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The 'incredibly cheap' market luring Pacific Horizon

Roddy Snell, manager of the top-performing Pacific Horizon (PHI) investment trust, has been adding to his holdings in vietnam, a country he believes offers 'the best long-term structural growth story in Asia'.

He thinks the companies he holds across his Asia-focused portfolio should be able to withstand the impact of a protectionist Donald Trump, and while he has an eye on the nuclear war-of-words between the US president and North Korea, he is also alive to the potential investment opportunities in the event of regime change.

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Daniel Grote: Hello! Joining me today is Roddy Snell, who manages the Pacific Horizon investment trust, which invests in Asian companies.

Looking at the way in which the trust is invested across different countries, you do have a narrower geographic focus than some of your rivals.

Roddy Snell: Well I suppose we’re a very actively managed trust and we’re purely trying to find the best companies we can for our clients. And we’re not trying to track an index so we’re not trying to invest in countries unless we can find those great bottom up ideas. And the countries we don’t invest in in any significance size that would be the Philippines, Malaysia and Thailand. We’re just not finding good ideas there at the moment. But, you know, that can change if we do. We recently took a holding for the first time in a while in Indonesia for example.

DG: Your Chinese holdings have gone up largely through investment performance, but India and Vietnam those are the two countries where you’ve been making investments recently. What’s drawn you to them?

RS: Vietnam we’ve been adding to since the middle of last year effectively. We got our accounts opened for the trust so we can invest directly in the country which had been an issue before. And the story there is I think it’s probably the best long-term structural growth story in Asia. It’s got a successful export manufacturing base, which is the key for any emerging market to emerge. Valuations look incredibly cheap compared to the rest of the region, probably about a 50% discount to most Asian countries, and that’s because of the lack of liquidity and it’s difficult for foreigners to buy, but that’s changing. The market is opening up rapidly and there are a lot of privatisations, so I think on a 10, 15-year view, it’s probably one of the most attractive markets you can invest in with a handful of great businesses.

And then India, we’ve held India for many years. But we think this is probably again one of the best growth stories across Asia and it has a number of excellent companies, and what I mean by that is businesses with very high returns on capital, with strong barriers to entry – it’s very difficult for foreigners to come in and difficult for new local players to set up, so we think those returns are sustainable for a long period of time.

DG: You mentioned Vietnam’s exporting capabilities. Looking across the portfolio, the sort of companies you are investing in, top what extent are they driven by domestic consumer demand and to what extent are they exporters.

RS: Yeah that’s actually an interesting question. It can actually be quite difficult to disentangle them, because there’s so much cross trade: Korean companies selling to China and then sold on to the US, etc. But I would say the largest part of the portfolio is to the domestic consumer, so that’s probably 60% to 70% and the remainder would be to exports.

DG: Because I guess one of the fears for the region is the impact of US president Donald Trump, especially if he follows through on this protectionist agenda that he’s been espousing. To what extent would your companies be impacted by that?

RS: I think relatively little. The majority of the companies we have, particularly on the exporting side, I would describe as world class. The likes of TSMC or Samsung Electronics, and these guys are making products that really no-one else in the world can do. I’m talking particularly on the semiconductor side where Samsung dominates, DRAM and NAND, and TSMC is the world’s global largest foundry, and these are things that just can’t be done easily by other businesses. So I don’t think protection actually affects those businesses. And even if it did they could just set up manufacturing plants in the US in a worst case scenario.

DG: The other obvious Trump threat to the region is the nuclear rhetoric between him and North Korea.

RS: I think geopolitical risks are always prevalent in the region. North Korea has been an issue for several decades. So I sort of think it’s worth keeping one’s eye on and I think where we go from here there is a question mark.

But ultimately South Korea, where we have a lot of money invested, has been very used to this situation for many years and I suppose we’re just going to have to keep an eye on what’s going on.

DG: I mean is there anything you can do as an investor with that sort of threat or is it just something that you are war of?

RS: It’s difficult because it’s a low probability but obviously high impact event. But I suppose as investors we obviously try and think about the impacts should they happen, and obviously there are some very negative impacts. But also there are some very positive impacts if North Korea were to suddenly open up. I mean, you’d have 25 million very cheap labourers which would be fantastic for some manufacturing companies in Korea, for instance. Some South Korean businesses involved in construction would have a very positive five-, 10-year outcome given the reconstruction, several trillion dollars would probably be needed. We certainly look at what might be the downside but also look for actual possible investment opportunities in North Korea were the regime to suddenly change. 

DG: Well Roddy, thanks very much for your time.

RS: Thank you very much.

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