Investing in Asia can be extremely rewarding, but can also lead to making calls that can look wrong for a long time. This is something that Ben Durrant, co-manager of the Baillie Gifford Pacific fund, has learned the hard way.
Durrant, who started co-managing the fund alongside FE Alpha Manager Roderick Snell in July, said the uncertainty in Asia makes it a long-term stock picker’s “dream market”, but admitted that he can also look wrong about certain companies.
Baillie Gifford Pacific has made more good calls than bad ones as it is in the top decile for performance over the past year and is the best performer in the IA Asia Pacific Excluding Japan sector for the past five years, returning more than 177% over the period.
Performance of Baillie Gifford Pacific over 5yrs
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Source: FE Analytics
Sometimes the difference between being right and appearing to make a mistake comes down to the slimmest of margins, Durrant said often it comes down to investors’ failure to recognise the ability of companies to evolve and grow beyond imagination.
One of the fund’s biggest hits, and its highest conviction stock pick, is SEA Limited. The managers first invested in October of 2017 and the stock is now the largest position in the portfolio at 7.4%.
The company was founded 10 years ago in Singapore selling games to internet cafes, but it has since evolved into a technology conglomerate with businesses in game publishing, e-commerce and financial services.
“It runs the best e-commerce business in Southeast Asia and increasingly other parts of the world, having out-competed from a standing start the likes of Alibaba, and then you're building a financial services business on top of that,” Durrant said.
“That's a multi-billion-dollar revenue line still growing at more than 100% year on year.”
Although SEA Limited is up 1,572% since its initial public offering (IPO) and is worth around $140bn (£106bn) today, Durrant is comfortable that it could be Southeast Asia’s first trillion-dollar company in five to 10 years.
He said investors in the region continue to under-appreciate the potential pace of growth of companies, with SEA Limited a classic example.
Performance of SEA Limited
Source: Google Finance
In Durrant’s view, the failure of other market participants’ ability to recognise the opportunity in Asia is demonstrated by simply looking at the region’s sell-side analyst forecasts.
“They all bunch around forecasting growth somewhere between 2% and 20%, but when you actually look at the outcome and returns, it is far greater on both ends,” he said.
“There are more than twice as many companies that grow at greater than 40% a year that they care or dream to acknowledge, and there's also a bunch that fail to grow or shrink or fail entirely, so of course the challenge is picking between those.”
However, to back companies where others don’t see the potential for growth often requires being able to accept being wrong, and not being afraid to look wrong.
One company that Durrant said could be perceived as one of the fund’s biggest misses is KE Holdings, the company behind Beike – a Chinese property brokerage that has an online platform for housing transactions and services.
“That has been a bit of a roller coaster to say the least,” he said. “This business listed about a year or so ago and went up five-fold after it listed and then has come down to the same place.”
Shares in KE Holdings have fallen dramatically after fears around the potential default of Evergrande – one of China’s biggest property firms – and the contagion risk it poses to the country’s property market.
“People think that this business is in trouble but we believe that this is the future of Chinese property,” Durrant said.
“It enables the secondary market transactions and you want increased price transparency, which increase transaction volume – and those two things are very valuable. That is where I suppose we think that other people don't appreciate it.”
Performance of KE Holdings
Source: Google Finance
Durrant added: “We were wrong in maybe not selling it when it went up five-fold and then buying it when it went down 80% but we think that it's very easy to be clever in hindsight and there is an emotional cost to trying to trade like that.”
“There is an unwillingness to go back if it turns out that you're wrong and it continues to appreciate, and also there is the relationship with the company as well that matters.”
Despite the fears surrounding the Chinese property market, Durrant doesn’t think there is a contagion risk due to the fact that property only forms a fraction of a per cent of the overall debt in China.
“The market has always been very heavily and effectively controlled,” he added. “In a way the current property situation in China is done on purpose.
“You wanted some of the most leveraged players, that couldn't be trusted as well to deliver, to come out of the market. And that is happening.”