After the gold rush

PUBLISHED : Tuesday, 28 April, 2009, 12:00am
UPDATED : Tuesday, 28 April, 2009, 12:00am

During the California gold rush in the mid-1800s, blacksmiths, wheelwrights, saloons-keepers and general merchants, working in trailhead towns, had a tough choice to make.

Hearing reports of easy pickings and wealth beyond their wildest dreams, they could join the stampede of prospectors and dreamers keen to venture all and head off into the unknown. Or, they could let others chase the pot of gold, content instead to stick to what they knew and make a steady and respectable living by simply going about their business.

History, of course, tends to repeat itself and, give or take a few details, recent years have given us a neat enough re-enactment of those events. As we know, certain banks and financial institutions have lost their way - figuratively speaking - somewhere out on the prairie. Others, who chose to mind the store, are still around, cautioning against unrealistic hopes and reminding anyone who chooses to listen that the promises of get-rich-quick schemes are usually too good to be true.

'We get extremely nervous when people start talking about new paradigms and saying that the world has changed,' says Alex Boggis, Hong Kong-based director of Aberdeen International Fund Managers, which has roughly US$200 billion of assets under management.

'Things do change, but human nature and cycles are quite predictable. We were aware bubbles were being built up and, two to three years ago, were quite happy to go to clients and say be careful, you will not get increasing returns at this point in the cycle.' The firm, he adds, is sticking religiously to its core belief of investing in strategic, not technical, products. It is resisting pressure from institutional clients to introduce environment or resource-based funds to meet short-term demand and has stopped accepting new money for various Asia-Pacific and emerging market funds.

Though regarded as 'quite boring' in certain quarters, it has been management policy for about five years not to own United States or British financials, and hedge funds are generally out of bounds.

'We could see the profits, but could not understand the fundamentals,' Mr Boggis says. 'They were synthetically producing all sorts of things. A lot of off-balance-sheet vehicles were also taking the opportunity to leverage higher. We didn't like the structural integrity of businesses like that, so we underperformed, but when the markets came down we did a little better than others.'

The corporate ethos, he says, remains investment-based rather than sales-driven. This outlook is long-term by definition and relies on a bottom-up approach to stock picking which is benchmark aware but not built around specific industry sectors.

The aim is to have low turnover of holdings per fund and to invest only in companies that pass a strict quality test in management, attitude to minority shareholders, experience in their field and prospects for achieving sensible business growth. Aberdeen monitors historic price-earnings ratios, cash flow and price to book, and is prepared to wait before buying a stock first for a smaller fund and, assuming good performance, then adding to Asia or global models. Long-term plays include China Merchants, Giordano, Swire PacificB, Jardine Strategic and Standard Chartered.

'We think timing the markets is near impossible,' Mr Boggis says. 'You may get lucky, but if you do, it brings in hubris and overconfidence. We want clients to buy and hold to the extent that we will turn them away if they don't understand that approach. It is not being arrogant; it is just the way we do things.'

He predicts that investment markets will see a return to simplicity with the focus again on basic business principles and good bookkeeping. Too many managers have put their faith in mathematical formulae, bell curves and abstruse technical data, believing that quantitative analysis, or 'quant', holds all the answers.

'The balance changed to be all quant, but you can't have everything assessed by standard deviations,' Mr Boggis says. 'Numbers can tell you anything you want. The only constant is common sense. It has a broad definition, but is often the least common trait.'

He adds that Aberdeen has always remained sceptical about the cult of quant, as it has about the cult of the individual - the star analysts or sales people who become the face of the company. Instead, the in-house process is team-based, requires fund managers to conduct much of their own research, uses a central dealing desk, makes compliance a high priority and stresses a sense of fairness for clients. 'None of this is rocket science,' Mr Boggis says. 'But our people are driven by doing what we do well. As a result, we are healthy, expanding organically, and in good shape to take advantage of lower asset prices in our portfolios for clients who understand our fund approach.'

He foresees growth in the Asian economies which, over time, will justify higher valuation in stocks. In this respect the inherent conservatism of many large companies operating in Asia is seen as a plus, making it easier to select 'survivors' that are good long-term plays with earnings growth potential.

More immediately there is also interest in buying quality corporate bonds. Some now give good returns for comparatively little risk, offering 500 to 600 basis points over government bonds. It is still necessary, though, to 'kick the tyres' to test the underlying valuations thoroughly and avoid unfounded optimism. 'Assuming there is always a cycle, our performance profile is to do best in the upturn period and to underperform in the hot markets. Our advice sometimes falls on deaf ears but we tend to be more contrarian and do not produce short-term products for short-term demand.'