January 27, 2013 9:44 am

China doubter sticks to strategy

Hugh Young, who oversees £37bn as head of Asian equities at Aberdeen, has warned investors he is “due a bad year” as his bearish strategy lags behind rallying markets.

Mr Young is managing director of Aberdeen Asset Management Asia, a role that sees him oversee eight funds including the group’s £2.4bn Asia Pacific fund, which is now trailing its peers.

“Stock markets have had a very good run and we are probably due a year of relative underperformance. If the markets were lower we would be a lot happier,” says Mr Young.

“We would like to swap the good companies we have for other equally good companies for lower prices, but we worry about low quality. We are not trying to chase performance every year.”

The fund’s benchmark index, MSCI AC Asia Pacific excluding Japan, has risen by more than 11 per cent since mid-November last year amid a resurgence in risk appetite. The gains have been led by Asia’s now-dominant economic force China, which is also benefiting from recent signs that its continued economic contraction could be coming to an end.

But Singapore-based Mr Young has set his stall as a doubter of China’s long-term structural growth story, remaining heavily underweight the market while most of his peers have done the opposite.

The 25-year-old Aberdeen Asia Pacific fund had a 24.8 per cent weighting to Hong Kong-listed shares when it last reported its asset allocation at the end of last year.

However, it held just 5.5 per cent in Chinese domestic-listed A-shares that have led the recent market rallies. By way of comparison it also held 19.6 per cent in the Singapore stock market and 11.9 per cent in Australia. The manager says he continues to believe that “the quality of listed Chinese companies is very poor” – and he is continuing to look elsewhere for investment opportunities.

“China has been on hold waiting for its next faceless leaders. Money will start flowing through the system again, but if we can’t find the right companies we will miss out on it,” he says.

He stresses that the Asian economy overall “is slowing at an extreme rate”, pointing to recent data that put the Singapore economy just outside of recession territory.

“Last year was disappointing in terms of earnings growth and 2013 looks not dissimilar,” he says.

Winterflood Securities analyst Simon Elliott says: “Hugh is always categorical about his strong value approach, with an emphasis on quality companies. If Chinese companies are too expensive or don’t meet his stringent corporate governance measures he simply won’t put his money there.

“Long term he has a very strong record. It all depends on how long [an investor’s] investment horizon is. If it is short term then [Mr Young] might not be [the right choice]. If not [then an investor] might be happy to stick with him.”

Adrian Lowcock, senior investment manager at Hargreaves Lansdown, said he was “not overly concerned” by Mr Young’s short-term lull. “China has huge potential for growth but there are risks involved – there are definitely still corporate governance issues and it is still an emerging market.

Eleanor Lawrie is a reporter at Investment Adviser

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