London in 1666, the entire square was devoted to the selling of fresh fruit and vegetables and Covent Garden became London’s largest market. In 1828, the neo-classical market building was commissioned, but by the 1970s, the site had outgrown its magnificent venue. Plans to demolish and re-develop Covent Garden were stopped following a vigorous campaign by local residents and in 1980 Covent Garden re-opened as Europe’s first speciality shopping centre after a five-year renovation period. It is divided by the main thoroughfare of Long Acre. The south contains the central square with street performers and a large Christmas tree. Covent Garden is well worth a visit at any time of the year, but at Christmas it’s a magical venue for young and old alike. On the way back to the hotel I was able to get a last look at the Regent Street Christmas lights which attract throngs of shoppers each year - a fitting way to end the final trip of 2022.
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