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SCMP Reporter

Scobie Ward's investment style may look pedestrian but he has consistently proved he is in the performance fast lane. The chief investment officer of Lloyd George Asset Management refuses to chop and change his LG Asian Smaller Companies to follow macroeconomic cycles or investment trends.

 Instead he has gathered a small but elite band of about 30 companies with good growth prospects and replaces only about four of them in any one year. Typically, he will keep a company in his portfolio for four years and the figures in both fair investment weather and foul bear out his long-term approach.

 The fund gained 119.39 per cent in the year to February 3 against a rise of 71.38 per cent in the benchmark MSCI Far East ex-Japan index, according to fund-tracking firm Lipper Asia.

 Over five years to that date the fund put on 160.62 per cent against just 4.53 per cent for the benchmark, Lipper said.

 'At times it has been a horrible investment environment,' said Mr Ward, who is assisted by fund manager Zaheer Sitabkhan.

 'Nevertheless the lesson we've learned - to pick good companies and hold them for the long run - is more profitable than trading.

 'We try to identify smaller companies that will grow into very large companies. We define a smaller company investment as a company with a market cap below US$600 million at the time of investment but our hope is that the share price and the market capitalisation will grow by multiples over the subsequent years.'  A company could grow in one of three ways, he said. There was the debt-fuelled acquisition route exemplified by Korean conglomerates such as Daewoo, which is now at death's door.

 'This wasn't a particularly rewarding experience for investors,' said Mr Ward.

 The second way is through the issuance of equity and the injection of assets, such as the red-chip phenomenon in Hong Kong in 1996-97.

 'We try to find the third kind of companies which, through high ROE [return on equity] and strong free cash-flow, have significant compounded growth and earnings per share. This is the formula for a home run in investing,' said Mr Ward.

 'If I had to point to one company that fits this mould to a tee it would be Li & Fung. This was a company which we identified shortly after it listed [in 1992] as having a very compelling growth model.'  The result of hanging on to the well-managed trading company is that the fund has 'certainly made five or six times our money in the last four years'.

 Mr Ward remains bullish on the prospects for the company, which has found a niche in acting as a link between retailers and downstream manufacturers in the developed world and producers in the developing world.

 By sticking with quality companies, Mr Ward said the fund benefited when the Asian crisis got into full swing.

 'Investors identified risk in the property and banking sectors and typically [moved to] cash and repositioned their portfolios to companies that could sustain growth. Many of the companies that we had invested in had an increase in liquidity and trading.'  Software companies are prominent in Mr Ward's portfolio and he has long been a fan of Indian firms in the sector. According to Lloyd George Management, the Indian software industry has grown by 50 per cent in US dollar terms every year for the past 10 years.

 'India being a country that has had a weak currency over the last 15 years, we see the software companies with their earnings predominantly in US dollars and their costs in rupees,' Mr Ward said.

 'These companies have had very strong growth themselves but have also improved their profitability per worker despite the fact that wages have risen by over 25 per cent a year. That's because they have moved further up the valued-added chain.

 'India produces more IT specialists per year than the United States and what we have found is that their software engineers are doing in many cases higher quality work at less than a third of the cost of their US counterparts.'  Mr Ward's mainstay play on the sector has been Infosys, which he has held since 1993. In that time he has seen the price rise 163-fold and the company's market cap reach $9 billion.

 He is not worried that his stock-picking approach sees him deviate a long way from the country weightings in the MSCI Asia ex-Japan benchmark.

 But he avoids putting more than 40 per cent of the portfolio in any one major market and more than 20 per cent in a developing market.

 'We have all seen the effects of [the massacre in] Tiananmen Square on the Hong Kong market. Such things tend to happen from time to time,' he said.

 For now though, Mr Ward is keen to accentuate the positive.

 'We are seeing really tremendous opportunities in most of the markets in Asia and that's because we are continuing to see really healthy restructuring at the corporate level,' he said.

 'We are seeing many of the same trends that we saw in the UK during the Thatcher Government and in the US throughout the 90s.'  The corporate restructuring in the US produced earnings growth which was higher and more sustainable than any commentator expected.

 'We are expecting that to be replicated in Asia,' he said.

 He highlighted the mainland as a growth prospect as it underwent corporate reforms brought on by the entry to the World Trade Organisation.

 For now he is keeping quiet about which firms he will invest in to make a play on that.

 But wholesale changes to the fund, which is in the process of being authorised for distribution in Hong Kong, are definitely not on the cards.

Scobie Ward  1989: Graduated from Harvard College with degree in history.

 1989: Began work as an analyst then promoted to investment manager at Indocam Asia Asset Management in Hong Kong.

 1991: Founding partner of Lloyd George Management.

 1996: Passed CFA exams.



Taking it small and steady