Hugh Young, managing director of Asia at Aberdeen Asset Management Plc, poses for a photograph in Singapore.(Photographer: Ore Huiying/Bloomberg)

Aberdeen's 1,400% Man in Asia on Why His Heart Isn't in Passive

(Bloomberg) -- Hugh Young understands the appeal of passive investing -- it’s one of the faster-growing offerings at his firm, Aberdeen Asset Management Plc. But that doesn’t mean he likes it.

“My heart isn’t in it,” says Young, who co-founded Aberdeen’s Asia business in 1992 and has trounced the region’s benchmark index with his flagship equity fund over the past three decades.

The 59-year-old stock picker’s faith in active management shows little sign of wavering despite one of the most challenging periods of his career. Assets in his flagship fund have dropped 67 percent from their 2013 peak amid a stretch of weak returns, while Aberdeen has suffered about $85 billion of net outflows in the past two years. The U.K.-based firm, which still has more than 90 percent of its assets in active strategies, agreed to merge with Standard Life Plc in March and cut 800 jobs across the group to weather growing competition from low-cost index funds.

Young, who’s been tapped to lead the new Standard Life Aberdeen Plc in Asia, says he’s open to experimentation as the firm tries to strike the right balance between active, passive and so-called smart beta offerings. But the core of his investment philosophy remains the same as it was the day he arrived in Singapore 25 years ago.

“If you cut the process right back to its heart, it’s being an investor in Asia’s best companies,” says Young, whose $3.4 billion Aberdeen Global - Asia Pacific Equity Fund returned 1,415 percent from its inception in 1988 through the end of May, beating its benchmark index by about 417 percentage points. “That doesn’t change.”

Aberdeen's 1,400% Man in Asia on Why His Heart Isn't in Passive

The numbers suggest that in Asia at least, managers like Young still have scope for optimism. Active funds in the region attracted an estimated $88 billion of net inflows last year, 90 percent more than their passive counterparts, according to Morningstar Inc. In the U.S., active funds saw $204 billion of withdrawals.

The divergence is partly explained by Asia’s high concentration of developing nations, where active managers’ prospects tend to be stronger, according to Jackie Choy, Morningstar’s director of ETF research for Asia, and Germaine Share, a senior analyst at the firm.

Emerging markets are Young’s bread and butter. He helped lead Aberdeen’s push into countries like Indonesia, the Philippines and India after opening the firm’s Asia office in his early 30s. His approach from the beginning: find cash-generating businesses with trustworthy managers and dominant market positions, and invest for the long haul. Young’s funds have owned Multi Bintang Indonesia Tbk, a beer producer in Southeast Asia’s largest economy, since the 1980s.

Back then, index-tracking investments in Asia were still in their infancy. Now, Morningstar says they account for about 44 percent of assets in the region’s equity funds and 9.4 percent of the money in fixed-income funds (the equity portion is higher thanks in part to the Bank of Japan’s asset-buying program).

Passive strategies have even taken root at Aberdeen. About 8 percent of the firm’s $392 billion under management as of March were in index, enhanced-index and smart-beta strategies -- which use metrics like dividends and growth to weight holdings instead of market capitalization.

Read more on Aberdeen’s merger with Standard Life here

Young, who spends so much time in Aberdeen’s Asia headquarters that he treats it like a second home, bristles at the idea of buying an index fund that simply tracks the market’s largest stocks.

“Logically, if you’re investing in something, do you just buy because it’s big?’’ he asks during an interview in his Singapore office, where he displays much of his personal art collection and often walks the halls in his socks. “No.’’

The way Young sees it, the rise of passive funds may ultimately be a good thing for active investors who manage to stay in business. While index trackers put pressure on fees, Young says their growing influence could also make markets less efficient, creating opportunities for savvy traders.

The challenge, of course, is to identify bargains that other investors eventually discover for themselves. 

It’s a feat that Young has struggled with recently. His flagship stock fund returned just 1.7 percent in the past three years, trailing a 14 percent gain in the MSCI Asia Pacific ex Japan Index and lagging behind more than 90 percent of peers tracked by Bloomberg.

Young ascribes some of the underperformance to a heavy weighting in Southeast Asia, where markets have struggled amid rising U.S. interest rates. His aversion to the governance practices at Chinese Internet companies has also hurt as industry heavyweights including Alibaba Group Holding Ltd. surged.

Despite the rough patch, Young says he’s still finding plenty of opportunities.

One of his more unusual picks is Yoma Strategic Holdings Ltd., a Singapore-listed conglomerate with real estate, consumer and automotive businesses in Myanmar. It’s an atypical position for Aberdeen, given that the company isn’t yet producing steady cash flows, but Young compares the group’s potential to that of Jardine Matheson Holdings Ltd., which has been operating in China and the surrounding region since the 1800s. Aberdeen holds about 9 percent of Yoma’s shares, which have climbed 25 percent in the past 18 months.

Passive investors? They’re largely unexposed. MSCI Inc. hasn’t yet included Yoma in its benchmark indexes.