For personal use only
VGI Partners
Asian Investments Limited
ABN 58 635 219 484
39 Phillip Street
Sydney NSW 2000 Australia T. +61 2 9237 8923 www.vgipartners.com/lics/vg8
29 July 2022
ASX Market Announcements Office
ASX Limited
Exchange Centre
20 Bridge Street
Sydney NSW 2000
BY ELECTRONIC LODGEMENT
VG8 Investor Letter - Year to June 2022
VGI Partners Asian Investments Limited (ASX:VG8) is pleased to make available the enclosed Investor Letter. The letter provides details on the performance of VG8 for the twelve months ended 30 June 2022 and commentary on current positioning.
Authorised for release by:
Ian Cameron, Company Secretary
Investor contact information:
Ingrid Groer, CFA
VGI Partners Asian Investments Limited
Phone: 1800 571 917 (inside Australia) +61 2 9237 8923 (outside Australia)
Email: investor.relations@vgipartners.com
VG8 - Asian Investments
Investor Letter
29 July 2022
only"If we were to unleash the abilities of every single person in Asia and let them fulfil their p tential, the resulting force would be truly tremendous."
SHINZO ABE (FORMER PRIME MINISTER OF JAPAN)
useD ar Fellow Investors,
For the twelve months ended 30 June 2022 (FY22), VGI Partners Asian Investments Limited (ASX:VG8) generated a net portfolio return of -19.3% after all fees.1
FY22 produced a challenging period for equity market returns in Asia. Over the last year, we have seen a significant decline in valuation multiples throughout the region, driven by global concerns of rising inflation
and tightening monetary conditions, in addition to a series of regional-specific headwinds. Most notable personalof these has been the slowing of growth within China, the region's largest economy, as a result of heavily curtailed economic activity associated with the country's zero-COVID lockdown restrictions and a
tightening in overall credit conditions. While we do not benchmark to any indices, we note the MSCI Asia Pacific All Country Index (AUD) returned -15.6% in the year to 30 June 2022.
While broader equity markets have been weaker, we have been disappointed with the returns delivered by the portfolio over the 12 months to 30 June 2022. We discuss the key detractors to performance later in this letter, in addition to some insights around the current shape of the portfolio and the opportunities that recent equity market volatility is providing investors in the region. While shorter-term volatility of performance is unpleasant, we are seeing an appealing investment opportunity set currently in the region and view the portfolio as well positioned to generate returns.
Merger with Regal Funds Management
Before we discuss the portfolio in detail, we would like to make a few comments about the recent merger of VGI Partners with Regal Funds Management.
ForAt the end of March, we were pleased to inform investors and shareholders that VGI Partners and Regal Funds Management had entered into a Merger Implementation Deed, combining two well-established investment management businesses and creating a market leading manager of alternative investment strategies. Following receipt of the required regulatory and shareholder approvals in May, the merger completed on 3 June 2022, with the new combined entity renamed 'Regal Partners'.
We are pleased to report the merger has progressed well. The key expected benefits of the combination have quickly begun to materialise, including the opportunity to access Regal's institutional grade corporate platform and marketing and distribution capabilities, in addition to leveraging Regal's long track record in investing in the Asian region. As previously communicated, Regal Funds Management has extensive capabilities in investing in Asia, operating one of the largest fundamental investment teams in
1 Past performance is not a reliable indicator of future performance and should not be relied upon as an indication of the future performance of any fund or
strategy.
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July 2022 Investor Letter
the region, complemented by highly experienced industry sector specialists working across offices in Sydney and Singapore.
On 15 June 2022, VG8 announced that it had entered into an investment advisory agreement whereby
Regal Funds Management, led by Regal Chief Investment Officer Philip King, would assist the Manager onlywith the investment of the Company's portfolio. Pleasingly, on 27 June 2022, VG8 announced that Philip
King had moved to leading portfolio management responsibilities for VG8, with assistance from VGI Partners' CIO Rob Luciano and the broader VGI Partners and Regal Funds Management investment teams.
B th VGI Partners and Regal share very similar philosophies around alignment with our investors, with key investment staff retaining meaningful shareholdings in the merged entity and substantial personal investments in the underlying funds and listed investment vehicles.
useThe manager has also been supportive of recent initiatives taken by the VG8 Board and the VG8 Board's
strong focus on capital management. This includes having a defined dividend policy and VG8's policy to
target a fully franked dividend yield of 4% p.a. is a good example of this. VG8 has paid two fully franked dividends during FY22 (5.5c in September 2021 and 5.0c in April 2022).
In addition, a second element of capital management includes the provision of an active on-market share
b y-back program whenever shares are trading at a discount to Net Tangible Assets. This not only provides
greater on-market liquidity but can also be highly accretive for shareholders. Many VG8 shareholders
would be aware that VG8 began operating a buy-back program in May this year. Over 3m shares, or
pproximately 1.5% of VG1's shares, have already been bought back since the program began.
We thank investors and shareholders for their kind messages of support through the merger process and look forward to providing more updates through future briefings and letters.
P rtfolio Update
As mentioned above, we continue to see a compelling investment opportunity set in the Asia Pacific region. From a valuation perspective, the MSCI Asia Pacific All Country Index is now trading near the lower end of its price-to-earnings (P/E) range and at an 18% discount to the MSCI World Index.
P/E Multiple (12 Months Forward Earnings Per Share Estimates)
25x | |||||||||||||||||
personal | |||||||||||||||||
20x | |||||||||||||||||
15x | |||||||||||||||||
10x | |||||||||||||||||
For | |||||||||||||||||
5x | |||||||||||||||||
0x | |||||||||||||||||
Jun-10 | Jun-11 | Jun-12 | Jun-13 | Jun-14 | Jun-15 | Jun-16 | Jun-17 | Jun-18 | Jun-19 | Jun-20 | Jun-21 | Jun-22 | |||||
MSCI World Index | MSCI Asia Pacific Index | ||||||||||||||||
Source: Bloomberg.
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July 2022 Investor Letter
This valuation discount for the Asia Pacific market is particularly interesting given the higher economic growth forecast for the region. The OECD forecasts that real GDP will grow +4.7% CAGR in the Asia Pacific region this decade, nearly double the rate forecast for the rest of the world at +2.4% CAGR.
Propelling Asia's economic growth is the increasing percentage of its vast population entering the "consumer class". A rising number of sophisticated consumers in Asia is expected to create further demand for educated and trained labour, which lifts others from poverty and extends the cycle. Asia's "consumer class" is already larger than the rest of the world combined and is expected to be around 1.5x larger than the rest of the world combined by the end of this decade.
Asia's Rising Consumer Class | Global Distribution of the Consumer | ||||||||||||||||||||||||||||||||
only | |||||||||||||||||||||||||||||||||
Poplationuse(billion) | 3.5 | 5 | |||||||||||||||||||||||||||||||
3.0 | |||||||||||||||||||||||||||||||||
2.5 | 4 | ||||||||||||||||||||||||||||||||
2.0 | (billion) | 3 | Asia | ||||||||||||||||||||||||||||||
1.5 | |||||||||||||||||||||||||||||||||
1.0 | 2 | ||||||||||||||||||||||||||||||||
0.5 | Rest of world | ||||||||||||||||||||||||||||||||
1 | |||||||||||||||||||||||||||||||||
0.0 | |||||||||||||||||||||||||||||||||
2015 | 2026 | ||||||||||||||||||||||||||||||||
2010 | 2011 | 2012 | 2013 | 2014 | 2016 | 2017 | 2018 | 2019 | 2020 | 2021 | 2022 | 2023 | 2024 | 2025 | 0 | ||||||||||||||||||
Consumer class | Poor and vulnerable | 2000 | 2010 | 2020 | 2030 | ||||||||||||||||||||||||||||
S urce: World Data Lab (as cited by the Brookings Institution). | Population | ||||||||||||||||||||||||||||||||
personal | 2027 2028 2029 2030 | ||||||||||||||||||||||||||||||||
The OECD forecasts that the Asia Pacific region will account for nearly half of global economy by the end of this decade. The Asia Pacific region will soon become too large for investors to ignore.
Asia Pacific's Share of Global GDP
65% | |||||||||||||||||||||||
60% | |||||||||||||||||||||||
55% | |||||||||||||||||||||||
50% | |||||||||||||||||||||||
For | |||||||||||||||||||||||
45% | |||||||||||||||||||||||
40% | |||||||||||||||||||||||
35% | |||||||||||||||||||||||
30% | |||||||||||||||||||||||
25% | |||||||||||||||||||||||
20% | |||||||||||||||||||||||
15% | |||||||||||||||||||||||
10% | |||||||||||||||||||||||
5% | |||||||||||||||||||||||
0% | |||||||||||||||||||||||
1820 | 1830 | 1840 | 1850 | 1860 | 1870 | 1880 | 1890 | 1900 | 1910 | 1920 | 1930 | 1940 | 1950 | 1960 | 1970 | 1980 | 1990 | 2000 | 2010 | 2020 | 2030 |
Source: 1820-2010 Maddison Project Database, version 2020. Bolt, Jutta and Jan Luiten van Zanden (2020). 2010 onwards OECD.
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July 2022 Investor Letter
Portfolio Positioning
VG8's long portfolio currently contains a number of investments that are listed in either Japan or Australia but leveraged to broader Asian growth. The long portfolio also has what we consider a relatively small weighting to China-focused businesses listed in Hong Kong. Below we look at these three markets, with some examples of how the fund is currently positioned.
Japan
Japan continues to be the largest weighting in the long portfolio. The Japanese market is currently trading | ||||
t wards its lowest P/E multiple in a decade and at an 11% discount to its 10-year average P/E ratio. | ||||
onlyJapan's Topix Index - P/E History | ||||
use | ||||
20x | ||||
18x | ||||
16x | ||||
14x | ||||
12x | ||||
10x | ||||
8x | ||||
personal | 250 | |||
6x | ||||
4x | ||||
2x | ||||
0x |
Jul-2012Jul-2013Jul-2014Jul-2015Jul-2016Jul-2017Jul-2018Jul-2019Jul-2020Jul-2021Jul-2022
S urce: Bloomberg using consensus forecast earnings on a
Japan has a broad range of companies that have developed market-leading products and established extensive sales networks across other Asian nations. In the chart below we highlight the substantial sales g owth seen by three of our portfolio companies into other Asian nations over the last decade.
R venue from Asia Pacific Countries Excluding Japan
Forbillin)(YenRevenue | 200 | ||||||
150 | |||||||
100 | |||||||
50 | |||||||
0 | |||||||
Olympus Corporation | Daifuku Co. Ltd | Shimadzu Corporation |
Global leader in gastrointestinal | Global leader in logistics automation. | Leader in pharma and food testing |
endoscopes. Leverage to rising rates of | Leverage to rising labour costs and | equipment in Asia. Leverage to Asia's |
gastric cancer screening. | increased supply-chain investment. | rising pharma and food industries. |
Source: Bloomberg. |
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VGI Partners Asian Investments Ltd. published this content on 28 July 2022 and is solely responsible for the information contained therein. Distributed by Public, unedited and unaltered, on 28 July 2022 23:23:06 UTC.