Investors on the lookout for new ideas might be forgiven for siding with companies they know and love. In fact, “buy what you know” is a mantra trumpeted by famous investor Warren Buffett, who claims that if you know and understand the company, you’ll know how it makes money and will therefore be more inclined to hold for the longer term.
However, by adopting this approach and excluding the unknowns, you could end up missing out on some long-term gains.
We asked four fund managers, who are FundCalibre Elite Rated, to tell us about one of their must-have holdings that ordinary investors might have never heard of:
Bank Rakyat (BRI) serves micro, small, and medium enterprises (MSMEs) in Indonesia.
Mick said: “It’s a market leader. At the end of 2020 it had more than 65% market share of the Indonesian microlending segment and is focused on growing its business with unbanked and underbanked populations.
“Through its acquisitions (of PNM and Pegadaian) in February, BRI expanded its microlending ecosystem designed to raise underserved people out of poverty. Over half (55%) of loans disbursed in 2020 went to MSMEs. The 2022 goal is to raise this share to 80%. BRI now serves more than 55 million customers and over 54,000 villages, companies, and small enterprises through its more than 500,000 branchless banking agents.”
Mick highlights that the percentage of Indonesians with a bank account grew from 20% to 50% over the past decade, with the bank playing a meaningful role in the progress. He said: “In 2020, the bank had over 120 million deposit customers and 13 million borrowers. It also serves underbanked and unbanked Indonesians through its branchless network of BRILink agents in rural regions.
“Bank Rakyat offers attractive rates to its customers while strong risk management through high underwriting quality as well as the community-based approach of microlending keeps defaults low (only 0.8% of its loan were non-performing in 2020).”
Mick explains that what really makes Bank Rakyat stand out is that it that can deliver a “triple win”.
“Customers can win through a great product serving their needs – accessible and affordable loans -, the shareholder can win though attractive economics and society at large can win as the share of unbanked populations is reduced, improving living conditions and spurring economic growth.”
Aptiv is an automotive technology company which manufactures products that David says are integral in the ‘digital nerve centre’ of a vehicle. He told us: “Its brand is not that well known, but its products are often mission critical for a vehicle to operate safely and effectively.
“The company is divided into two divisions – 'Signal and Power Systems' and 'Advanced Safety and User Experience'. Signal and Power systems essentially integrates and regulates all the power control features in a car which are becoming increasingly complex given the move to electric vehicles (EVs).
“Advanced Safety and User Experience is focused on areas such as radar detection (to automatically stop the vehicle and allow for more vehicle autonomy, for example, and self-driving) and vehicle connectivity.”
Crucially, David believes that it is well positioned to benefit from a number of structural trends such as the move to vehicle electrification. “Global EV penetration is still below 5% but accelerating as most vehicle manufacturers pivot to a full electric strategy. Aptiv is often the supplier of choice to provide the technology to enable this. It has long-term relationships with multiple auto makers and a strong reputation for quality.”
For future growth, the company is in an “extremely strong position”. “The architecture of a vehicle is becoming less about the basic mechanics and more about software and how it is integrated,” he said, “and Aptiv has formed a joint venture with Hyundai to further develop fully autonomous vehicles. This joint venture could have significant value in the future.”
Dutch multinational ASML is a supplier of semiconductor capital equipment, focused on lithography, which involves printing an image from a flat surface. According to Charlie, if software is eating the world, then semiconductors provide the cutlery.
He said: “Although ASML has long dominated this market, over the last decade it has perfected the use of a next-generation technology that utilises extreme ultraviolet light (EUV). Generating and harnessing EUV light is an almost unfathomably difficult engineering challenge – one that proved too demanding for competitors Canon and Nikon to even attempt.”
Charlie explains that ASML’s EUV machines – about the size of a single-decker bus, at a cost of more than 100 million euros – have become precisely what chip makers need to print smaller circuits while increasing capacity and speed. “Therefore, in the EUV era, ASML is no longer just a dominant supplier, but rather a monopoly, created through technological brilliance and innovation, as opposed to the more traditional M&A route,” he said.
“While the likes of Samsung and TSMC – ASML’s largest clients – strive to maintain technology leadership in semiconductor manufacturing, other producers – notably those in China - are endeavouring to play catch up. The result is that ASML’s importance in the supply chain has become further entrenched, evidenced by its order book stretching out to 2026.”
Charlie tells us that the higher manufacturing output of EUV systems and a larger installed base are beneficial to the company’s gross profit margins, which he expects to rise to the mid-50% level over the long term. Combined with an improving working capital position, he believes ASML should be able to grow its free cash flows by 20% per year over the next five years.
Sharukh told us: “Ping An is one of China’s largest insurers with most of its business coming through the life and property & casualty (P&C) businesses. Insurance adoption is relatively low in China and as the economy continues to grow, we expect demand for Ping An’s life and P&C products to increase. The company also offers complementary services such as banking and asset management which fit in well with the insurance business.”
He points out that although Ping An is a large financial company, in some ways he views it as more of a technology company. “For example, through Ping An Good Doctor, the company offers online healthcare consultations while through Autohome, Ping An runs China’s largest online dealership platform.
“Most importantly, these investments into technology increase Ping An’s addressable market – through Ping An Good Doctor, the company can become more entrenched within the healthcare system while through Autohome, Ping An can cross sell its auto insurance products. In this way, the company can increase its earnings and dividends, while doing so at a high return on capital.”
Sharukh highlighted that even though 2020 was a challenging year which saw a small decline in net profit, Ping An still increased its final dividend by 8%. “Despite the company’s strong operational track record, valuations are relatively undemanding which means the stock offers a decent dividend yield,” he said.
Past performance is not a reliable guide to future returns. You may not get back the amount originally invested, and tax rules can change over time. The views expressed are those of the individual managers and do not constitute financial advice. The mention of specific securities is for illustration only and is not a recommendation to buy or sell those securities. FundCalibre is an appointed representative under Chelsea Financial Services.