OMGI equity guru on why he’s doubled exposure to AI

Crabb Josh Old Mutual 2014

Old Mutual Global Investors head of Asian equities Josh Crabb has more than doubled the exposure to artificial intelligence in his Asian Equity Income fund, but is rejecting the excitement around household technology stocks.

Crabb, who has been managing Asian equities for 15 years, including at M&G and BlackRock, has increased his position in AI from 5 to 12 per cent over the past few months, and is ready to increase it further.

In an exclusive interview from OMGI’s Hong Kong office, where Crabb is based, he explains how the fund is targeting more income-related stocks and how he is playing the growth in India.

Talk us through your income strategy

We never think just about one type of income. There is defensive, cyclical and also “income likely to surprise”. What I mean by that is that the payout ratio in Europe is quite high, and in the US it is low but they have a lot of payback activity so it is still high when you combine the two. In Asia we are still seeing payout ratio leaps, which means dividend and income can increase even without earnings growing. We think Asia is going through an inflection point, because most people tend to have a defensive income because the market had been weak for a number of years, and now people aren’t exposed enough to the more cyclical income names.

Which are the main themes in the fund?

The main theme of the fund is AI, connected to the Internet of Things. What we are seeing coming out AI and IoT is very similar of the big product cycle we saw when smart phones came out. If we go back to when the PC was out and people were talking about the big companies like Microsoft and Intel, and there was the smartphone coming out. The way you interact with AI is similar to what you do with smartphones but the interface is very different.

Most people are very fond of Facebook, Amazon, Apple, Netflix and Google, the FAANG stocks. They are stocks around smartphones but if you take out the smartphones, these companies won’t exist. From our perspective if you look at AI we think that there are different winners.

As we saw with PCs, some winners will make that transition but our premise is that internet companies are very well-owed and have very large market cap. The opportunities we see, which will run for a number of years, include the fact that valuations are cheaper than FAANGs, cap size is smaller and there is less market involvement.

India is another big theme of yours. What’s the outlook for the market?

The recapitalisation of the state banking system has been a very important step in its progress. But why does everyone like India? It grew a lot slower than China, and people made the premise that it would step up at some point. Part of the reason it has grown much slower is because it is a democracy and you have never had only one party in control. A lot of the reforms have been painful and that made the economy weaker but it
was a necessary change over the medium term. Our promises are that in order to catch up on growth what you need is an improvement in the infrastructure in the country and catch up on what China and Japan did.

Which sectors are you favouring?

We are overweight in financials and materials. For materials, we don’t mean commodities. In India we might own some cement, steel and piping companies but they they are not commodities traded around the world. Financials tend to be different around the market. We own insurance companies in China because we think the asset management industry is about to go through a good growth and prices are low too. From an underweight perspective, we own telecoms and the mobile Internet names. They are very popular and our premise is not that they are going to be bad, but we would rather take that money and invest it in AI because the value relative to the prospect, the growth that is going to come, and the valuation is much more relatively attractive.

How many holdings are in the fund?

The number varies over time because we tend to buy baskets around some of the themes. We will have between 80 and 120 stocks but we don’t have 120 ideas. For four themes we’ll have almost half of the portfolio so we tend to identify key themes and sometimes for liquidity reasons or disruption in technology we may own a few more names to have an advantage.

Do you invest in the fund?

Yes, absolutely.