Local knowledge key to building success over the long term

THE Scottish Oriental Smaller Companies Trust invests in businesses predominantly in Asia (excluding Japan and Australia) with a market capitalisation of less than US$1 billion (£660 million) prior to investment.

The investment manager is Susie Rippingall of Asia Pacific and Emerging Markets specialists First State Investments. Based in Hong Kong, the manager feels ideally placed to uncover quality companies in the region. She explained: "We look for companies that provide growth at a reasonable price.

"This means investing in those companies with strong balance sheets and established dividend policies which can achieve a sustainable growth in earnings of 15 per cent a year. When a company is too expensive, we would prefer to wait until the valuations are more attractive before buying."

Rippingall believes her longer-term outlook pays dividends for shareholders. "We can see through a short-term, two to three-month problem period because our investment time horizon is generally three to five years. Some of the holdings have been in the portfolio since launch over 15 years ago," she said.

The process of selecting companies for inclusion in the portfolio is focused at individual company level rather than by taking a view on sectors, or even countries. However, the significant underweight position in India is due to the manager's view that India is behind the curve on dealing with inflation and that valuations are unrealistically high.

A lot of work is done before a company makes it into the portfolio, according to Rippingall. "I read about companies in the local press, talk to analysts and regularly visit the management of the companies that interest me." She cites the 20-strong team at First State as an invaluable resource in such a vast geographic region.

The manager offered the Erawan Group as an example of the investment process in action. The Thai company owns a range of hotels, including some run by up-market brands such as Hyatt and Marriott, and benefits from regulations preventing foreigners from owning freehold property.

"They are now branching out into the budget end of the market by building hotels for the Ibis chain. This should help them attract their share of the increasing number of travellers within Asia that are on a budget. We met with the management twice and liked the story. However, we waited until the price of the shares fell due to travellers staying away during the political unrest in Thailand."

For more information on The Scottish Oriental Smaller Companies Trust call 0800 587 4141 or visit www.firststate.co.uk

l Barry O'Neill is a chartered financial planner with Thomson Shepherd Limited (incorporating Coggans Wood).