Scottish Oriental Handbook: Part 4
Avoid: Predicting macro-economic variables to identify potential winners and losers
The handbook
Our investment approach is aimed at preserving capital and growing it sensibly. This approach has remained steadfast since the Company was established in 1995. In the fast-growing Asian region, there are several exciting stories or popular themes prevailing at any point of time, which promise attractive returns. These themes rarely stand the test of time and investing behind such opportunities comes with the risk of permanent loss of capital.
Therefore, our investment process starts by determining what we will not do.
Avoid: Predicting macro-economic variables to identify potential winners and losers
Instead of trying to predict the direction of interest rates or currencies, our investment process is focused on trying to find high quality businesses operated by competent management teams which have an established track record of performing well across these changes in the business environment.
Asian countries have witnessed a range of disruptions since Scottish Oriental was established in 1995, ranging from the Asian Financial Crisis and the Global Financial Crisis to pandemics such as SARS and Covid-19. In our experience, well run businesses used each of these disruptions to emerge with a stronger market position in their respective categories. We assess the track records of companies to observe attributes such as their pricing power, market shares and returns on capital employed during difficult periods, to find resilient businesses which are likely to succeed over the long run.
Case study: Selamat Sempurna
Achieving consistent growth and profitability in Indonesia's filter and radiator market
Selamat Sempurna is the largest manufacturer of filters and radiators in Indonesia, predominantly used in the automotive and off-highway industries. Its leading market position and focus on the after-market segment rather than on selling to original equipment manufacturers (OEMs) who dictate pricing terms, has led to a consistent track record over decades. Since 1992, the company’s sales have grown at 19 per cent and net profit has grown at 29 per cent annually. Despite facing several disruptions over this period, its net profit has declined in only 3 of the last 30 years.
The filter and radiator industry is highly fragmented, dominated by small, informal players. Selamat Sempurna has used its net cash balance sheet to consolidate the industry by acquiring smaller competitors and, in some cases, its channel partners to control its distribution more effectively. Its returns on capital employed has increased consistently, from 13 per cent to 18 per cent in the 1990s to 35 per cent currently, as it has improved its profitability through operating leverage from increased scale. Through its association with Donaldson Corporation of the United States of America, the company’s management has also gained exposure to global best practices towards shareholder returns. Selamat Sempurna has grown its dividend per share in each of the last 19 years and was among the first companies in Indonesia to start paying quarterly dividends. Its conservative management team is focused on sustaining this track record in the coming periods as well.
Risk factors
Capital at risk. The value of investments and any income from them may go down as well as up and are not guaranteed. Investors may get back significantly less than the original amount invested.
Important Information
This document has been prepared for informational purposes only and is only intended to provide a summary of the subject matter covered and does not purport to be comprehensive. The views expressed are the views of the writer at the time of issue and may change over time. It does not constitute investment advice and/or a recommendation and should not be used as the basis of any investment decision. This document is not an offer document and does not constitute an offer or invitation or investment recommendation to distribute or purchase securities, shares, units or other interests or to enter into an investment agreement. No person should rely on the content and/or act on the basis of any material contained in this document.
Net Asset Value (NAV) performance is not the same as share price performance and shareholders may realise returns that are lower or higher than NAV performance.
This document is confidential and must not be copied, reproduced, circulated or transmitted, in whole or in part, and in any form or by any means without our prior written consent. The information contained within this document has been obtained from sources that we believe to be reliable and accurate at the time of issue but no representation or warranty, express or implied, is made as to the fairness, accuracy, or completeness of the information. We do not accept any liability whatsoever for any loss arising directly or indirectly from any use of this information.
References to “we” or “us” are references to First Sentier Investors.
In the UK, issued by First Sentier Investors (UK) Funds Limited which is authorised and regulated by the Financial Conduct Authority (registration number 143359). Registered office Finsbury Circus House, 15 Finsbury Circus, London, EC2M 7EB number 2294743.
Scottish Oriental Smaller Companies Trust plc (“Company”) is an investment trust, incorporated in Scotland with registered number SC0156108, whose shares have been admitted to the Official List of the London Stock Exchange plc. The Company is an alternative investment fund and has appointed First Sentier Investors (UK) Funds Limited as the alternative investment fund manager for the Company. Further information is available from Client Services, First Sentier Investors (UK) Funds Limited, Finsbury Circus House, 15 Finsbury Circus, London, EC2M 7EB or by telephoning 0800 587 4141 between 9am and 5pm Monday to Friday or by visiting www.scottishoriental.com. Telephone calls with First Sentier Investors may be recorded.
First Sentier Investors entities referred to in this document are part of First Sentier Investors a member of MUFG, a global financial group. First Sentier Investors includes a number of entities in different jurisdictions. MUFG and its subsidiaries do not guarantee the performance of any investment or entity referred to in this document or the repayment of capital. Any investments referred to are not deposits or other liabilities of MUFG or its subsidiaries, and are subject to investment risk including loss of income and capital invested.
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