Matthews Asia Perspectives
Matthews Pacific Tiger Strategy: 25 Years of Investing in Quality Growth Companies
September 6, 2019
The Matthews Pacific Tiger Strategy launched in 1994. Over 25 years, Asia has experienced dramatic changes through rising household incomes, deepening capital markets and a shift toward innovation-based economies. In this Q&A, the Pacific Tiger Strategy's portfolio managers discuss how the Strategy has maintained a disciplined, consistent investment process for a quarter century. Sharat Shroff is lead manager. Raymond Deng and Inbok Song serve as co-managers.
How has the Strategy remained true to its investment process?
While Asia's financial markets have evolved, our investment process remains evergreen:
When evaluating individual companies, we typically consider three main pillars: the underlying business model; the strength of the management team; and the stock's current valuation. When all three look attractive, the seeds are planted for an investment case that we may follow.
- We focus on domestically oriented businesses that cater to local and regional consumers
- We take a company-first approach to identify the most compelling investment opportunities
- We recognize that quality growth companies require strong management teams to generate sustainable returns
- We believe small and midsize companies offer more-attractive growth potential and alpha generation over time
- Taking a long-term view, we stay invested through market cycles
Because we invest from the bottom up, we avoid artificial design constructs from the top down in terms of sector weights or country allocations. Our sector makeup and country exposure vary over time based on where we find the most attractive opportunities.
Since the launch of the Strategy, the universe of Asia ex Japan equities has grown much larger and more diverse. But our investment process remains the same. We use active security selection to identify attractive growth companies that can potentially sustain their growth over the long term; we seek to maintain a diversified portfolio; and we have a strong quality bias.
How do you manage risk in the portfolio?
Our approach is oriented toward reducing the risk of permanent impairment of capital, more so than to relative risk factors such as tracking error. We do so by focusing on survivability and sustainability of the individual businesses within the portfolio. Both of these factors are significantly influenced by the culture of corporate governance.
When evaluating corporate governance, we aim to understand the strength of a company's governance structure through multiple interactions with its management team and watching how it handles challenges over time. This is an area where we believe proprietary research and active security selection can add a lot of value in markets that are still somewhat inefficient and where corporate governance varies widely.
Another layer of risk management is taking a milestone approach to building positions in companies that we like. We monitor the progress that companies are making toward meeting their goals, and we increase allocations as companies demonstrate the ability to execute on their strategy.
Finally, we tend to focus on consumer-oriented companies, which have the potential to be less cyclical than other sectors such as industrials or energy. We believe consumption is a more durable compounding factor over time. Focusing on the consumer requires a patient approach because consumer behavior is a type of a hidden layer in economic growth, one that slowly compounds amid larger market swings in more cyclical areas of the economy.
How has the profile of the consumer in Asia changed over time? And what is the appeal of capturing the consumer wallet for long-term investors?
Consumer behavior is remarkably consistent. As incomes rise, consumers naturally want to upgrade and improve their quality of life. Consider China, where you have a combination of fast income growth, low household debt and high household savings. As a greater number of people enter the middle class, they upgrade their lifestyles accordingly. People want to travel, remodel their kitchens with nicer appliances and have concierge services in their apartments. The next wave of upgrades will likely be around consumer services, including higher-quality health care and innovative wealth management products.
The evolution of spending patterns and consumer upgrades in China probably has been one of the fastest transformations in the region. We expect other parts of the region to follow suit at their own pace. For long-term investors, we believe capturing the consumer wallet can be an effective strategy for compounding growth across market cycles. In addition, domestically oriented companies—those focused on the local consumer—also tend to be more resilient amid trade tensions.
What excites you about the next 25 years of investing in Asia?
As portfolio managers, it has been our privilege to have a front-row seat to Asia's growth and development. When we travel through Asia for research, we find a genuine sense of opportunity and optimism. Many people feel they can participate in growing middle-class prosperity for themselves and their families. With the confidence that their societies are heading in the right direction, households and businesses are motivated to save and reinvest their capital locally.
Another important trend across the region is the rise of the entrepreneur. Asia's entrepreneurs have greater access to capital than ever before, they are gaining a more level playing field due to a number of changes across the region, and they benefit from the rising purchasing power of the consumer. In fast-growing economies, entrepreneurs play a key role in generating durable and inclusive growth. Asia's entrepreneurs can be found at the helm of start-ups, as well as companies with billions of dollars in market capitalization.
We are also excited about the growth potential in emerging parts of Asia, home to economies on the less-developed end of the spectrum. As a result of our bottom-up investment process, our strategy currently tilts toward countries such as India, Indonesia, the Philippines and Vietnam, which are less represented in the benchmark. This is where we see the next generation of quality growth companies emerging within Asia. As growth investors, we are naturally attracted to some of the more dynamic parts of the region.
The views and information discussed in this report are as of the date of publication, are subject to change and may not reflect current views. The views expressed represent an assessment of market conditions at a specific point in time, are opinions only and should not be relied upon as investment advice regarding a particular investment or markets in general. Such information does not constitute a recommendation to buy or sell specific securities or investment vehicles. Investment involves risk. Investing in international and emerging markets may involve additional risks, such as social and political instability, market illiquidity, exchange-rate fluctuations, a high level of volatility and limited regulation. Past performance is no guarantee of future results. The information contained herein has been derived from sources believed to be reliable and accurate at the time of compilation, but no representation or warranty (express or implied) is made as to the accuracy or completeness of any of this information. Matthews Asia and its affiliates do not accept any liability for losses either direct or consequential caused by the use of this information.