Understanding Asia’s impact
Joseph Mariathasan explains the rationale for Stena's move to invest in Asia, and why pension funds should be seeking to emulate the approach of its CIO, Björn Linder
Björn Linder (pictured right) is the Chief Investment Officer (CIO) for Stena Long Term Equity, a newly-established investment department at Stena AB, the Swedish shipping, drilling, property and finance group which he joined January 2006. He made the decision that the impact of emerging markets generally - and Asia in particular - was so profound, that the Stena group would benefit by having an on-the ground presence. This is currently being set up, with Linder himself being based in Singapore from July.
Stena Long Term Equity was set up by Stena to manage investments in listed companies throughout the globe. "When I joined Stena two-and-a-half years ago, my mandate was to set up a new kind of investment operation and invest in globally listed companies, not in an index-driven way, but in a focussed way investing in a few companies by doing thorough research," says Linder. "I wanted to increase the in-depth analysis, understanding businesses better and moving towards a private equity approach to investment, but without getting too close to a company and sitting on the board. We have also leveraged our know-how by utilising a number of expert advisers in the investment process and have tried to share views with a few fund managers with similar philosophies."
The approach has been successful, with Linder claiming a 27% annual return since he started two and half years ago. As he argues: "We have a very concentrated portfolio that has generated a good return with risks that are well understood and manageable. While some people would claim a concentrated portfolio means a high risk, we argue we can be more diligent in identifying the risks and understanding the implications involved in a portfolio with few investments. When things go wrong we understand why.
"The next step for us in our investment process will be to set up an office in Singapore, which will not only allow us to better understand the implications of the development in Asia for our existing European investments but also identify new opportunities in Asian markets. Even though we cannot cover the whole of Asia, we can develop our investment process by identifying themes and sectors that we can relate to our existing portfolio".
Linder says the impact of emerging markets in today's world is such that almost everything you invest in gets directly or indirectly exposure to the former CIS states and Asia. So unsurprisingly, when Stena started investment, it recognised and chose companies with high proportion of exposure to emerging markets generally, and Asia specifically.
"For the last 15 years, I have always been curious about the developments in emerging markets and particularly Asia," continues Linder.
"The investment analysis gets complex in understanding the real profit drivers for global companies, therefore we had to expand the analysis." The problem with conventional fund managers, he argues, is that the methodology of managing portfolios divided into regions such as US, European, Asian mandates and so on just reflects a way of organising people within business lines or regions, and is not a thoughtful way of seeking outstanding opportunities and following global themes.
As he puts it: "The world is not easy. If you understand a company, you need to follow their clients wherever they are; you need to know where the production is based and where the competition is. Most companies have a direct exposure to Asia and the former CIS countries either by sales, by production or through competition. But we need to know how profitable that activity will be in the future. We need to better understand what the future means for sales and production in the areas of the world where there is structural long-term growth."
The emerging countries of Europe and Asia have one fundamental difference when compared with developed countries, and one that is often overlooked: they are much less geared than developed countries. As Linder explains: "I really believe a low leveraged country offers opportunities that are very different from countries like the US, UK and developed Europe generally, which are highly leveraged, both at the individual level and at the state level. If you compare them with Russia, China, and many other Asian countries, these countries have current account surpluses and low gearing at both the country level and also for individual households who have only recently started leveraging their properties.
"So the banking systems look interesting, for example. The increase in consumer growth you see is not only because of increased wealth rising from GDP growth, but also because of increased leverage. This leads to further consumption-led growth in these countries and we are keen on following that. We will therefore eventually diversify into domestic consumer-led growth in Asia from export-led European industries and the domestic driven opportunities seen in Europe."
But Linder does see some pitfalls to this: "There are a lot of companies trying to increase market share rapidly with increased level of operating expenses and capital expenditure, and this can be at the expense of margins, driving down profits. So it is not always that easy to develop within the domestic marketplace and in some sectors there is a lot of competition. Global brands are competing with local brands. We need to be humble and understand the business models first."
While the Stena group is a global company, the move by Linder to Singapore represents a focal point for the group's financial investments in Asia. "So far, we have travelled a lot and taken on advisors. The Singapore office will enable us to follow our investee companies into the region and understand their customers. It will also give us an understanding of how efficiencies can be improved in European companies," explains Linder. With the rest of his team based in the Gothenburg headquarters of Stena, the success of this move will depend on their ability to develop a cohesive approach across the globe.
Should pension funds generally adopt a much more ambitious approach as Stena has done towards emerging markets? Linder does see that pension funds by necessity, have to be more cautious when they enter into emerging markets for a lot of reasons, that include social responsibility and ethics as well as concerns over liquidity.
As he says: "Some pension funds are quite large so a big pension fund needs to understand what it is doing when it invests in smaller capital markets. The problem could be that they are only able to invest in the large blue chip stocks so perhaps they do not achieve the exposure that we are able to find by being smaller."
But Linder is puzzled by the slow progress made by pension funds generally to understanding the implications of the rise of emerging markets. "What I do not understand is why pension funds do not set up operations to understand what is going on better. They could set up a branch in Asia, for example. It is easy to read a lot and hear people in Sweden, for example, speaking about Asia, but it is totally different from actually going to Asia and meeting people. So many people seem to have strong opinions in Europe about China and Russia without ever going there, or perhaps only going once or twice."
As he goes on to argue: "That is why we are setting up in Singapore, in order to increase our knowledge. I don't think you can buy experience in Asia by just choosing fund managers in Asia. We need to understand the region better not only for now but also for the long term. We need to travel and meet people and see what is happening. Many people have adopted an approach that is too simplistic."
But perhaps it is in asset allocation that pension funds can really neglect the role of emerging markets. Linder argues: "I think that perhaps when people are taking decisions on asset allocation and benchmark portfolios, they have often travelled too little to understand what is going on. When they are doing asset allocation, looking at US equity markets, bonds, and so on, they should not just look backwards to see what was going on during the last 100 years. The world has changed dramatically and we need to understand what the future will look like." Linder argues strongly that setting up in Asia is a minimal cost for big organisations, like pension funds, that have the capacity. It will be interesting to see if anyone takes up the challenge.
As well as running the finances at Stena AB as CIO, Björn Linder also sits on the advisory board of East Capital Financial Explorer, an asset manager specialising in Eastern European financial markets. Prior to his current role, Linder was CIO for the Fourth Swedish National Pension Fund (Fjärde AP-fonden)