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Aberdeen is known for investing in the highest-quality names and this approach was not rewarded in 2013, when high quality underperformed low quality. The Edinburgh Dragon (EFM) fund was also hurt by its long-standing overweight to India and Southeast Asia, while also being underweight North Asia, especially countries such as China, Korea and Taiwan.
These decisions were, however, consistent with the fund's long-term process and indeed, we think the process is one of the attractions here. It's a firmwide approach originated by Hugh Young in 1985 and it emphasises quality, growing companies that have the right management to deal effectively with that growth. They consider quality companies to have sustainable, competitive business models; strong balance sheets; and high returns on assets and capital. They look for management that carry the right skills to grow a company for the benefit of shareholders and are prepared to be patient and wait for the growth.
Indeed, the fund’s turnover, at less than 10% most years, is one of the lowest we have seen and it helps to keep a lid on costs. Further, that patient approach has proved its effectiveness over the long term. Since Aberdeen took charge at the end of 2003, Edinburgh Dragon has returned some 12% and has beaten its Morningstar Asia ex-Japan Equity Category average fund by well over 2.5 percentage points annualised. The team has also demonstrated well its ability to run the fund with risk kept firmly in check. Indeed, despite the use of gearing and a fairly concentrated portfolio, its overall Morningstar Risk rating is below average.
The team is another attraction here. Although the fund has a named manager in Andrew Lim, in reality it’s a team approach, in keeping with all Aberdeen equity funds. This team is well resourced and has depth of experience, not least from its leader Hugh Young. Young cofounded Aberdeen’s Singapore office in 1992 with former colleague Peter Hames.
Although Hames’ retirement in June 2010 was a loss, we believe the handover has been smooth and Hames’ duties have been divided amongst the team, some of the senior managers of which have been with Aberdeen for more than 10 years. The team is spread across Singapore, Sydney, Bangkok, Kuala Lumpur, Hong Kong, and Tokyo, which gives them a big advantage, as company meetings play an important role in the process.
Overall, we think there’s much to like here: an experienced and well-resourced team with a firm-wide process. We are conscious of the recent underperformance, but the process has been tried and tested in such a way before and our conviction in both the team and that process is unchanged. The fund retains our Gold Rating.
