Keep a cool head and maintain a low profile. Never take the lead – but aim to do something big.

— Deng Xiaoping

Asia, even after being one of the fastest-growing economies over the past decade, still possesses so much untapped potential. In just a few decades, many countries in Asia have experienced a rich history of economic growth and we believe that this trend may continue for many years to come.

Spanning from Japan to Turkey, Asia is not a single market but rather a giant melting pot of diverse cultures, economies, languages, regulations, religions, and even shopping habits! Since it is impractical to touch on every major market in Asia, we narrowed our scope down to two key regions: Greater China and Southeast Asia.

This area can further be divided into developed and developing economies, such as:

• developed: Hong Kong, Japan, Singapore, South Korea, Taiwan
• developing: China, Indonesia, Malaysia, Philippines, Thailand, Vietnam.

No two countries are the same, and this is even more true in Asia. Even within Asia itself, the ways of doing business may differ greatly. In an interview by The Peak with Dr Ng Chin Siau, CEO-Founder of Q&M Dental (Singapore) Limited, there was a short section documenting how business was done in China as compared to his company's base in Singapore.¹ To paraphrase, here are some of the examples given of how the way of conducting business differs between countries:

• In China, deals are struck at the dinner table; a round table is preferred as it allows everyone to face one another.
• The Chinese prefer face-to-face communication, not through email or telephone. Also, alcohol helps.
• If you are served bai-jiu (), it means you are treated with the utmost respect. One should drink up, or learn to drink it.
• Once lawyers are involved, it may mean that the relationship is heading down the drain. Many deals are lost because of this.
• In China, there are no clear guidelines as there are in Singapore. In China, the cultural values are typically ranked this order: relationships, reason and, lastly, law. In Singapore, the reverse appears to be true.

We see this sharp difference in business culture across most Asian nations. Each country seems to have its own hidden rules on how business should be conducted. Therefore, to succeed in the business world, you need to know how to play by “the rules” in each country. Even with neighbouring countries like Singapore and Malaysia, which are literally just a bridge away, we can witness two very different business environments. Now imagine the difference between a company operating in China and another based in Indonesia. This is what makes Asia interesting.

In addition, we also notice that even multinational firms adjust their business strategies in Asia. For example, these companies might need to adjust their offerings to meet the unique needs of each Asian country. Some successful examples include Nestlé SA, which sells single-packed servings of instant coffee and soup stock cubes in Asia, and Unilever, which tapped into the Philippines market by selling starter packs of shampoo and conditioner costing just about US 10 cents each.²

There are also tonnes of examples of large corporations from the USA or Europe that failed to launch their business in Asia. Even tech mammoth Google Inc. faced challenges in China. These show that there is no “one size fit all” formula in Asia, and multinational companies that do not understand that might suffer here.

We would like to end this section with a story from Mr Daryl Guppy, a famous technical trader.³ At a Chinese financial conference in Shenzhen, there was a renowned American financial trader giving a presentation to a Chinese audience. However, Mr Guppy wrote that the speaker completely misunderstood the thinking and aspirations of his audience. Listening to the comments from the few Europeans in the audience, they found his presentation inspiring, insightful and useful. On the other hand, the Chinese in the audience found his presentation irrelevant. The first task of a speaker is to create empathy and relevance. The American speaker tried to do this by highlighting the change in lifestyle for the audience from making money in the market, moving from the city to the countryside, an idyllic rural paradise. However, this was a Western dream. Although the audience and the speaker desired the same outcomes, their conception of those benefits was different.

Now imagine what would happen if you were to look at an Asian company through the same lens used for a company in the United States.

What Asia Has Going for It

Even in the face of global headwinds, developing Asia is still expected to contribute to 60% of the world's growth.⁴ In this section we will introduce key macro-economic and demographical themes that Asia has going for it.

From being the “factory of the world”, Asia has become the “millionaire factory of the world”, with more millionaires here than in North America and Europe.⁵ Not only are there more millionaires, Asia's millionaires' net worth of US$17.4 trillion was also more than North America's US$16.6 trillion. (Yep, a trillion is the one with 12 zeroes.) And we can expect more from Asia as traditionally production-centric countries switch gears towards consumption-driven industries.

Corporate Governance in Asia

Corporate governance is a guide to how a company should function. In countries like the USA, corporate governance might refer to guidelines on ethical behaviour, environmental concerns and shareholder welfare. The culture of having good corporate governance requirements in place is not exactly the same in Asia. And some investors foreign to Asia have learned this the hard way.

Of course, we do see improvements in this area. There are plenty of well-run companies in Asia that practise good corporate governance. However, as an investor in Asia, we believe that it is worth your time to know what exactly you are dealing with in order to prevent any unnecessary surprises. And the best way to kick-start this topic is through an understanding of ownership structures.

In Asia, it matters to know who is running the show, how, and why they do things in certain ways.

Shareholder Structure

Families still play huge roles in the corporate world in Asia. Many listed companies are majority-owned and managed by the founding families. With the decisions of a major shareholder able to influence a company, an understanding of the company's shareholding structure as part of our investment checklist is absolutely essential in these parts of the world.

And Links Aren't Just Linear

Just like life, relationships between companies are not that straightforward. Company structures in Asia can be brought to a whole new level. Kabushiki mochiai (mutual aid shareholdings), more commonly known as cross-shareholdings, became famous in Japan after World War II till the 1990s.²⁹ Beginning as a structure intended to provide business stability, over time it may have led to exclusionary, anti-competitive business practices, possibly contributing to Japan's “lost decade(s)”.

Cross-shareholding is a situation where a publicly traded company owns shares in another publicly traded company. In short, listed companies own each other. A key concern for investors regarding this relationship is the inter-dependency of the publicly listed companies involved and the effect this has on valuing these companies. Imagine two listed entities where A owns 50% of B and B owns 50% of A (Figure 3.1). With such a significant position, the valuation of both companies is inter-dependent. If you were to solely rely on market valuation for your valuation, this could go on all day.

By itself, we don't think that such a structure is negative. For a real-life example, let's look at Singapore-listed Jardine Matheson Holdings Limited and Jardine Strategic Holdings Limited, both part of the Jardine Group. Controlled by the Keswick family, the group has leading businesses in the fields of engineering, construction, mining and even agribusiness. To provide some background, after incurring heavy debts post-defence of Hongkong Land Holdings Limited, the Jardine Group established this shareholding structure (Figure 3.2) in the 1980s to thwart potential hostile takeovers.^30,31

Even with their cross-shareholdings structure, the Jardine Group have been good stewards of capital and fair to minority shareholders over the long term. In addition to their shareholding arrangement, the group is also notable for not playing by norms when it comes to their board structure. Yet those issues have not stopped investors from enjoying strong returns over the last decade. Over the past 10 years, all its main groups have produced an average total return of at least 15% a year.³² In our books, this is definitely a positive example.

Now for an extreme case, we present to you one of the largest global conglomerates – Samsung Group. The group appears to have perfected this form of ownership, with one of the most complex company structures we have ever seen.³³

From Figure 3.3, the de facto holding company – Samsung Everland Inc. (currently Cheil Industries Inc.) – owned 19.3% of Samsung Life Insurance Co Limited, which held 7.6% of Samsung Electronics Co Limited. In turn, Samsung Electronics held 37.5% of Samsung Card Co Limited, which held a 5% stake back in Samsung Everland Inc. And this was just a small portion of the structure. The shareholdings literally went a full circle. A 2013 Korea Fair Trade Commission reported that although the Lee Family's combined stake was only 1.53% in the Group, they controlled about 49.7% of the Group's 74 companies through the web of cross-shareholding!³⁴

Succession

In Asia, control is key. This issue was further aggravated by a cultural reluctance to tackle the topic of succession planning, with mention of it seen as taboo. The younger generation might be seen as disrespectful, or even overly ambitious, if succession issues came up during conversations.

Although some successful Asian businesses are no longer in the management of the first-generation family members, the patriarch typically continues to have a certain degree of influence. Unfortunately (or fortunately), companies can survive for centuries but their founders cannot. With some well-known billionaires like Stanley Ho approaching the century mark, succession is a key concern, especially as his family feud was one of the most public we have observed in recent years.

Due to his complex family structure, his is a fascinating case. Most people would have their hands full with just one wife, but not Stanley Ho. With four families, three surviving wives and 16 surviving children, Stanley Ho had a lot on his plate.³⁵ With his family feud publicly played out for all to see, it is a clear illustration that succession was definitely not an easy process.

In the research paper “Succession: The Roles of Specialized Assets and Transfer Costs”, a study was conducted over 217 succession cases from Hong Kong, Taiwan and Singapore, and found that succession tended to coincide with tremendous destruction of value. Over a period from 1987 to 2005, this study reported an average negative 56% net-of-market buy-and-hold (market-adjusted) stock return in the five-year period, and negative 16% when compounded three years before the succession year.³⁶ With a number of Asian tycoons approaching their golden years, this could be an interesting investment angle to look at. The Chinese proverb 富不过三代, meaning “wealth does not pass three generations”, comes to mind.

Yet not all companies are unprepared for successions. Succession transition in blue-chip companies like Singapore-listed Oversea-Chinese Banking Corporation Limited (“OCBC”) and Hong Kong-listed Li & Fung Limited (“L&F”), showed us that it is not impossible for a publicly listed Asian firm to move past one generation of managers.

The key aspects of their success relative to some of their peers were their greater acceptance of change, losing complete management control and willingness in engaging external management. Via their extensive global network, L&F is recognised as the world's leader in supply chain management, with a top line of US$19 billion.³⁷ The company is currently managed by the fourth generation, with Spencer Fung having taken over the reins of this juggernaut in 2014.³⁸ If we step back, we can see that L&F is more than just one company; from Figure 3.4, we can see that the entire group consists of much more.³⁹

L&F hasn't been shy with engaging external talent. In May 2011, Bruce Rockowitz took over from William Fung as L&F's CEO. Rockowitz had been an executive director of the group since 2001 and president since 2004. Rockowitz joined the group after a company he co-founded was acquired by L&F.⁴⁰ And after the fourth-generation family member, Spencer Fung, took over as CEO of L&F in July 2014, Rockowitz was appointed as CEO of the newly listed Global Brands Group Holdings Limited. In an NUS Business School interview, William Fung reinforced the importance of engaging professional management by highlighting that unless ownership and management are separated, it would be tough to transit into a professional management era.⁴¹

However, with 65% of Asian firms still choosing a family member for succession, this is far from the norm in Asia.⁴² The key hurdle isn't cultural, but rather an issue of trust. In just the past 100 years, the political situation within most Asian countries can at best be described as volatile. In Thailand alone, since the Siamese revolution of 1932, there has been a total of 11 other successful coups, including the latest in 2014, an astonishing one coup every seven years!⁴³

Basically, the volatile circumstances in Asia might have led to an environment that rewarded discretion and tight control. This strategy might have paid huge dividends in the past, but a fresh approach could lead to greater abundance if Asia needs to move forward.

We are not implying that a controlling shareholder is necessarily a negative. It all depends on the shareholder. If the controlling shareholder has a stellar record, we are all for it. If we are able to invest into such a company with the “right” business and at the right price, all we have to do is stay for the ride. On the other hand, if we as minority shareholders are not treated fairly, given the tens of thousands of listed entities here in Asia, there might be better opportunities for us out there.

Ultimately, we believe that action speaks louder than words. Instead of focusing on how well a company writes its corporate governance statement or how many independent directors sit on the Board, we find that the integrity, results and track record of the management is a much better way to assess the nature of a company. With that said, transparency and disclosure do make our job easier.

Disclosure and Transparency

If you had to describe publicly listed companies in Asia with two words, “disclosure” and “transparency” might not be the first two words that come to mind.

In 2014, The Economist published an article exploring the issue of where politically connected businessmen or women were most likely to prosper.⁴⁴ It was mentioned that successful businessmen had got rich through connections, mainly operating in rent-heavy industries. Rent-heavy sectors are industries involved in licensing or requiring heavy state involvement. These sectors would then be vulnerable to monopolistic practices. Typical examples of such industries include casinos, agricultural, mining, infrastructure, defence, and energy operations.

From the list, seven of the top 10 countries came from Asia, with four from Southeast Asia, implying that many businesses in the region still thrive due to good connections. No wonder people tend to have an impression that quality disclosure and transparency are not the strong suits of companies in Asia.

With this as a backdrop, we might wonder how such a preconception came about. One of the possible reasons could be due to the Asian markets' relatively closed structure. This inevitably led market participants to favour internal markets over external markets for resource allocation. The low transparency and high ownership concentration reflect the desire to protect information related to rent-seeking activities and could have also contributed to the perception of lower disclosure practices, thus creating a loop.

But, hey, it is just human nature to only want to do business with people you trust, through word of mouth or as some call it “guanxi”. Think about it: if there were two proposals of the same quality and the only difference was that you had worked with one of the guys before, most of us tend to stick with the person that we have dealt with before; it is just human nature. There's absolutely nothing wrong with that. Of course, it goes without saying that this guy did not screw things up the last time; connections alone cannot help if the guy cannot get the job done.

All said, we just have to keep in mind the difference in culture and way of doing business in Asia; investors need to be aware of how to detect these issues by themselves when investing in Asia.

And things are not as bad as they seem. There are publicly listed companies in Asia, with a pretty good standard of disclosure and transparency. When we talk about disclosure and transparency, of course we do not expect companies to reveal their trade secret – if Yum! Brands don't go around disclosing the 11 herbs and spices used in Kentucky Fried Chicken, it does not mean that they aren't transparent enough. Ironically, if they do disclose it, then it might be a problem for shareholders. But how do we know what is enough?

When it comes to a company's annual reports and shareholder presentations, a good gauge of decent disclosure and transparency is that after going through a couple of the company's annual report and presentations, you should be able to understand at least:

• How did the company make money, or why did the company lose money?
• How did the entire industry perform?
• Who are the company's competitors and how did the company stack up to them?
• Did the company walk the talk?
• What does the company own, and what does the company owe?

To show that we are not kidding you, we have three companies with publications (annual report and presentations) that check most of these boxes.

Company 1 – CapitaLand Mall Trust

In general, we have found that REITs have rather high standards of transparency and disclosure – yes, even in Asia. And which better REIT to look at than CapitaLand Mall Trust (“CMT”), the first REIT listed on the Singapore Exchange?

With simple to understand assets and operations, a REIT is the perfect example to kick off our analysis. This is because virtually all the information needed to understand REITs is publicly available. In layman's terms, a REIT is a company (structured as a trust) which owns and operates highly visible properties (a building does not just vanish overnight) and earns money from rental income.

With just this overview alone (Figure 3.5),⁴⁵ we can get a decent picture of how CMT functions.

• CMT has 16 properties in its portfolio.
• These 16 properties are managed by property managers that collect property management fees in return. Think of them as people you pay to get you the best deal without directly dealing with the tenants.
• At the REIT level, the managers (normally linked to the sponsor) are the Board of Directors. Like any other company, they set the strategic direction of the REIT and manage the assets and liabilities for the benefit of unitholders.
• With the basis of a REIT being a trust deed between the Trustee and REIT manager, a trustee is required. In brief, a trustee is there to protect the unitholders.
• Finally, in the case of REITs, unitholders are the equivalent of shareholders.

With a basic understanding of how a REIT works, let's see how well CMT fared when it came to the quality of their publicly available documents.

Asset Type   Not all REITs are created equal; each has its pros and cons. Think of a REIT's property as the underlying operating business of any other company out there. For example, Raffles Medical Group Limited, a healthcare service company due to the nature of its operations, is a totally different company to Sembcorp Marine Limited, a marine and offshore engineering solutions company.

Although there are many types of REITs out there, these three stand out:

• commercial – Tower Real Estate Investment Trust
• retail – SPH Real Estate Investment Trust
• industrial – Cache Logistics Trust.

They could even be like The Link Real Estate Investment Trust, with a mixture of retail, offices, fresh markets and even car parks in their portfolio. In CMT's case, with 16 shopping malls in Singapore, it is clear that CMT is a retail REIT.⁴⁶

Together with the breakdown of their trust structure, we know exactly what industry they operate in (urban and suburban shopping malls), what they own (from % interest to strata lots) and where their properties are (even if we don't go down personally, Google maps are really clear these days). Additionally, CMT also had a write-up of their 14.55% stake in CapitaLand Retail China Trust – a China shopping mall REIT with ten shopping malls in China.

In CMT's annual report, the following were disclosed:

• top 10 tenants (tenant name, sector and percentage gross rental income)
• breakdown of tenant mix by sector (F&B, fashion, supermarket, etc.)
• breakdown of gross revenue and net property income by mall
• occupancy rate by mall
• tenant sales
• occupancy cost
• shopper traffic
• summary of lease renewal and lease by mall
• portfolio lease expiry for the year by mall.

CMT even went down to the level of the respective malls, with a detailed breakdown of their location, size, acquisition year, purchase price, tenant mix and even the number of car parks! With the quality of information at hand, we can get a pretty good idea of CMT without even speaking to anyone.

Furthermore, CMT's Annual Report also has a treat, with an “Independent Retail Market Overview” report prepared by a professional consulting firm and a section titled “Singapore REIT Sector” detailing not only the local, but also the regional outlook and state of the REIT industry.

Operational Track Record   When we talk about track record, other than profitability (a given), we also must see if the REIT walks the talk when it comes to project execution.

What we mean by this is: if they say that they are going ahead with an acquisition, asset enhancement initiative (“AEI”) or even a disposal, we have to look back on how well they followed through. In FY2015,⁴⁷ CMT accomplished the following:

• IMM Building: Phase Two AEI completed
• Clarke Quay: completed reconfiguring
• Plaza Singapura: ongoing rejuvenation works
• Tampines Mall: completed education hub.

So how do we judge if the company was on schedule? Simple. Just refer to CMT's presentation in the earlier year – FY2014 under their “Looking Forward” section.⁴⁸ To their credit, CMT walked the talk.

Yield   For most investors looking at REITs, the dividend yield is their point of focus. To calculate dividend yield, you need two numbers – dividend per share and market price. Other than just reporting the dividend yield as a single number – 5.8% based on CMT's closing price on 31 December 2015,⁴⁹ just in case we want to work it out ourselves, CMT took it a step further by displaying its monthly closing unit price.

Investors looking for income-producing assets will also want to find out how CMT stacked up against other local instruments like government bonds, fixed deposits and even the Straits Times Index. And CMT did not disappoint (Figure 3.6).⁵⁰

Although dividend yields are a key consideration for REITs, they are not the be all and end all. Note: Your dividend yield is pegged to your purchase price and not the market price; the one pegged to market price is the current dividend yield.

Another operational yield-related metric is property yield – net property income (NPI) divided by the property value. To simplify things, property yield shows how much a REIT gets from its property. For example, a REIT with an NPI of S$400 million and S$8 billion in property has a property yield of 5%. You should be able to get what you need from their Annual Report.

“Smart” Money Gets Hit Too

If you think that only small retail investors get hit with such issues, think again. Here's one of the UK's best-known fund managers – Anthony Bolton, the manager of Fidelity Special Situations fund from 1979 to 2007. £1,000 in his fund over the entire 28 years snowballed to around £147,000.⁶⁶ Yet Bolton is still human, and not immune to investments going awry.

Bolton was a contrarian, specialising in small and medium-sized companies. Following a trip to China, he came out of retirement in 2010 to launch the Fidelity China Special Situations investment trust. Performance-wise, it would be safe to assume that he did not have the best of times during his four years heading the fund. Bolton's subsequent decision to stop managing the fund highlighted the fact that even the most seasoned of investors can fall prey to ambiguous financial practices.

One of his high-profile experiences included an investment into China Integrated Energy, Inc. which lost 90% of its market value in 2011 following accusations of fraud and the resignation of its auditors.⁶⁷ In summary, his understanding of corporate governance appeared to differ from the local environment. And this caused a mismatch in expectations.

Furthermore, fund managers weren't the only ones affected. Even large businesses, in a bid to expand their mining machinery market in China, suffered this fate. A recent case was Caterpillar Inc.'s 2012 acquisition of ERA Mining Machinery Limited, the holding company for Zhengzhou Siwei Mechanical & Electrical Equipment Manufacturing Co Limited. Less than a year after the deal, Caterpillar announced the discovery of a “deliberate, multi-year co-ordinated accounting misconduct” related to the acquired firm. This led to a US$580 million write-down, 86% of their purchase price.⁶⁸ You could say that they got bulldozed.

It's not that Asian companies are less trustworthy per se. Remember Hewlett-Packard's US$8.8 billion write-downs of Autonomy in 2012? This was almost 80% of their acquisition cost of $11.1 billion just a year earlier.⁶⁹ Bad things can happen everywhere, it's just that it pays to pay more attention in certain places. Hence, it pays for any investor, big or small, to have a certain level of scepticism when investing in Asia.

Putting it bluntly, it's naïve for investors to simply implement the Western value system when investing in Asia. We certainly are not condoning fraudulent behaviour of any sort. With studies done that positively correlate corporate transparency to market returns, we ourselves welcome a fair and transparent reporting framework in Asia. But at the end of the day, like any market, the stock market operates under a caveat emptor environment. Thus, we always, always have to do our due diligence.

At the end of the day even with all that happened, Anthony Bolton was still positive on China's prospects, with mention of great investment opportunities there.⁷⁰ Considering his experience, that says something about Asia.

Government – The Elephant in the Room

Other than issues of corporate governance, another challenge faced by investors in Asia is political risk. In many Asian countries, the government might have a sizeable effect on how things pan out. In many cases, they are still the largest investors in their respective countries. Asia is also home to some of the largest sovereign wealth funds, here are a few of them:

• Singapore: With a net portfolio value of S$242 billion (2016), Temasek Holdings (Private) Limited, commonly characterised as a sovereign wealth fund, is also one of the largest investors in the stock market. It has substantial stakes in many Singapore-listed blue-chip companies, such as Singapore Airlines Limited, Singapore Telecommunications Limited and Keppel Corporation Limited.⁷¹
• Malaysia: Khazanah Nasional Berhad, the strategic investment fund of the Government of Malaysia, had a realisable asset value of RM150 billion (2015). The fund is also one of the largest investors in Malaysia, owning a major stake in some of the largest corporations in Malaysia. Its portfolio includes equity ownership in listed industry giants IHH Healthcare Berhad, Tenaga Nasional Berhad and CIMB Group Holdings Berhad.⁷²
• Thailand: Likewise, Thailand Ministry of Finance is also an investor in publicly held companies. Its portfolio included a substantial stake in PTT Public Company Limited – Thailand's major integrated oil and gas company⁷³ – as well as a controlling stake in Airports of Thailand Public Company.⁷⁴
• China: Unlike most countries, where investment is done predominantly through a national wealth fund, China has many investment funds created by its state governments. The state funds have grown so much that many of the top publicly listed entities have some of the state government as their majority shareholders. Most of China's largest corporations are commonly known as State-owned Enterprise (SOE).

There are both pros and cons of the government being the major shareholder in companies you invest in. The key point to take home is to understand that at times, the government might prioritise national concerns over shareholder returns.

In cases when either the company operates in a regulated industry or where the government is the main shareholder, we must be aware that there might be occasions in the short term when the primary objective may not always be 100% profit-driven.

Don't Bet Your House on Legal Prosecution

Another area for investors to look out for is the state of prosecution in the financial markets. And judging from what happened in the past, the level of prosecution might not be as strong as one might expect in Southeast Asia and China.

For starters, let's take a short look at some of the stock exchanges. The main markets of Malaysia⁸⁵ and Thailand⁸⁶ both have an independent stock exchange commission regulating their respective capital market. Whereas Indonesia and Singapore, on the other hand, allowed their respective exchanges to operate as self-regulatory organisations.⁸⁷ In reality, both systems have their own advantages and disadvantages; there is no single bulletproof system able to satisfy everyone.

In the case of self-regulatory organisations, it is even harder for the exchange to balance its role as both the market operator and regulator. As these exchanges operate as a for-profit entity, there might be tough situations which the exchanges need to handle very carefully in order to protect shareholder value and at the same time fulfill its duty as a regulator.

Activism and Shorting

Activism is a strategy whereby the investor proactively engages with management to unlock value. An activist investor normally starts by identifying a company with “trapped value”. There are numerous reasons that could result in a company trading at a discount to its fair value, ranging from management being inefficient capital allocators, to conglomerates trading at a conglomerate discount, or even the straightforward case of mismanaged operations.

This is where the activist steps into the picture. By obtaining a sizeable stake in the company, this investor could get a seat at the proverbial table, allowing him access to the board and management to unlock this “trapped value”. Sometimes, this might lead to hostile events such as removal of management or fighting for board seats in the company. This process could take months or years.

There are many famous and successful activist investors in the United States. Carl Icahn, Daniel Loeb and Bill Ackman are billionaire investors who made their wealth through activist investing in publicly listed corporations. But when we look at the Asian market, there is clearly a lack of such personalities. Why is this so?

A main reason for this phenomenon might be the shareholding structure, the high percentage of family-owned listed entities in Asia. Activist investors have a higher probability of success with diverse shareholding structures, especially those without a controlling shareholder. If there is already a controlling presence, it might be extremely difficult for any independent activist investor to push forward changes, regardless of their merits.

And we think that this applies to the low popularity of shorting in Asia as well. Up till now, we have only been discussing the long side. On the other side of the investing coin we have short selling, or the sale of shares not owned by you. How this works is that, after borrowing the shares from a broker, you sell them, hoping for a price decline. That way you can buy the shares back at a lower price to return to your lender, with the difference being your profit. For a short position, the dynamics of the game are totally reversed. Basically, for a short seller, your potential downside is unlimited while the upside is capped by your purchase price.

Be it legacy or cultural reasons, many Asian listed companies are still controlled by the founding family. This creates a problem for activist investment because it is not that easy to win a proxy fight against the major shareholders or in cases where the families are the management. In more mature markets like the United States, a 5% stake might get you a seat at the table. In Asia, by contrast, an ownership of 5% secures you a place on the top 20 shareholder list in the Annual Reports and might get you noticed. But to successfully outvote the majority shareholder is a whole different ball game. Practically speaking, you might not be in the best position if you are up against someone with a 51% stake in a company.

However, this doesn't mean to say that you can't make your voice heard. In Asia, hostile takeovers or high-profile boardroom tussles don't appear in the papers every day. Yet there might be another way to get your voice heard as an activist investor in Asia. The in-your-face style of doing things might not be that well received here; we prefer taking the high road, working together with the company instead of taking them head-on.

Primarily written for institutional owners who are asset owners and asset managers, we found that a piece titled “The Singapore Stewardship Principles for Responsible Investors” by Stewardship Principles Working Group provides an interesting way of being an activist.⁹² This piece was succinctly summarised with the following seven points:

1. Take a stand on stewardship – Responsible investors establish and articulate their policies on their stewardship.
2. Know your investment: Responsible investors communicate regularly and effectively with their investee companies.
3. Stay active and informed: Responsible investors actively monitor their investee companies.
4. Upload transparency in managing conflicts of interest: Responsible investors make known their approach to managing conflicts of interest
5. Vote responsibly: Responsible investors establish clear policies on voting and exercise their voting rights in a responsible fashion.
6. Set a good example: Responsible investors document and provide relevant updates on their stewardship activities.
7. Work together: Responsible investors are willing to engage with one another where appropriate.

For us, the last point of working together is the key. Standing up and ranting at an Annual General Meeting, criticising the management and board of directors, gets you nowhere; it might even make things worse! There are much more subtle ways to engage with the company from written or verbal correspondence to closed-door meetings. Related to activism, but much less radical, this approach is much-preferred in Asia. On the flip side, do note that change tends to take time and it might come very slowly.

To end this chapter, we will be running through some learning points from a high-profile case involving Singapore-listed Olam International Limited.