Chou Chong, manager of the Aberdeen UK Growth fund, seeks out companies that may be out of favour with other investors because of short-term problems, but are fundamentally sound.
It is normally left-of-centre journalists who harp on about the City’s short-termism, with the slightly more with-it types moaning about the menacing growth of hedge funds and private equity. But it is more interesting when the criticism comes from within the City’s investment community.
Chou Chong, who is in charge of 12bn in British and European equities at Aberdeen, does not quite fit the left-wing mould – to be honest, I have no idea where his political sensibilities lie – but his analysis of City short-termism makes interesting reading. He says that not just market pundits but also institutional investors have become ever more myopic.
“Institutional investors have become more short-termist, reacting emotively to stock news and rumours from day to day, prizing short-term share price gains and quarterly performance over long-term investment,” he says.
He has dubbed the process “the tabloidisation of UK investment”. But he is not on a political mission to change the world; he is on a financial mission to capitalise on other people’s mistakes. “UK-listed companies can be vilified as pariahs one month and feted as media darlings the next,” Chong says. “Take Marks & Spencer, a national institution. Shunned by investors only three years ago, it is now highly sought-after thanks partly to a revamped media image, yet a sane analysis of the British clothing retailer three years ago would have revealed a sound business model and a sensible long-term buy.”
It is common thinking among fund managers that once a company issues a profits warning it will be the start of several more, and the share price will be hammered. Better to get out now rather than hang around for the next grim warning. But Chong says British investors are making big mistakes by refusing to tolerate other people’s errors. “Fickle fund managers are loath to give even Britain’s most respected companies a second chance after making a couple of blunders,” he says.
Perhaps it is Chong’s Far East background, but he also finds it peculiar that British companies are so willing to use buybacks and special dividends to support the short-term share price rather than reinvest surplus cash to grow the business over the long term.
So where does this sort of thinking lead him when he is putting together a portfolio? One thing that is immediately noticeable from his Aberdeen UK Growth fund – a 320m fund that has a mix of institutional and retail money – is how much it is oriented towards consumer services and goods. Most other fund managers are terrified of the British consumer and what a couple more interest rate rises may do to consumer confidence. But what Chong sees is some of the world’s best retailers at reasonable valuations.
“Valuations on consumer stocks are very inviting,” he says. “Everybody has been negative on the consumer since 2005, but the reality is that Britain has a very good set of retail managers compared to Europe and the rest of the world. We made our decision to overweight the sector irrespective of the consensus against the sector.”
He gives Sainsbury’s as an example. During most of 2005 it was trading below 300p, a victim not just of consumer slowdown fears but the seemingly irrepressible rise of Tesco’s. But Chong decided at the time to double his exposure from 1.5% of the fund to 3%, and it has paid off handsomely – Sainsbury’s is now trading at about 410p. It was a similar story at M&S. “When Philip Green came along, we took profits,” Chong says. “When the takeover did not happen, we bought again at a lower price. It has been very good for us.”
Another unfashionable area of the market has been UK engineers. Chong has been a keen buyer of Amec, the engineering and project management group. Its share price suffered badly during the May sell-off, tumbling from above 400p to about 275p, but it has since climbed back to about 420p. “I have been following it for a long time and first picked it up about a year ago,” he says. “It announced some large provisions and said UK construction trading was weak, which precipitated the fall in price. We decided to buy more.”
After that, Amec bounced back on bid speculation, and only last week rebuffed a bid approach from First Reserve and Texas Pacific, two American private equity firms – the second approach it has turned down in a matter of months. It is now trading at a four-year high and Chong says it has further to go – although it is interesting that Fidelity has pared back its holdings.
Chong is taking a similar approach with Tomkins, which he says the market has unfairly punished for management and cashflow problems in America. It has yet to enjoy a revival – it is trading at just 240p compared with a high of 336p in April – so it is a case of “watch this space”.
Although there are some substantial sector bets in the fund, there are few major stock bets. It currently has 56 holdings, but not many are above 3%. “We take a fairly simplistic approach. If we like a company, we normalise our holding at around 1.5-2% of the fund,” Chong says. “As we become more familiar with it, we may start to raise it further. But whenever it goes above 3% we ask ourselves ‘can we do better by going elsewhere?'”
He gives HSBC as an example. “We like HSBC a lot, but that does not mean we have to hold 8% of the fund in the stock,” he says. There are a few 3%-plus holdings in the fund – HSBC at 4.2% is one of them, the others being Shell, BP, Glaxo and RBS. Glaxo is one of Chong’s few pharmaceutical holdings.
“We really like both Glaxo and Astra Zeneca ,but however much we try we cannot be confident about where their future streams of earnings are going to come from,” he says. “We hold more than 3% in Glaxo largely because we rate its management quality and valuations are acceptable.”
He says he is generally “benchmark aware” rather than benchmark following, which is rare for a fund manager who has largely worked in institutional business.
Performance on the fund has improved markedly since Chong took over, although he is ultra-keen to stress how it is down to a team effort. Over the past three years the fund is up 62% compared with the sector average of 58%, while over a year it is up 20% compared with the sector’s 17.1% gain. It is not the most startling level of outperformance, but for a relatively low-risk fund it is a decent proposition.