Wealth Management: Blog – Meet the Manager: Michael Gilmore, Albizia Capital

Sophie Kilvert - Client Adviser

I had the opportunity to speak with Michael Gilmore, who, based in Singapore, is the Head of Research at Albizia Capital, a Fund which we have held in our portfolio since late 2014. While our investment team hold and monitor company shares directly, we also look to work with third-party Fund Managers, who can offer expertise in areas of the market that we do not research ourselves. We choose to work with specialist managers who complete deep fundamental research, look for high-conviction investments, and maintain a long-term investment horizon, all with a very hands-on, grassroots approach. Most importantly, we work with Fund Managers whose interests align with our own, with a similar investment philosophy which focuses on delivering inflation-beating returns and offering diversification.

We view such funds as an extension of our own research capabilities; managers like Michael offer us different perspectives and more in-depth, specialist knowledge of areas where we have minimal visibility. As we continue to face the pandemic of COVID-19, Michael's informed, boots-on-the-ground approach provided us with a unique perspective on the current health crisis. Where we do not have the visibility to grapple with the challenges currently facing the South-Eastern Asian market, Michael was able to give us an exclusive insight into the current landscape. In this deep-dive into the Albizia Fund, Michael shared his thoughts not only on the challenges presented by COVID-19, but also on the wider regional pressures facing the market, together with an in-depth look at the Fund's research strategy and stock selection, with fascinating stories from the local businesses Albizia invests in.

Our hands- on approach

Communicating frequently with Albizia is crucial to our own investment philosophy, and Michael is always happy when someone takes a keen interest in the Fund. Two years ago, our investment team were able to spend a week with Albizia in the Philippines and Indonesia, to understand their grassroots investment process. Michael reminisced that they took the team to a traditional market far outside Jakarta and built in stages, so our team could physically see the process Albizia completes when investing. At the other end of the spectrum, Albizia introduced our Fund Managers to the owners of the businesses in the Philippines, gaining a more strategic top-down view of Albizia's investment process. Gaining this detailed insight into the Fund's strategy is a vital part of our research, and paramount for maintaining transparent, long-term relationships with our managers.

Focussing on the long-term

What became clear throughout our conversation was how important long-term relationships are to Michael, and to Albizia. It defined his move to Albizia in 2014, having known Justin Seow, Founder of Albizia, since 2000. Having interacted for over 10 years before working together, both as consumer-sector analysts, Michael admitted that joining Albizia was an easy decision to make, and an opportunity he jumped at when the Fund became large enough to take on another partner.

Forming long-term relationships is a core part of Albizia's investment approach. Of the 35 main companies held in the portfolio, Michael gave a unique insight into one of the largest companies they hold: Philippine Seven. Long-term is truly at the heart of Philippine Seven too, as the business has been in the same family for over 20 years, with the largest outside shareholding group being brought in 15 years ago as the Taiwanese franchise of 7-Eleven. There were very few opportunities to own positions in the company, Michael divulged, with the shares being held tightly by the family. But, having known known the business for a long time, Justin maintained the relationship for five years, before he received a call that a block of shares was available from the family. Their strategy, Michael explained, is not just to collect information about companies, but to foster relationships, and it was this long-term vision that made Justin the first choice to become a partner in Philippine Seven.

Understanding Albizia's investment approach

When looking to invest in companies, Justin and Michael look for entrepreneurial leaders, who understand the customer and can create an advantage within their industry. 7-Eleven is a great expression of this; with stores becoming the central focus of areas in the Philippines, the company constantly aims to add new items and services that the customers in these areas want. For example, Michael explained, in 2019 they started selling freshly fried chicken in their stores. In South-East Asia, the fried chicken market is a competitive one. McDonald's and Jollibee, the two main chains in the Philippines, probably have about $1bn in revenue a year, just from fried chicken alone. 7-Eleven saw an opportunity; over the space of 12 months, they rolled out over 25 satellite kitchens, hitting over 1200 stores with their new product. But their advantage comes in their opening hours: their peak time is from midnight to 4am, when those working in call centres in US and UK time zones, were leaving the office. Where other restaurants and fast-food chains were closed, 7-Eleven stayed open, to provide a hot, sought-after snack to a key portion of the working population. This innovation meant that in one year alone, fried chicken contributed to 5% of their sales.

Understanding customer habits, 7-Eleven know that it is rare for the consumer to leave only with their originally sought-after product from a convenience store, often seeking out other services. One of the biggest services in the Philippines is putting more money onto your pre-paid account or e-wallet, and due to 7-Eleven's geographic footprint, they're now about 75-80% of market share of all top ups on phones and e-commerce wallets in the Philippines. From his deep account of the company, Michael made it clear that Albizia's continued investment in the retailer is due to this high level of customer sensitivity, efficiency and innovation.

An unfamiliar market

Naturally, it is necessary to have a strong understanding of both the South-Eastern Asian consumer and industries to hold the competitive advantage, and where we are more familiar with Western markets, Michael emphasised the unique challenges presenting in the South-Eastern Asian region. Indonesia and the Philippines have 23,000 islands and very little road infrastructure, which can present a mighty obstacle to business. At the same time, when Albizia finds a good entrepreneur, it is often someone who can offer a business service in a place where others physically cannot, due to these limitations. In the West, we might take for granted the speed with which an idea can come to market, where in Indonesia, Michael explained, it might take 10-20 years to replicate someone else's distribution network.

Challenges in a time of crisis

But these unique regional challenges also provide reassurance in a time of crisis. The companies Albizia invest in experience tough circumstances all the time, either from these infrastructural limitations, or from crises such as floods or typhoons. As we face the global pandemic of COVID-19, Michael reminded me that the companies Albizia invests in are all 'battle-tested.' He therefore expects most companies Albizia invests in to come out of this pandemic in a strong position, depending on their sector. Looking at one of Albizia's portfolios, which is heavily invested in companies providing essentials like food and beverages, he expects to see only a shallow crisis. For some companies, he even expects positive results. For example, Masan Consumer in Vietnam, selling instant noodles, currently have a highly accelerated distribution rate, increased from a month on the shelf to barely a day. Michael provided reassurance that where there are vulnerabilities in the portfolio, Albizia are reducing their position. For example, their Tengara Fund is invested in the tourism sector, but since the start of the pandemic, Albizia have been reducing their exposure to that category. Over the long-term, Michael suggested, different sectors and countries will bounce back faster than others, but believes that essential services, which Albizia is heavily invested in, should recover quickly.

Beyond COVID-19

Looking beyond COVID-19, we discussed the role sustainability plays in Albizia's investment decisions. Above all, Michael emphasised, Albizia focusses on the long-term, and therefore wants the businesses Albizia invests in to think about their own sustainability and long-term durability. That naturally involves avoiding pollution, taking care of communities and staff, and Michael believes that companies are beginning to appreciate these issues more and more, allowing Albizia to engage with companies on a greater level. For example, Albizia are working with several companies to move them towards a circular plastic economy. As Michael pointed out, around 25% of all ocean plastic comes from South-East Asia, according to the Ellen MacArthur Foundation. To help their companies, Albizia introduced them to groups such as WWF, or the UN Environmental Programme, running projects to help companies reduce single use plastic. Although a signatory to the Principles for Responsible Investment, Michael made it clear that these principles merely express the approach which is already deeply -embedded in Albizia's investment philosophy.

Speaking with Michael was not only a fascinating opportunity to understand the stories behind the companies Albizia invests in, but also a reminder of the strong relationship we foster with the Fund, and their own long-term approach which is so closely aligned to our own.

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