Managers See Reforms Driving Growth in Asia

Note: This article is part of Morningstar's May 2015 International Investing Week special report.

During a recent presentation hosted by Morningstar Australia, global investor and

The big "thrust we've had in our portfolio is now towards Asia," said Neilson, who is one of the top investors in Australia and manager of the Platinum International Fund. "We are now about 45% in Asia, 9% in Japan, and the remaining portfolio in China and India.

"Those are our big exposures, and it's all about reform," he added, pointing to a "revitalization of capitalism" from the reforms taking place in the region. In particular, Neilson is "seeing plenty of opportunity in Asia."

He believes China will be starting a new bull market fueled by reform and easier monetary policy and was particularly optimistic about India under the relatively new leadership of Indian Prime Minister Narendra Modi.

"We love what is happening in India. This is a country that most people treat with mirth because it is usually two steps forward and several steps back," he said. "But in the last 20 years, the average [real] growth rate has been 7%, so for all the confusion, it is a country that has grown quite well." Under Modi, we are seeing a rewrite of regulation around bank lending and the way utilities are managed.

The Hong Kong-based investment manager Anh Lu echoed Neilson's view of the region's reforms. As portfolio manager of T. Rowe Price Asia ex-Japan Equities, Lu sees these reforms as opening up growth prospects for companies and opportunity for investors.

"Asia is a very entrepreneurial region, but government initiatives have curbed entrepreneurialism. Key reforms currently being undertaken will free up capital. The economic outlook is looking better than the last three years," Lu said.

She pointed to such key reforms as the introduction of a goods-and-services tax in India. The GST should widen the tax base and increase revenue for the government to use on initiatives such as infrastructure spending. She also cited a continued move toward anticorruption, fiscal reform, and capital-account liberalization in China. Reforms in other Asian countries are also taking place, including the redirection of savings to infrastructure in Indonesia, service-sector liberalization in Korea, and constitutional reforms by the military government in Thailand.

Manager Picks: Spirits, Luggage, and Semiconductors So, what specific companies are these fund managers invested in? Platinum's new investments in Asia are targeting infrastructure in India and China. Neilson also highlighted a company--spirit-manufacturer Kweichow Moutai, which produces the distinguished spirit brand, KweichowMoutai--that has managed to grow following China's move to anticorruption.

Not only can it "clean the grease from your car," but this spirit has a history of being consumed by the Chinese military and the nation's rulers, Neilson said. Two years ago, China started clamping down on bribe-taking and anti-extravagance measures. Given that the liquor was consumed by the ruling class, there was a significant drop in sales, and negative news reports soon followed.

However, Neilson explained that the well-managed business anticipated this change and broadened its distribution beyond the "power cities" of Shanghai and Beijing. Now, the "average punter" (that is, members of China's middle class) can buy the product.

At a cost of $10 to make the product, the company generates a 50% aftertax return, so return on capital is greater than 20%, according to Neilson. "It was an extraordinary love story for us. The business has no debt, with cash on its balance sheet. Please go out and buy this product. It is good for us and it is good for you," he said.

Lu captures growth in the T. Rowe Price portfolio from four key themes: rising domestic consumption, technology and innovation, world-class businesses, and improving business practices. Rising disposable income remains a key trend, long term, in the region, according to Lu.

For a self-confessed luggage aficionado, Lu said there is plenty to like about the world's largest luggage manufacturer, Europe-based Samsonite SMSEY. "I know people laugh when I mention innovation and luggage, but this is a business that is a dominant market player but has products tailored to local markets, strong pricing power, and management with a consistent track record," she explained.

The Chinese stock Tencent TCEHY is the best-positioned Internet company in mobile and is among the top five Internet companies in the world, according to Lu. The business is positioned to capture new opportunities, including online payments and e-banking, which will be big in Asia once regulation will allow more competition.

A common approach for many global fund managers is to invest in companies domiciled in the developed world but whose earnings are leveraged to emerging economies. For instance, Lu said

Lu acknowledges that Asia has disappointed investors in the last three years, but with the planned (and implemented) reforms, the region is on a "good trajectory of growth despite the rising valuations."