Angus Tulloch learned his first lesson in fund management at the tender age of 10. Eager to follow in his father and grandfather’s fund manager footsteps, he bought his first shares in textile weaver James Nelson. However, he hadn’t anticipated what was to follow shortly after.
‘The company was taken over two weeks after I sold it, which I suppose was a lesson for me in patience and cash flow,’ he says.
This youthful interest later turned into a career and he is now one of the best-known fund managers in emerging markets. With nearly 30 years in the business under his belt he has run a number of global emerging market and Asia-focused equity funds, initially for Stewart Ivory before it was taken over by First State Investments in 2000.
While the former Citywire +-rated manager has reduced his hands-on responsibilities over the last few years, he remains lead manager of the group’s largest Asian equity fund, the US$10 billion First State Asia Pacific Leaders, and is head of Asia Pacific and Global Emerging Markets.
His fund has almost doubled the performance of its benchmark over the last three years to the end of February 2014, returning 19.7% versus 10% from the MSCI AC Asia Pacific ex Japan index.
‘We are all prisoners of recent history and that often has very dangerous consequences. If you can extend your historical perspective it prevents you getting too enthusiastic or depressed about market events’
The grand scheme of things
With his long experience Tulloch is keenly aware of the bigger picture when it comes to emerging economies and draws on his avid interest in history to gain perspective. ‘When you are frontier investing and if you go to a country and take the trouble to read about its history, when you talk to people, be they politicians, bankers or company directors, you get a much better welcome. It has helped me a lot in that sense.’
‘We are all prisoners of recent history and that often has very dangerous consequences. So if you can extend your historical perspective I think it helps prevent you from getting too enthusiastic or depressed about market events,’ he says.
China is a prime example of investors being captivated by a recent success story and the belief that its growth rate will continue at the same level.
‘China at the moment is fascinating. We have had an economic growth rate of 7-8% for the last 20 years and people assume because it has been so consistent that this will continue forever. It cannot and will not,’ Tulloch says.
‘People forget that the economy is becoming much bigger so a rate of growth this high becomes much harder to sustain. Also, if you have growth for that length of time without a break, people start investing as if that’s going to last forever and that is dangerous because you end up with huge excess capacity. So it helps to look back as far as we can and compare China’s recent economic experience with that of other countries.’
Stock-picking successes... And an unpleasant surprise
Tulloch first invested in this Hong Kong beverages and desserts brand in the 1990s, just around the time the group’s international expansion was at full tilt and it started to sell its products outside of Asia.
Hong Kong China Gas:
Tulloch has owned this stock, commonly known as Towngas, since his fund’s inception and it is one of the oldest listed companies in Hong Kong. ‘At one stage it was selling seven times as much gas in China as it was in Hong Kong but not making any money out of it at all, so there was a very promising future profit stream,’ he says.
‘The biggest disaster I’ve had with a stock was owning a Hong Kong company called Skyworth Digital and finding out one morning that half the directors had been summoned for investigation by the Independent Commission against Corruption,’ Tulloch says.
Rotating the talent
Based in Edinburgh but a regular visitor to Asia, my meeting with Tulloch takes place in First State Investments’ offices in Singapore during his recent five-week tour of the region, which has taken him to Hong Kong, Australia, Myanmar and Singapore before he jets off to India. The interview is a timely one as it comes shortly after the announcement that Alistair Thompson is stepping down as Tulloch’s co-manager on the Asia Pacific Leaders fund. So, why the change?
The appointment of Richard Jones as his new co-manager, he says, is part of First State’s manager rotation process as they move staff around to enhance their knowledge and experience.
‘I always think people focus too much on the lead manager of funds; someone has to pull the trigger at the end of the day but what goes into the portfolio is very much a team effort.
‘Richard has been with us for almost five years and he is very experienced with over 25 years in the fund management industry.
‘He already runs one other fund for us and we are keen to expand his portfolio management responsibilities.’
Even for veterans such as Tulloch and Jones, the last few months have been tough for emerging market managers following a strong investor sell-off. This has taken money away from a number of EM and Asia funds including Tulloch’s.
But the investment stalwart appears calm about the situation. ‘We haven’t suffered too much, though the asset class is undoubtedly less popular than it was three years ago.
‘Our emerging market strategy is still closed and we’ve had under 5% of AUM net outflows in all.
‘I think a lot of it is done, not completely done, but valuations are more attractive in some areas than they were, particularly Latin America,’ he says.
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Going long on India
One of the biggest asset allocation changes Tulloch has made over the last 12 months, he says, is to significantly increase his exposure to India.
While many other investors are also watching the country and its upcoming national elections, Tulloch insists this is not a tactical move and he is backing the economy for the long term.
‘We have added significantly over the past 12 months to our Indian exposure but that is on a three to five-year view, we are not claiming it is an inexpensive market at the moment.
‘We have always been enthusiastic about Indian companies and for their potential to become multinationals in their own right. The classic example is Tata with Jaguar Land Rover.’
His appreciation for these businesses is apparent when you look at his fund’s country allocation where India is in the top spot at 20.3%. This represents more than triple his benchmark’s allocation to the country.
‘There are many listed Indian companies that we wouldn’t touch with a barge pole but there are some very good companies with exceptional corporate governance, genuine concern for stakeholders and with a real international awareness and willingness to partner with international businesses.’
Corporate governance comes up continually during our meeting and forms a key component of First State’s analysis and stock selection process.
‘The longer I have been investing, the more I have realised its importance. If you invest in good people you will do well. You should never buy something just because it is cheap, you should buy something with real substance that is run by really good people.’
Among the Indian companies that fit this mould are Tata Consultancy, an Indian IT services group, and car manufacturer Mahindra & Mahindra, which both feature in his fund’s top 10 holdings.
Other Indian stocks he is backing include pharmaceutical groups Lupin and Dr. Reddy’s, which Tulloch says occupy a prominent position in the global generics industry.
Recent polls indicate that opposition leader Narendra Modi of the Bharatiya Janata Party, who is the current chief minister of India’s Gujarat state, is favourite to win the election and Tulloch says this bodes well for the country.
‘If Modi was able to do what he did in Gujarat across the rest of India, even in part, growth rates could improve substantially and encourage much-needed investment in infrastructure and the private sector, both internally and externally.’
Absolute return mindset
Building a solid portfolio of diverse stocks is a team effort at First State where both youth and experience play their part. Investment meetings can be entertaining, says Tulloch, as ideas need to be backed up, whoever you are.
‘People are quite staggered by the questioning sessions at our meetings. I probably get more ruthlessly questioned on ideas by young members on the team than everyone else.’
Stock selection remains at the core of his approach and whereas in past cycles investors could bet on a few emerging market countries and come out on top, Tulloch has always looked for quality companies. ‘It’s not just now that you need to be bottom-up in emerging markets, you always have to do that as you never know when the tide will go out,’ he says. I remember in 1987 when overnight that happened, all the conceptual stuff that gets pushed by things like QE becomes virtually valueless and you don’t want to be in those companies in such circumstances.
‘We are longer term than most investors and we define risk in a very different way. Most people define risk as underperforming a peer group or an index whereas we define it as losing money for our clients and we hate doing that.’
Too hot to handle
A long-time advocate of the consumer sector, Tulloch says he has not added to this exposure recently as some areas have become a bit too fashionable for his liking, particularly in China and India.
‘The valuations in Asia are still quite tight, particularly the consumer sector. Consumer stocks have marked time over the past year, there is not real value appearing yet.’
Two themes Tulloch feels have attracted too much investor attention are casinos and the internet.
He also remains cautious on the outlook for the resources sector, although he continues to like gold as a hedge against inflation but would tend to limit his exposure to this theme in his fund at around 2.5%.
In terms of other resources, such as industrial metals, he says we are still seeing the effects of more supply hitting the market as demand from China has been reducing and as such prefers to stay clear.
However, there are other sectors linked to the rise of Asia’s consumers where Tulloch has a more confident outlook such as telecoms, financials and health care. ‘Health care has tremendous potential and we have a couple long-term holdings in Australia including CSL.’
One of the reasons he likes this company, he says, is because it continues to spend a significant amount of in technology and research and development.
Within telecoms one of his top picks is Malaysian group Axiata, which has a strong footprint in its domestic market, as well as India and Sri Lanka. The company also has a presence in Singapore and this Asian financial hub is another favourite of Tulloch’s. His recent visit gave him the opportunity to meet up with some domestic companies and he has high hopes for Singapore’s banking sector.
‘Singapore has got a great future as a wealth management hub and we are fairly confident on the currency outlook so we have quite a bit of exposure.’
As always, Tulloch is moving with the times and creating his own bit of history in emerging market fund management.
This article originally appeared in the April issue of Citywire Global magazine