As a global trade war continues to escalate under Trump 2.0, companies in Asia are bracing for impact.
For investors reassessing their Asian equity exposure, this might be an opportunity to focus on companies in the region that are founder- or family-led.
These types of firms tend to take a more long-term approach to capital allocation and during times of economic downturn are better positioned to act aggressively when others are dialing back.
This is according to Stewart Investors portfolio manager Oliver Campbell, who told FSA the ability to behave counter-cyclically can be a powerful driver of long-term returns for investors.
“When you have good families and good corporate stewards behind companies, and they take long term perspectives on their business, you tend to do a lot better as a shareholder,” he said.
“If you’re taking a long-term view on your business, you can behave counter cyclically – that means when markets go down, you want companies that can make the best of that; they can acquire when everybody else is scared, and that ability to act counter cyclically can be very powerful.”
“What you don’t want is that pro-cyclical behaviour where you’re selling at the bottom and you’re over exuberant at the top.”
He pointed to the Indian conglomerate Murugappa Group as one example of a portfolio company that has acquired distressed companies at cheap valuations in the past.
“Because they were distressed and because they can take a generational view on those businesses, they can work to turn them around,” he said. “That can be a really powerful moment as a shareholder.”
“We’ve seen it before with the Mahindra families. When they acquire distressed companies, you can do very well as a shareholder because you know that they’re going to fix those businesses, and you’re aligned with them over the long term.”
Intergenerational views
This long-term approach and ability to invest counter-cyclically often stems from the intergenerational view on wealth that family stewarded companies have. This is why Campbell said Stewart Investors tends to back these firms.
He said: “If they’re thinking about their children, their children’s children, 100 years of growing and transferring that wealth – then there’s a very good chance that they’re going to avoid some of the short-term risks that a short-term manager might take.”
“If you’re running a company for your next options package coming up in two years, you might choose to not pay your taxes, you might choose to pollute a river, you might choose to have child labour in a supply chain.”
“It will save you costs in the near term, but it will cost you dearly in the long term. But if you’re only running it for three years, there’s a chance you don’t care about the long term.”
Campbell said this type of short-termism is more common with professional management teams who may risk a business franchise for the short-term gain.
“If you see companies which are taking out debt to boost their earnings or to do buybacks to boost the stock price in the short term – it doesn’t help the long-term shareholders, but it helps the executives to get paid,” he said.
“I think any time you see companies increasing hiring, capital, investment spending, especially counter-cyclically, these are good signs a business is being run for the long term.”
But even companies that aren’t necessarily family-owned, but those with long-term stewards also benefit from the same effect.
He highlighted Taiwan Semiconductor Manufacturing Company (TSMC) as an example. Now the world’s leading semiconductor foundry, it only recently took over Intel’s decades-long manufacturing lead by aggressively investing into research & development at the expense of short-term profits.
This year it is on track to spend roughly $40bn on capital expenditure. Campbell said: “At $30bn to $40bn of capex a year, you can’t make these decisions on a whim. It’s a huge amount of money. If you make a $30bn mistake in capital spending, it has serious repercussions.”
“So you have to know what your business is going to look like 5, 10, 15 years from now, and TSMC is a company that does have a kind of talismanic patriarch in Morris Chang.”
“But, it’s also run knowing that it has to be around for the next 20, 30, 40, years. So as long as you’re aligned with that corporate steward that can take 10, 15, 20 year view on things – you can do well as a shareholder.”
Samsung
Another Asian-listed technology firm with a long-history of family stewardship is Korean-listed Samsung, although the firm’s share price has lagged in recent years.
Stewart Investors has been using the recent weakness as an opportunity to increase its stake in the company across several of its strategies, Campbell revealed.
“Samsung has some $60bn of net cash on the balance sheet and a family that can take a long view on their business,” he said.
“They’ve managed to build a consumer electronics business from nothing, they’ve managed to build a logic boundary from nothing, and now they’re lagging in this memory business.”
“Can they get it right? Well, they have a war chest that they can deploy over time, and they have a track record of building these things, so you can’t discount them.”
Overall, Campbell is optimistic about the steps the company is taking to build out their logic, foundry, memory and biologics businesses.
“They’re talking in decades about these businesses,” he said. “And there’s a lot of comfort in that, so when things go wrong in the shorter term, that can be a good opportunity to invest.”
