A rare, wide-ranging interview with Angus Tulloch hosted by Charles Heenan at the Library of Mistakes. He discusses some of the lessons learnt from a career investing in emerging markets. Some of my notes are included below (these are for personal reference only and not meant as a comprehensive transcript; any mistakes are also my own).

On what has changed since he started his investing career in the 1970s:

Some of the biggest economies in the world today (China, India, Indonesia, South Korea etc.) – none of them were in the index and few of them were investable. Post and telex were the primary way people communicated back then, then it moved on to faxes and now of course email, text etc.

The quantity of information has exploded but the quality of information provided and the analysis has not. Anyone in the business now is inundated with information. When he entered the industry, the way you made investment decisions was you got into the office at 10 am, sat around the table, opened the post and then someone would say Cazenove has done a write-up on Jardine Matheson. Someone else might ask why do they like it and you might conclude maybe something is going on in Asia, that sounds like a great idea and that was the decision made. The world has clearly moved on from then.

In terms of how he chooses what matters in the current world of inundation – he was lucky that he had a father who was a fund manager, and he learnt a lot from him. Perhaps the biggest lesson was to back people – it was all about people. Good people tend to gravitate towards good business models and good people generally don’t overborrow. Those were probably the three things in the model of what they look at. But the emphasis his father always placed was on investing in good people.

When he started his career, you paid a huge amount to use a broker. Commissions were 5-10x of what an institution would pay now, but what you were really paying for was the information, which usually came from the company direct. This is now known as insider trading. He started at Cazenove and they had good corporate contacts. You would go to a meeting, go through each division, ask very short-term questions about how well each division was doing, do your sums and you would realize they were going to make 30% less than the market thought. So you would come out of your meeting, find a payphone, ring your 3 biggest clients and you would get a pat on the back from the firm.

Corporate structures have also declined – in partnerships, you were very careful about who your partner was because they could lose all your capital, and you were very careful about how they behaved because what really mattered was the reputation of the firm. Today, the corporate structure is much larger companies, so people don’t know each other as well and it is much easier for people to get carried away. One example would be Goldman Sachs, which used to be a partnership and had quite a good track record. Then it ceased to be a partnership and some of the things they have since been involved with probably wouldn’t have happened if they had the original partnership structure.

On the industry’s evolution, alignment with clients – ultimately, people hate losing money. Sometimes we forget that in this industry. It becomes a game and it is all about doing better than the peer group. The educational analogy for him is you don’t go to school just to pass exams, you go to school to develop your capacity for learning and your interest in learning. If you are taught well, you generally do well in exams. With investment, if people only start focusing on the peer group or the index (particularly over the short-term) and they use that as the base to compete against, they start making decisions which are generally not in the long-term interests of the client.

On resisting the pressure to change when his style was out of favour:

He has been very lucky in terms of the businesses in which he has worked. At Stewart Ivory, there was no pressure to invest in any way at all, it was entirely up to yourself how you invested. But you were expected to look after the clients, to do fundamental research, know your companies and behave properly. In the latter part of his career, they were owned by a bank, which meant they were very focused on asset gathering vs. investment performance. That is not surprising because they are rewarded very much on how short-term earnings go.

When he started as part of First State, he had a very interesting interview. They had a new CIO who had him and Stuart Paul into the office and the CIO asked him how long should you give a fund manager before you fire him. His reply was it depends on whether they are sticking to their investment philosophy, do they know their companies, are there particular fads in the market that mean their style is out of favour etc. When they came out of the interview, Stuart told him I think he was talking about you! Fortunately, that was about 6 months before the tech market crashed and they didn’t have any exposure in that sector, so there was no question about firing him at the time.

Investing in markets that boom & bust and the story of Shell Malaysia:

He thinks anecdotal evidence can be very useful in identifying booms and busts. He has always been better at identifying the booms and being worried about the herd instinct at the top of the boom then he was at actually catching the bottom of the market.

One example is when they went to visit Shell Malaysia in the 1980s. They told him they had done an analysis of all the calls going out from the office that week and 70% were from individual employees to their stock brokers. One feature of the Asian markets at the time was that the private client was a much bigger feature than the institution. In Malaysia at the time if you had to book a phone call you’d be on the phone for 3 hours before you were put through and could place an order. You couldn’t get into restaurants, taxi drivers were telling you what to invest in and there were dozens of similar signs that told you when a market was really frothy.

The tech boom was partly the same. There were 2 reasons they read the cycle, although they probably sold their tech stocks far too early. One was that a member of their team noticed that everyone was talking only about one particular ratio at the time and that was the PEG ratio (P/E relative to the growth rate). But if you looked at various other ratios, they gave you a completely different picture in terms of valuations. The other warning sign was when he went to a presentation given by PCCW, which was run by Richard Li. He arrived late to the meeting and since there was no standing room at the back of the room, he had to go stand next to the stage. Looking at the audience’s faces, it suddenly clicked that they no better idea than he had about what this company was doing yet they were completely mesmerized.

His thoughts on the markets today:

One thing he hopes he has learnt is not to predict markets. What we are seeing at the moment is this concentration of interest in a very small number of stocks, which is history rhyming. There is too much of this time it’s different and he doesn’t think it is going to be different. He saw some data the other day that in 1990, 7 out of the 10 largest companies in the world by market cap were Japanese and not one of those companies is even in the top 20 today. The music for a lot of these companies at some stage is going to stop and he thinks it might be killed by regulation as much as anything, particularly with the social media-related companies.

If he was looking to buy a fund at the moment is he would get a list of all the funds out there, preferably investment trusts and their discounts, and he would find out which had the biggest tracking error, rather than the lowest tracking error. He thinks we are very much in what we had back in 2000 when you go to a meeting and all the consultants would talk about was tracking error.

On the importance of people:

The most important, and enjoyable, part of the job was company meetings. In general, you get a lot more out of a meeting with smaller companies, they are much less polished and you can see an insight into an industry that you won’t get from the bigger companies. What he was really looking for was would he want to work for this company, and work for this particular person. If the answer was yes, you were often 50% of the way there. Obviously, you wanted to be in a business model that was robust and had growth potential, but it was really about backing the people. If there was a sniff of anything dishonest, or even honest but which they didn’t like, they would pass.

There was one company in India which eventually collapsed through a fraud. There was no inkling of that at the time they met, but the company paid a much lower rate of tax than everyone else and that just made them uncomfortable. The other reason they didn’t like it was that the chairman and the finance director were related. They always like to see two strong characters if possible in a business rather than just one. What is great is when you are in a meeting with a chairman and CFO and you see them disagree in a polite and respectful way.

His thoughts on investing in banks:

Property was/is incredibly important in Asian markets and especially in the entrepot markets (Hong Kong and Singapore). Once the property market turns, you don’t want to be anywhere near a bank. One of the things people do in the investment industry is starting top down, saying Asia is growing X%, we want more money there and then they want to buy something liquid, so the obvious place to go is a bank. If the currency and property market are going in the right direction, banks are probably a very good place to be invested.

Unfortunately, the culture across the whole banking sector is often about outperforming your competitors, so what you find as a cycle goes on is that they invariably go over the top lending to property or whatever else is the latest fad. So as an investor in banks, you have got to be particularly focused on the economy and the stage of the cycle. By far the best banks they found in the emerging markets universe were family controlled (e.g. OCBC, Public Bank, Thai Farmers Bank) and that is because it is the family’s own money and they don’t want to lose it. The other thing he learnt with a banking crisis is you don’t want to go for the first or second recap in the cycle coming back, but the third is usually quite a good time to get back and that happened time and again.

On the portfolio construction process:

You want a team discussion but one person making the final decision. You can’t make investment decisions by committee and you can’t split portfolios up between two people because a portfolio is like a herbaceous border, you want something to be flowering in different parts and at different times. It becomes very difficult to have that if you have two people running one portfolio. Committees are fine when things are going well, but when things fall apart, no one wants to take responsibility. So it is much better that one person makes the final decision. But you need to have someone on the team that is made aware and consulted before the decision is made, so they know why the decision is made. You also need a flat structure so everyone in the team feels they can contribute regardless of status, but at the end of the day you want to have one person making decisions.

On other lessons from his fund management career:

Anchoring bias – most people in the investment industry will own up to anchoring far too much, which is looking at what you paid for a stock and taking that into account when deciding whether to sell it. It’s not just trimming the winners, which people generally do far too early, but it is also when you build a portfolio and someone gives you more capital, you tend to add it to the stocks that haven’t performed so well and don’t add it to the ones that have performed well. At one point, he tried removing book costs from portfolios to help him overcome this bias but he still found himself referring back to the information. 

The biggest thing he got right in the post-Stewart Ivory days was recognising what he was hopeless at. He was a hopeless manager, not good at running a team, marketing etc. If we go through life and recognize what we are not good at and find someone who is good at doing that to compensate, it really is 1+1 = 5. The success they had was to a large extent because he wasn’t running the business and it would have likely been a disaster if he had been running it.

On capping the greed – they did stop accepting new capital in their funds, which should be the case when you grow and find you can’t buy smaller companies anymore. They lost two senior people on the commercial side when they closed the Asia Pacific fund. But investors ultimately respect you for doing that because they know you are looking after their interests. What he wonders is whether funds should offer loyalty discounts. If you are invested in a fund for 3 years, why shouldn’t you get a discounted fee after that. That would seem to him a very obvious thing.

Other topics:

Thoughts on culture – any other ways to measure it, can it change? The example he always thinks of is Jardine Matheson. In the late 1980s, they had a subsidiary (Mandarin Hotels) and they did a placement to a family-controlled company at a discount to asset value and the share price, which other shareholders weren’t given a chance to participate in. That made him biased against Jardine Matheson for the next 20 years or so. They wouldn’t be allowed to do that now. Jardine was perhaps more entrepreneurial but he probably preferred Swire, which was not as entrepreneurial but tended to be more scrupulous. You have generally got to change people at the top to change the culture.

Is China uninvestable? No, but if you invest in certain areas in China, you have to have a very big risk premium because the state has a very big influence there and what it does is quite unpredictable at times. Some people would say the rule of law doesn’t apply either. They always had more money in India than in China but that was because history was a very important part of what they did and you had companies with longer operating histories in India. You also had much greater respect for private property as well. Finally, the demographics today are certainly much better in India. People talk about India becoming more totalitarian under Modi but he thinks there is more of a natural basis for democracy in India and it will be very difficult to make it a dictatorship.

Advice for new investors? They implemented something called a conviction log for younger members of the team. If someone felt strongly about a sector or a company, they had to write it down and they could track its progress over time. When they did their performance appraisal, they were allowed to bring it along as a point of discussion. It meant people could learn from their mistakes. One thing he regrets not having done is kept a diary for 10 minutes every week to write down what he learnt, biggest mistakes etc. It would make the most wonderful reading now if he had done that.