Unearthing Asia’s buried treasures

Released in 1958, Akira Kurosawa’s The Hidden Fortress is widely credited with inspiring a rather more well-known film: Star Wars. A knockabout jidaigeki epic, it features a classic example of what another great director, Alfred Hitchcock, called a MacGuffin.

Hitchcock coined this term to describe a plot device that matters an enormous amount to a movie’s characters but relatively little to the audience. The Hidden Fortress’s MacGuffin takes the form of 200 pieces of gold concealed in hollowed-out sticks.

What a wonderful metaphor for the brightest of Asia’s smaller companies. Like the camouflaged cache that spurs the adventures of Kurosawa’s heroes, these businesses can be a source of significant reward but can also be far from easy to uncover.

As far as investors are concerned, of course, such opportunities are anything but merely MacGuffins. They may represent an important and attractive means of diversifying portfolios in terms of region, sector, industry, market capitalization, and other factors.

So how are these found? At least on the face of it, the answer is straightforward enough. Like Tahei and Matashichi – The Hidden Fortress’s principal protagonists – you just have to keep digging.

The value of an on-the-ground approach

The first problem investors may encounter when they set out to explore Asia’s smaller companies is that these businesses are frequently under-researched. The extent of coverage in emerging markets (EMs) is particularly meagre.

Much of the blame lies with the members of the investment analyst community, the vast majority of whom focus their gaze elsewhere. While hundreds might eyeball a US technology titan, barely a handful – if any at all – are likely to pay heed to, say, a family-owned food firm in the Philippines.

Having studied at leading American universities, many of this food firm’s executives have a conspicuously entrepreneurial outlook and a fierce commitment to sustainability and good governance. These attributes have helped the business see off numerous would-be rivals, including several multinationals, and preserve its domestic dominance.

How did we discover this story? Our own specialist investment team draws on on-the-ground expertise, first-hand knowledge and direct engagement with companies – which is to say we strongly believe in the merits of being there.

Beyond the quant

It is tempting to assume all the information needed for robust investment decisions lies in the superabundance of data that businesses are nowadays required to disclose. It is also tempting to assume era-defining advances such as artificial intelligence (AI) are rendering the task of making sense of that superabundance ever simpler.

There is more than a germ of truth in both assumptions. Transparency levels are unprecedented, and AI is eminently capable of carrying out the heavy lifting that number-crunching and many other types of analysis entail.

Yet quantitative analysis is by no means guaranteed to tell us everything we ought to know. A business’s qualitative aspects can be every bit as influential – and maybe even more so – in guiding our choices.

This is why we prefer to see things for ourselves. It is why we visit premises and facilities. It is why we meet with senior executives. It is why we enter into dialogue and ask probing questions about issues such as cashflow, adaptability, and strategic vision.

This kind of additional insight can make all the difference in determining whether we feel a company will satisfy our expectations in the long run. We regard it as vital to our efforts to identify opportunities that most investors routinely overlook or never even get to hear about.

Hiding in plain sight

In Asia, as in other regions, smaller companies have tended to outperform their larger counterparts over time. This is normally because of their capacity for growth, their willingness to innovate and their ability to respond to or even drive market disruption.

Today, in the face of continued geopolitical and geo-economic uncertainty, many have another potential advantage – their domestic focus. Businesses with little or no exports are highly unlikely to be caught up in the ongoing fallout from US-led action on trade tariffs.

Take India’s foremost oil, gas, and chemicals logistics company, as well as the country’s number one importer and handler of liquified petroleum gas – a crucial element of the nation’s shift to cleaner energy.

Many of these businesses have been around for years, if not decades. The family-owned food firm in the Philippines was founded in 1978, when Star Wars was taking cinemas by storm. The Indian oil, gas, and chemicals logistics company was established in the 1950s, when Kurosawa was at his creative peak.

The truth is that, like those hollowed-out sticks packed with gold, the brightest of Asia’s smaller companies are often hiding in plain sight. Ultimately, in our view, the trick lies in putting in the effort necessary to spot them.

Endnotes

Editorial image credit: Willrow Hood - stock.adobe.com

Important information

Projections are offered as opinion and are not reflective of potential performance. Projections are not guaranteed and actual events or results may differ materially.

Equity stocks of small and mid-cap companies carry greater risk, and more volatility than equity stocks of larger, more established companies.

Foreign securities are more volatile, harder to price and less liquid than U.S. securities. They are subject to different accounting and regulatory standards, and political and economic risks. These risks are enhanced in emerging markets countries.

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