How Invesco kicks the tires before investing
Equity funds sometimes seem all too similar, but differentiation can be sharpened through investment process and philosophy, said Jalil Rasheed, investment director and head of the Singapore office for Invesco.
Rasheed, who joined Invesco in 2013 after a long career at Aberdeen, has managed the Invesco ASEAN Equity Fund since August 2014. Recently, he explained his investment approach to Fund Selector Asia.
The fund uses a long only, bottom up investment strategy, working with a concentrated portfolio of 38 positions. A common theme in the portfolio is to have a bias toward companies that generate recurring income, so construction and commodities businesses, for example, tend to be avoided.
"We need to be able to foresee what earnings will likely be in three years time."
Technology runs in cycles as well, and they are hard to predict, he added. However, one investment is in a company with recurring software maintenance for the financial industry, which has earnings from royalty licensing.
Within the universe of ten ASEAN countries, he has a preference for Singapore, Indonesia, Thailand, Malaysia and the Philippines. These five, plus Vietnam, he considers investible.
"We continue to believe that domestic consumption remains a key growth driver for the region," Rasheed wrote in his most recent research note. "Trends such as greater focus on leisure activities; increasing brand awareness and growing consciousness about healthcare are all key drivers of consumption in the ASEAN region."
On the ground
There are 40-odd equity funds from a variety of offshore and Asian fund houses that specifically cover ASEAN, according to FE data. But Rasheed, who works with two analysts, believes his team's on-the-ground analysis of potential investments is a differentiator.
The team uses a research template to look into company financials, getting an idea of expectations for the next three years. After gathering the numbers, they then talk to management to understand their long-term strategy.
"We're most concerned about expectations for the next 3-5 years. Do they have the right management, people and money to realise plans? Is management incentivised to do it?
"We ask what is the motivation keeping you in this job for ten years, what drives you?"
They even ask about management salaries, which in Asia can be a sensitive issue, he said. "We explain we are long-term investors, we don't exit investments much, and we'd like to be seen as partners."
In Asia, on-the-ground verification of a prospectus can be valuable when assessing a potential investment, and Rasheed said he often goes on-site and looks at operations.
In Indonesia, for example, he learned about a company's palm oil operations by watching the process from tree to refinery and comparing that to how other plantations do it. A team member was recently in Cambodia and Laos to look at an investee company, a cement maker from Thailand with operations in those countries.
In addition to management, they meet the owners, who could be family members with influence but with no executive role. They also try to meet with suppliers and competitors as well as regulators. In Asia, regulators usually have a more direct impact on businesses than their counterparts do in developed markets.
"Even though we are a minority investor, we consider ourselves a business partner. We're taking the view that we will hold the stock for a long time, maybe five years and beyond. So we trade less than others and our costs are lower and the fund is fully invested at all times. Every time you trade, there are execution costs, trustee fees, custodial costs -- all back office costs you don't see."
Out of 3000-some companies listed in Southeast Asia, his team sees about 120 per year.
Despite the extensive screening process, sometimes they get it wrong. In one case, the team invested in a bank "with dynamic management we liked", Rasheed said. But the management got overly ambitious and began to acquire other businesses and spread geographically, prompting the fund to exit that position.
"There are times we get it wrong, but the way we designed the investment process is to minimise shocks. The aim of the fund is to grow in a sustainable manner every year, rather than move with volatile shocks."