Sharat ShroffFund manager profile

Fund manager profile

Sharat Shroff Matthews Asia

28 Portfolio Adviser February 2014 www.portfolio-adviser.com

Sharat Shroff describes his role as a fund manager with US-based Asian specialists Matthews Asia as: “I go to Asia to get the ingredients and then come back to San Francisco to do the cooking.”

What is encouraging for him right now is how the sources for and vari-eties of the ingredients are growing, even though the popular macro story is one of economic growth slowing.

Since the business was founded in 1991 there has been a tremendous amount of progress in the region but, surprising even himself, Shroff says:

“The level of scepticism a r o u n d Asian in-v e s t i n g rema ins r e a s o n -ably high

to be in the first quartile managed to deliver a speedy rate of growth.”

Taking stockAnd what about the argument of looking for companies lower down the quartile rankings that are likely to move upwards?

Shroff countered: “If you can find a company that is third or fourth quar-tile and it does move into the top quartile then returns are likely to be phenomenal. It is just that the odds of doing that consistently and sus-tainably over several different cycles is not easy. So the core of our portfo-lios will hinge on finding those busi-nesses which we think have a fairly comfortable return on capital margin over their cost of capital.”

Companies’ durability and persis-tency are key.

Beyond this starting point of 7,000 to 8,000 companies, and with persis-tency very much at the fore, his next screen is companies that delivered 10% sales growth every year for the past 10 years. To his surprise this pro-duced less than 100 companies.

His point is that there are not that many businesses that can deliver this sort of sales growth consistently yet if he had built a portfolio of just these companies, he says, it would have outperformed the benchmark over the past five or even 10 years.

What this gives Shroff is a prepon-

and this is surprising when you con-sider [the positives].”

His list of positives includes the rising GDP per capita compared to the US, citing Taiwan and South Ko-rea as particular standouts, and the huge growth in global middle class consumption that will see Asia ac-counting for more than 50% by 2050, from 20% at the beginning of this century.

He added: “The growth has hap-pened, but in spite of that growth there are several parts of Asia resem-bling the US back in the ’50s. China resembles what the US was like then. If you go to places like India and In-donesia, you go further back in time.”

Hungry for moreAsia for Shroff is currently all about change and facing up to the challeng-es to doing so, saying Asian econo-mies have to “continually push the envelope when it comes to maintain-ing productivity and efficiency”.

There is also the shift from indus-trialisation to service-led growth, with consumption moving from basic staples to a slightly more discretion-ary spend among the growing num-ber of middle class consumers.

As a self-confessed minority share-holder, how does Shroff participate in the region’s growth and the region’s developing economic and social in-frastructure?

One factor that has worked very well for him as a measure is return

on invested capital.

“It is a fairly simple exercise where we isolate companies in the Asian universe into four quartiles accord-ing to return on capital invested. What came out of that exercise is, from 2000 to 2012, of the companies that started in the top quartile, 86% of them finished in the top or second quartile.

“How does this help? It helps be-cause the companies that happened

Sharat Shroff was educated in Asia, has worked there on the buy and sell sides, is now investing there, and sees both the challenges and the opportunities that are there – though he works in San Francisco By Gary Corcoran

An entreé to Asian investing

“Growth has happened, but in spite of that growth there are several parts of Asia resembling the US back in the ’50s. China resembles what the US was like then. If you go to places like India and Indonesia,

you go further back in time”Sharat Shroff, fund manager, Matthews Asia

Biography

Sharat Shroff manages Matthews Asia’s Pacific Tiger and India strategies and co-manages the Asia Growth and Asia Focus strategies. Prior to joining Matthews in 2005 as a research analyst, he worked in the San Francisco and Hong Kong offices of Morgan Stanley as an equity research associate.

Pacific Tiger Fund since launch

%

Source: Morningstar, IMA

-15

-10

-5

0

5

10

15

Asia Pacific ex Japan MSCI Pacific ex Japan

Matthews Asia Pacific Tiger

Sep ’13Mar ’13Sep ’12Mar ’12Sep ’11Feb ’11

Sharat Shroff Fund manager profile

www.portfolio-adviser.com February 2014 Portfolio Adviser 29

2006 when Shroff says he was already wary of equity valuations, in China especially.

“We took China off the table and moved into ASEAN markets in 2006/07 because we could get reason-able growth and much more reason-able valuations in markets that were otherwise being ignored at the time.”

He still likes ASEAN, selectively, though is taking some money off the table and moving back into China, South Korea and India.

This recent rise of India’s fortunes as far as investors are concerned hark back to the start of Shroff’s career when he worked for Morgan Stanley in India on the sell side. He was also educated in India and has the advantage when he is researching companies of being fluent in Hindi and Bengali (and English...). lderance of businesses that are do-

mestic in nature whether they are consumer, healthcare or financials. What is also appealing is that many of these companies in 2000 had a market cap of less than $5bn so there was significant headroom for them to deliver the kinds of sales growth that he is looking for.

Even when it comes to stock buy-ing, Shroff says there are still sig-nificant challenges one of which is, again, his descriptor of being a ‘mi-nority shareholder’.

“For example, some healthcare stocks still look very attractive but it is difficult to participate in that growth as a minority investor. Over

years ago to put £100m to work across the region but now there are markets opening up to foreign investors in In-donesia – where liquidity has gone up threefold in that time – the Philip-pines, Vietnam and so on.

The region has gone from be-ing dominated by China and India, through the expansion of ASEAN countries, back to China’s strato-spheric rise with India left straggling.

Now, says Shroff, India is on the way back: “One of the features of in-vesting in India is the opportunity of finding uncorrelated growth. The chance of finding uncorrelated – to the rest of the region and perhaps the rest of the world – growth is higher in India compared to any other part of Asia.”

He was not fazed by the fuss sur-rounding ‘Chindia’ back in 2005 and the past five years, Chinese com-

panies, for example, have really emerged and become a lot more in-vestable than they were,” he explains.

“But, a lot of the Chinese companies happen to be listed in the domestic market which is often walled off from foreign investors.”

There are efforts under way at the moment by China’s administrators to open up its domestic A-shares to overseas investors.

The Asian hotpotOne thing that works in Shroff’s fa-vour is the widening and deepening of the markets across Asia. It would have been difficult, he says, even 10

%Source: Matthews Asia0 5 10 15 20 25

Cash & otherEnergy

MaterialsTelecom services

IndustrialsUtilities

HealthcareConsumer discretionary

ITConsumer staples

Financials

Pacific Tiger Fund Sector allocation

Pacific Tiger Fund Country allocation (%)

Country Fund Benchmark Difference

China/Hong Kong 26.6 38.1 -11.5

India 15.5 7.6 7.9

South Korea 15.2 20.6 -5.4

Taiwan 7.6 14.8 -7.2

Thailand 7.5 3.2 4.3

Indonesia 6.3 3 3.3

Malaysia 5 4.8 0.2

Switzerland 1.6 0 1.6

Singapore 1.2 6.8 -5.6

Philippines 1.2 1.1 0.1

Vietnam 0.7 0 0.7

Cash/other 11.6 0 11.6

Source: Matthews Asia