When knitwear and embroidery can produce 1,000% returns, November 2019

Finding a 'ten-bagger' - or a company whose share price goes up at least 1,000% - is every investor's dream.

First used by legendary Fidelity fund manager Peter Lynch in his book “One up on Wall Street”, the term actually comes from baseball. And, while you might be forgiven for thinking that a stock that grows this much would have to be an exciting tech company or a start up, that’s not always the case.

When we caught up with Alan Rowsell, manager of ASI Global Smaller Companies fund, he gave us the example of Shenzhou International, the Chinese manufacturer of high-end knitwear. Alan invested in the company when the fund launched in January 2012, and it has become the fund’s first ten-bagger.

What does the company do and why has it been so successful?

“The company produces, dyes, finishes, prints, embroiders, cuts and sews knitwear for the likes of Nike, Adidas, Uniqlo and Puma. In what is a fiercely competitive market, the company has been able to differentiate itself through relationships with customers, their ability to innovate and its ability to combine multiple stages of production.”

How do you go about picking companies for the fund?

“I work with an eight-strong team look to identify the highest quality smaller companies with sustainable growth that we can find. We search for emerging winners – those under-researched, relatively undiscovered disruptors and innovators in line to become leading companies in future.

“We do this by first using a proprietary screening tool called the Matrix, to help to reduce the 6,000+ global smaller companies universe to a more manageable size. The Matrix electronically tracks 13 factors, such as quality, earnings growth, momentum and valuation, which our backtesting has found can help to predict share price performance. Each company is given a total score, with the higher the score the potentially more interesting the idea.

“Team members then research the most interesting opportunities from their respective region, with the culmination of the process being the ‘best ideas’ list of around 100 stocks. From this we select our highest conviction ideas, building a diversified portfolio of companies that are held for the long term.

“Close company contact is a key part of the process, with the team holding more than 400 company meetings per year. This allows us to cross-check the veracity of our investment thesis, assess the strength of a company’s business model as well as any environmental, social or governance (ESG) risks and opportunities.”

So the Matrix helped you identify Shenzhou International?

“Most definitely. Without the Matrix we would never have invested in the company, as we simply would not have known about it. 6000+ companies is a vast universe to cover and the Matrix gives us continuous coverage and highlights to us stocks that are displaying the quality, growth and momentum characteristics we deem attractive.

“That said, while its a key part of the process, the Matrix can never tell us the quality of management, how attractive the industry is, how sustainable their competitive advantage is or any ESG risks or opportunities – this can only be achieved by fundamental research and meeting with management.”

You’ve held the company for almost eight years now – is that a normal length of time to invest in a holding?

“Within the small and mid-cap space we believe momentum is a winning strategy, with the greatest returns generated by holding outstanding companies for extended periods. We have found that companies that have a strong competitive advantage can sustain this for many years.

“Linked to running our winners is the flexibility the strategy has to hold up to 30% in names that have moved through the top of the small cap index – in other words they are no longer small. All stocks purchased by the strategy will be small to start with, but having the flexibility to hold a select number of favoured names has been has been key to our success and allows us to continue to benefit from the long term growth potential of these names.

“Our approach is to just focus on the stocks, investing in high quality businesses with sustainable growth prospects. That is where we think we can add value, not in the big macroeconomic decisions. This often leads us to market leaders which have a strong competitive advantage in their niche and unique drivers that will sustain earnings growth for years to come, regardless of what happens in the global economy.”

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. Alan's views are his own and do not constitute financial advice.

Published on 06/11/2019