Ellerston Asian: Thematic Investing

Ellerston Asian Investments (EAI) is an ASX-listed investment company. Launched in September 2015, the fund is Ellerston Capital’s first Asia-focused offering. The portfolio is managed by Mary Manning, who was previously with Oaktree Capital and Soros Fund Management.

The fund combines bottom-up analysis with a macro overlay, identifying key thematics likely to drive equity markets in the region. As at end October, the fund held about 30 stocks with ~80% of the portfolio value invested in the technology, consumer and financial sectors. By contrast, the fund currently has no exposure to pure-play Asian exporters, auto or textile supply chains. Geographically, the fund is overweight India and underweight export-oriented Asia countries (such as Hong Kong, Singapore, Taiwan and Korea).

The majority of the fund’s holdings are large cap Asian stocks (the average market cap of their portfolio companies is ~$60bn). Portfolio valuation highlights are as follows:

  • Average EPS growth of 21%
  • Average P/E of 21
  • Average PEG of ~1x
  • Average ROE ~20%
  • ~15% in cash

Although there is little overlap between the fund’s investment style (or holdings) and my own, Mary’s video presentation on the key thematics likely to drive Asian equity markets in the medium term is interesting. None of the insights are necessarily new, but it’s helpful to see the bigger picture.

My notes from her presentation are below:

Asia’s demographic barbell

  • Asia has two distinct demographic structures (North Asia and ASEAN & India)
  • North Asia characterised by low birth rates and a rapidly ageing population
  • By contrast, ASEAN & India have fast growing (and increasingly urban) working populations
  • This is driving demand for different types of products & services:
    • Insurance, healthcare and wealth management in North Asia
    • Consumer staples & discretionary, automobiles and financial services in ASEAN & India
  • Model portfolio stocks: AIA, DBS, Britannia, Universal Robina, Bank Rakyat

Mobile commerce in Asia

  • 500 million + people already shop online in Asia, increasingly via their mobile phone
  • Online sales are growing at a significantly faster rate than total retail sales
  • Many countries are now experiencing a leapfrog effect, with consumers bypassing offline retail channels and going straight to online and mobile channels
  • These trends are creating both winners and losers in a number of other sub-sectors including logistics, real estate, technology and telecommunications
  • Also helps them figure out where not to invest
  • Model portfolio stocks: Alibaba, VIP Shop, Jumei Global, Samsung, Haier (H)

Structural reform in India

  • The combination of both structural reform and cyclical recovery is likely to be a driver of Indian equity markets in the medium term
  • Structural building blocks under Modi include increased infrastructure spending, implementation of GST, housing for all by 2022 and the “Make In India” initiative
  • At the same time, oil prices remain low and inflation has been contained, which should allow for interest rate easing in the medium term
  • Model portfolio stocks: HDFC, ICICI Bank, Shriram Transport, Asian Paints

Capital market liberalisation in China

  • The Stock Connect link between China and Hong Kong expands the connection between the Chinese market and the rest of the world (see this infographic from Goldman Sachs)
  • International investors now have access to Chinese companies while the HK market has access to pools of domestic Chinese liquidity
  • Over time, this should result in a wider flow of funds in both directions
  • Model portfolio stocks: Moutai, Qingdao Haier, Yili, China Everbright