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Hugh Young’s headaches: what’s the cure for his underperformance?

Our series on blockbuster managers underperforming turns its forensic focus onto the Aberdeen AM stalwart. What’s he doing to turn things around?

In the hot seat: Hugh Young

Following on from our focus on Michael Hasenstab's current hardships, our performance review series turns it attentions to another leading light and fund selector favourite facing up to a painful period to understand what has hampered returns and how they plan to turn it around.

The Aberdeen Asset Management veteran Hugh Young has carved out a lengthy career investing in the Asian and emerging markets. However, his shorter-term performance is beginning to feel the strain of increased aversion to the Asian market.

In this analysis, Citywire Selector and Citywire Investment Research zero in on what has caused the equity investor’s downturn, how fund selectors are reacting and hear from Young himself on how he plans to ensure his Asia approaches can return to the sector summit.

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Heavy hitter drifting downwards

Young is one of the most recognisable names in Asian investing and his footprint in asset terms if considerable. He is active in nine sectors in total and has the majority share in four of these markets.

The table above shows, however, performance hasn’t matched flows. The ideal location is in the top right hand corner, which would show strong risk-adjusted performance over three and 10 years. However, his funds are clustered in the directly opposite area, signifying underperformance.

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Biggest fund keeping pace

It is not all doom and gloom for Young, however. He is ahead of the average manager in the Asia Pacific ex Japan sector in absolute terms over 10 years. This is largely powered by his biggest fund in asset terms, the Aberdeen Global – Asia Pacific Equity fund, which currently clocks in at $4 billion.

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Flows begin to slow…and exit

Over the 12 months to the end of February 2016, Young has seen outflows from all but two areas of his investment coverage, these being his Japan and Singapore-focused funds.

However, his Indian strategy, Aberdeen Global – Indian Equity, has seen $1.37 billion of outflows over the 12 month period. This is while the aforementioned Asia Pacific Equity fund dropped $3.2 billion over the same timeframe.

Speaking to Citywire Selector, Young said: ‘On an absolute basis the fund has suffered because of the reversal in investor sentiment towards the emerging markets since the ‘taper tantrum’ of 2013. This led to substantial capital outflows from Asia as investors indiscriminately pulled their money from the region.’

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Excess return beginning to flag

While the longer-term pedigree stands up to scrutiny, the ability of the Aberdeen Global – Asia Pacific Equity fund has become less resilient to downturns and tends to underperform in market rallies.

This table showcases how Hugh Young’s Asia Pacific ex Japan approaches have fared compared to the wider market in the last 12 months. Of the nine down periods, Young outperformed in just three.

In the past, Young has boasted that this fund does well in periods of market downturns. However, over the past year he has only been able to outperform in the down periods for 40% of the time. His strategy is built for tough markets where he concentrated on building his portfolio from the quality of businesses as well as strong balance sheets.

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Young’s view: tech challenges and bank bets

The industry veteran is not oblivious to the hardships of the Asian region but also conscious of not compromising his long-held investment style. Young is adamant he will remain ‘slow and steady’ despite it not being a ‘sexy’ approach, Young says the recent underperformance can be linked to some obvious themes.

‘A big reason has been our decision not to invest in companies linked to the explosive growth of social media and online commerce in China. For example, we didn’t invest in Tencent because we are uncomfortable with its corporate structure,’ he says.

‘Our Asia Pacific fund rose on an absolute basis during the first quarter but lagged the benchmark. Our positions in Hong Kong and Korea were key detractors. In Hong Kong, both HSBC and Standard Chartered Bank continued to be weighed down by higher provisions, a slowing Chinese economy and global growth concerns.’

‘This was compounded by the uncertainty created by the Bank of Japan’s imposition of negative interest rates in its latest attempt to boost spending,’ he adds. ‘Despite these uncertainties, the two lenders have continued to strengthen their capital positions by reducing exposure to riskier assets and streamlining their balance sheets, supported by focused, competent and professional management.’

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The selector view – small isn’t necessarily mighty

While the focus of the piece is on his broad Asia Pacific ex Japan exposure, selectors are also cautious over other operations in the wider market.

Fabio Catalano of Italian group AcomeA previously held the Aberdeen Global – Asian Smaller Companies fund, which, he said, has suffered alongside Young’s other funds. One main sticking point being how it had become unwieldy.

‘We sold all the investment in that fund some years ago because the assets under management became too big relative to the universe and they had big participation in several small companies that could hurt the normal selling decision in a stressed period.’

‘So, we haven’t been invested in the strategy recently and I don’t think we will reinvest in the near-term, as it is still too big, while also being less consistent in our quantitative screening relative to other funds in the sector.’

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Verdict: short-term shocks mask tenacious tenure

Nisha Long, senior investment analyst, Citywire Investment Research

‘Hugh Young has bouts of short term underperformance which can be linked to either poor stock picking or poor asset allocation decisions by the management team. However, he sticks to his guns and his continued underweight stance towards China has proved that his concerns for this area of the market was justified.’

‘He holds stocks for a long period e.g. showing his knowledge and experience: one of his larger positions in the fund, Samsung, held for decades, even during the tech bubble in the late Nineties. This is a company that shows how far Asia has come. Ten years ago no one wanted to be seen with a Samsung gadget because its products looked cheap and a bit tacky. But today everyone is buying anything that has Samsung’s name.’

‘Hugh Young is a tortoise. Slow but steady and suited to the long-term investor. To put it into context - Since launch in April 1988, the Aberdeen Global - Asia Pacific Eqty A2 Acc USD fund, has returned 1024%. The MSCI AC Asia Pacific ex Japan Index has returned 610%.’

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