Integrity in the business is absolutely essential
Category: Asia, Global
By Tan Lee Hock
Industry veteran Tulloch practices what he preaches
In this day and age of short-termism where one’s performance is measured on a quarterly basis and where results are expected accordingly, it is gratifying that there are others who take the long view and who are able to profit from it. One such portfolio manager is Edinburgh-based Angus Tulloch, a joint managing partner of First State Stewart – the Asia-Pacific/global emerging markets arm of First State Investments – managing assets totalling US$41.5 billion as at December 31, 2011. Mr. Tulloch is a market veteran whose investment management career spans more than three decades; or to be precise, 32 years of professional money management experience, according to the company’s latest factsheet. Mr. Tulloch started investing when he was ten years old and his father, noticing the young boy’s interest in finance, introduced him to a stockbroker. He started investing with five pounds that he was given to kick-start his investment career and has not looked back since then.
The company’s investment approach embraces an absolute return mindset and while it is a bottom-up stock picker, the emphasis is on investing for the long-term, selecting quality companies whose earnings are sustainable and predictable.
On a visit to Hong Kong last month, Mr. Tulloch shared his views and thoughts with Asia Asset Management on a broad range of topics. Excerpts of the interview follow.
On the company’s stock selection approach
We are interested in companies that have focus and we like companies who care about their stakeholders – this includes having regard to the environment for example as well as looking after minority shareholders. If you invest in companies that tend to cut corners, I think this will eventually return to hit you.
On the rise of state capitalism
We are seeing that in China and we have to be cautious when investing in these companies. We much prefer to invest in privately-owned companies as they tend to have a simple agenda that is focused on servicing shareholders and stakeholders. State-owned companies can have confused objectives and sometimes, making sustainable profits is not their prime objective.
Having said that we do not believe in unbridled capitalism either and whilst free market forces are important, they have to be controlled.
On finding good companies in China and India
We have seen that growth has slowed in India but that is not the end of the world. Recently in India we have seen political paralysis set in and that has delayed the decision making process. All things being equal, I think we are finding quite interesting and entrepreneurial companies in India.
On the importance of dividend distribution
This matters to us as we go about looking for companies to invest in but management quality is critical. We worry about companies that place growth above all else especially growth at all costs.
On socially responsible investing
We are mindful of investing in companies that pollute the environment as we regard that as part of their process of taking care of stakeholders. We have not, for example, invested in tobacco companies for over 15 years as we feel that they may face potential legal liabilities and these can come back to hit them. For mining companies, for example gold mining firms, it is difficult for them to operate without doing some damage to the environment. However if they are conscious of that and are keeping this to a minimum, then they might be considered.
On being a corporate activist
We are not an activist as such and in Asia, we do not take a heavy handed approach. That annoys people and I think it does not work. If you approach companies sensibly, they will give you the time of day. We have expressed opinions to companies in matters that are material and we do feel we have an obligation to change if things are not going in the right direction.
On measuring performance on a quarterly basis
The world has become extremely short term, because we have been doing this a long time, well over 20 years; our investors do not expect us to perform consistently every quarter and they are quite acceptable really that we underperform the benchmark because they know that what we are doing usually is not silly and not being carried away by the flavour of the month. During the technology boom in 2000, we had no tech stocks at all so we had a year of significant underperformance but when the bubble burst, we had a good return in absolute terms because clients are in the business to make money, not just to outperform a benchmark.
On setting benchmarks and being guided by them
I think benchmarks are particularly artificial constructs and I think to measure against a benchmark over three years is not a good way to judge performance, and really it should be over five years and ideally over seven years so that you can see how a fund manager performs over a whole cycle.
At the end of the day, we all have to do better than a benchmark but that does not mean that we have to look at a benchmark over the short-term. The whole problem in the investment management industry is that risk is defined as underperforming a benchmark over the short term. So people tend to focus on the benchmark and as a result, they lose sight of the long-term objective.
On compensation structures that are based on yearly performance
I think to pay bonuses over a period of one year is wrong. In our case, our investment performance bonuses are calculated over three to five years; a major part of our senior staff’s remuneration has to be invested into a composite of the products that we manage so that our interests are aligned with that of our clients. I am sure that this is the way forward. It is quite common in private equity but not so common for listed equity.
On why has this compensation structure is not more widely adopted
I think some companies will argue that they face short-term pressures of finding the right people and to keep them. If that is the norm based on what was done in the previous year and rewarded accordingly, then I think it will be difficult to change the system.
On attracting and retaining talent
It is important to have a combination of new talent coming on board and developing them internally; if this is not the case, there is always a danger of being inward looking and especially for fund managers who have been at it for a long time – one can well be blasé about things.
On the attributes of a good portfolio manager
I think having curiosity is an extremely important attribute and so is the ability to stand back and go against the flow, being a contrarian, so to speak. It is also critical to be an original thinker and you have to have an interest in the details – it helps to have an interest in finance; it will also help if you enjoy engaging companies as that will provide insights into the culture of a company. Integrity in the business is absolutely essential.
I think one should also have a sense of humility and a combination of being confident in yourself and awareness that you could be wrong and constantly learn from one’s mistakes.
On what keeps him awake at night
I hate losing money and so I am much more worried about that than underperforming a benchmark.
Discuss: Integrity in the business is absolutely essential