Emma Wall: Hello, and welcome to Morningstar Series, "Why Should I Invest With You?" I am Emma Wall, and I am joined today by emerging markets guru, Hugh Young of Aberdeen.
Hi, Hugh.
Hugh Young: Hi, Emma.
Wall: So, we are here today to talk about investing in emerging markets. You are the guru of emerging markets investing, but this has been a difficult year, both in terms of underlying performance of the markets and sales of the funds, and indeed in terms of outflows because of that. How does that present challenges to you as an emerging markets investor, or is it really about sticking to the knitting?
Young: Well, it certainly presents challenges and you have to go back and review why you've done, what you've done, were you correct in doing what you're doing, did you do it for the right reasons? Sometimes the right reasons can lead to the wrong outcomes, of course, so you can be logical about why you went in a certain direction, but for some reason people flee the markets and prices go down and you perform poorly.
I guess for us in our emerging markets vehicles we've performed slightly better than benchmarks this year. In our Asian vehicles, we've underperformed benchmarks largely due to asset allocation, i.e., we have far more in Southeast Asia, this part of the world that you see behind us rather than in North Asia and China, and China notwithstanding its falls has actually performed very well.
And, yes, of course, we've had mistakes as well and we have mistakes every year; in the good years and the bad years. They are, obviously, more painful in an overall bad year or tough year as we've had, both in absolute and in relative performance for our Asian funds anyhow. But then we look at some of the component parts, and in India, we've performed strongly; in Malaysia, we've actually performed strongly.
The trouble is, of course, we've had too much in Malaysia and arguably should have had more in India, even though we were overweight.
So, it's life – having done this for so many years we have our inevitable bad years. We've had some really bad years. I mean, this is certainly in relative performance not far from being one of our worst years. And even in absolute performance, we're down, but far from some of our worst years we've had. So, it's part and parcel of these markets.
Yes, it's tough. You have to answer clients. You have to justify what you do particularly in the tough markets. Although arguably, I would say the question should be equally tough for you when you're performing well.
Wall: And talking to that you have said before a lot of your positive performance has been down to luck. I don't know if that's you being too modest. How much of it is about the fact that emerging markets go in and out of fashion and favour?
Young: Well, that's certainly true. So, being in emerging markets in Asia as I have been for 25 years it's been, in some sense, lucky that I was in those markets because of; A, they've been fabulous and fabulously interesting, the returns have been all over the place in any given year. Longer term returns good; although if you compare our returns with benchmarks over that long period, we're substantially ahead of benchmarks.
There is always an element of luck in everything that we do; luck falling into the right job, luck whatever with one's life. So I wouldn't discount that. But there has also been a lot of hard work gone into it. And we've got a large team covering these markets; a lot is avoiding mistakes, which I think in our industry not enough people emphasise.
It's always focusing on the 100-baggers that have gone up and you've made a ton of money in. But usually the pitfalls are when you make permanent losses in money and that's very hard to get back.
Wall: So looking forward, then we're almost at the end of the 2015 and we like to make predictions. 2016, will it be as bumpy a ride or do investors have something to look forward to?
Young: That's a tough one, because, of course, typically starting any year, we also – well, it's going to be another good year because we're all eternally optimistic, certainly after Christmas coming in, everyone has rose tinted glasses. Economically it's going to as tough a year I think. So global economy remains quiet and it looks likely to be quiet for at least another 12 months.
Interest rates must go up because they are distorting so much. I mean, it's not that the economy is booming, that you had to put interest rates up, it's really that all the money is being misdirected, which is why we're having all this nonsense going on that we've had for the last few years. So, rates must go up, that will be painful in certain areas, it might will suck money out of the markets. So saying, a lot of money has already come out of emerging markets and Asia.
So we've seen huge redemptions, not just us at Aberdeen, but the whole industry has seen big shifts away from emerging markets, valuations are reasonable. I'd love to say that they are dirt cheap; they are not dirt cheap, but they are reasonable.
I think vitally the companies that are extremely strong. So in general the companies who have stuck to their knitting, they've not stretched their balance sheets, they have been very vary of what's going on for as long as we have.
So I think everything is quite well placed. But if I had to gamble it is going to be another year of single-digit earnings growth. It will be nice if the markets went up 5% to 10%, but who knows. Our predictions always prove incorrect, so it might be a 30% year. I'm not sure what direction that 30% will be in but it could be equally volatile.
Wall: But for long-term investors this is the place to be?
Young: Oh, I think it is absolutely a place to be. I mean, if you look at any industry anywhere in the world where are they looking to for growth, it is emerging markets and Asia. You've just got to be careful of what entry routes you use for it, which is, of course, where I would argue that Aberdeen comes into it.
Wall: Hugh, thank you very much.
Young: Thank you.
