Why Companies Override Countries
To unlock durable growth in emerging markets, Portfolio Manager John Paul Lech begins with a sharp focus on individual companies.12/15/2020
To best serve our clients, we seek alpha by actively managing our portfolios and conducting in-depth, on-the ground fundamental research to identify the most compelling opportunities while aiming to minimize downside risk. This is how we built our successful track record in Asia.
For three decades, our belief in the long-term growth of Asia was forged through a number of volatile episodes: the Asian Financial Crisis in the late 1990s, to the SARS crisis, to several geopolitical scares, to the bursting of China’s equity bubble and the 2008 Global Financial Crisis. These challenges have tested, and ultimately strengthened, Matthews Asia’s unique investment philosophy.
We believe that to consistently capitalize on Asia’s opportunities requires a long-term perspective, patience and confidence, grounded in relentless research. Through in-person, on-the-ground fundamental research, we develop our understanding of the economic forces driving growth in Asia and our insight into the businesses that are best positioned to thrive.
Realizing Asia’s potential calls for active portfolio management, rather than a passive index-based approach. Active management is one way to generate alpha—the potential for excess return as many of Asia’s equity indices are weighted by market capitalization. This means they’re effectively backward-looking—rife with yesterday’s winning companies, but missing tomorrow’s biggest opportunities.
We actively manage portfolios based on 30 years of experience in selecting Asian equities. Our process draws on our collective knowledge and experience to develop expectations not just at the country, industry, or sector level, but at the individual business level.
We drill down into lesser-known businesses, including assessing financial positions, resource allocation decisions, incentive structures, ownership history, governance practices to identify long-term opportunities that may not be visible to others. The result is portfolios that differ substantially from benchmarks.
In evaluating a prospective portfolio company, we seek solid companies with sound fundamentals, strong balance sheets, viable business models and the ability to maintain reasonable growth rates over the long term. Consistent with our multi-year orientation, we assess the value of the business as a whole, looking through the lens of future growth potential. When we engage with a company, we seek to assess not just its prospects, but a broader understanding of the entire ecosystem in which it operates.
A typical on-site company visit includes meetings with the CEO and decision-makers of a company, plus trips to their production facilities and warehouses. Our on-the-ground analysis extends to supply chain partners, competitors, and industry and economic experts. To gain a first-hand perspective on various segments of the economy, we also meet with local individuals including real estate professionals, trade association representatives, and government and central bank officials. This effort translated to more than 2,600 company meetings in 2019, including over 1,000 on-site visits in locations ranging from Asian financial centers to remote inland outposts.
Our long-term approach paired with our extensive, on-the-ground research gives us conviction in the companies we invest and provides us with the confidence to manage portfolios through all market cycles.
Asia is inherently volatile. Over the course of three decades of our experience in the region, we have developed a rigorous—and tested—approach to risk management. Our organizational structure reflects the high priority we place on risk management, with a dedicated, independent risk-management function, housed within the Risk and Compliance Department, overseeing both enterprise and investment risk. The Risk and Compliance Department is led by our Global Head of Risk and Compliance, who reports directly to the firm’s CEO.
At the portfolio level, we continually monitor a variety of risks within each portfolio, at both the security and macro levels. We believe business risk is the most important risk meriting increased attention throughout our investment process. If significant concerns arise, we re-examine any affected holdings. We revisit current positions when new ideas offer more compelling risk/return trade-offs and adjust our positions accordingly.