I'm a fund manager: Here's why I'm backing pizza in China - but not railway builders

Each month, we put a senior fund or investment manager to task with tough questions for our I'm a fund manager series to find out how they manage their own money.

In this instalment, we spoke to Sree Agarwal, portfolio manager at the Scottish Oriental Smaller Companies Trust.

When we question fund managers, we want to know where they'd invest for the next 10 years - and what pitfalls to avoid.

We also quiz them about the impact of Donald Trump and their greatest ever investing mistake.

Scottish Oriental Smaller Companies Trust is one of the longest-running investment trusts in Asian equities, having launched in 1995.

It invests mainly in smaller Asian quoted companies with market capitalisations US$5,000m.

It holds companies in Australasia, China, Hong Kong, India, Indonesia, Malaysia, Pakistan, Philippines, Singapore, South Korea, Sri Lanka, Taiwan, Thailand and Vietnam.

Scottish Oriental's largest holding, DPC Dash, is one of the businesses I would want to own steadfastly for the next decade. DPC Dash is the exclusive franchise operator of Domino's Pizza in China.

The company is currently only in 55 cities in China, with around 1,000 outlets. This compares to Pizza Hut, which has more than 3,000 restaurants but has struggled with profitability as well as growth in China.

After spending years optimising its store operating model and building a strong management team with the support of its principal Domino's, growth at DPC Dash has accelerated. It is adding 300 to 500 locations each year.

It has the potential to be a significantly larger business with higher levels of profitability, as it gains operating leverage from its scale. The company's net cash balance sheet is well positioned to fund its growth.

In the context of its growth potential it has a similar valuation as other Domino's franchisees in other markets, such as the UK and Australia, where the growth prospects are substantially lower.

We are excited about the steady increase in consumption growth across Asia. As income per capita rises, it creates an aspirational middle class.

The populations in many emerging Asian economies are reaching an inflection point, where an increasing share of their income is being spent on products and services such as cars, housing and travel.

Well-run, market leading businesses in these categories can potentially benefit from years of strong growth.

We spend our time trying to identify the management teams which are most likely to capture a dominant share of the growth of their respective profit pools.

Scottish Oriental doesn't invest in infrastructure asset owners.

Various Asian economies are witnessing sharp growth in infrastructure capital expenditure as they build roads, high-speed trains, bridges, and other similar projects.

We don't like to invest in those companies who build and operate the assets. Their main customer is often the government, which leads to long payment cycles and low returns on capital employed.

There are often questionable practices involved in winning the contracts to operate these assets as well.

To benefit from the tailwinds of infrastructure investment, we prefer to invest in the owners of these assets, or the direct suppliers - cement, paint or wires and cables companies that benefit from the same growth in spending.

They typically come with much higher returns on capital, as these products often capture strong brand value in the markets in which they operate.

No, not at all. What has been surprising is that some of our companies that you would have expected to be negatively impacted by Trump's tariffs have in fact turned out to be beneficiaries.

We own a Chinese company; Haitian International. It is a manufacturer of plastic injection moulding machines, used by a wide variety of companies, ranging from electric vehicles to mobile phones.

Currently, about 60-65 per cent of the business is based in China and 30-35 per cent is outside. Because of the tariffs, several of their customers are setting up capacity outside China, for which they need new plastic injection moulding machines.

Their business outside China has thus been growing rapidly in recent months and overall growth continues to be very robust. It's trading on 9-10 times price to earnings with 4-4.5 per cent dividend yield.

Overall, the portfolio is focused on owning businesses with consistent and predictable growth prospects.

This naturally leads to a concentration of companies which are predicated upon domestic demand, rather than export-led external demand drivers.

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Yes - in the long term. If you look at the growth of any economy, it's broadly a function of two things: population growth and productivity.

As countries like Korea, Taiwan, and others experience very low birth rates, the population growth turns negative at some point and that can become a big challenge for business and government alike.

Companies that are dependent on domestic demand in those economies will suffer and some will become increasingly export-oriented to make up for it.

It is clear that companies are exporting into a more volatile world, whether it's because of the US tariffs or instability elsewhere.

We like to ensure we are exposed to companies and countries which have both a strong domestic economy, and an economy driven by domestic demand.

The portfolio's largest holdings, including Uni-President China, a domestic manufacturer of instant noodles and beverages; Philippine Seven Corporation, the dominant operator of convenience stores in the Philippines; Cloud Music, a leading music platform in China; and Niva Bupa Health Insurance, a leading health insurer in India are all driven by structurally growing domestic demand in their various countries.

Growth itself does not create value. The ideal is the predictability and sustainability of consistent growth, with high returns on capital.

We will only pay a fair price for a company - but it also needs to come with some ability for improvement, which will enable higher returns on capital.

This combination should drive value creation in a business.

Investing in a passive index works for some people, but you will end up owning hundreds of companies.

Scottish Oriental is a concentrated portfolio of 45 holdings that offers investors access to some of the most exciting investment opportunities in Asia.

We don't own stocks because they're of a certain size, or they have a certain liquidity or cachet.

We own them because we genuinely believe they have the ability to create disproportionate value over the next five years and beyond.

I have personally been invested in Scottish Oriental for the last eight years.

To mark Scottish Oriental's 30th anniversary earlier this year, we calculated that if you'd invested £1,000 in 1995, that would have grown to £22,390 in today's money - an uplift of 2,139 per cent.

Scottish Oriental beat its benchmark, the MSCI AC Asia ex Japan Small Cap Index by 1,846 per cent in that time and I have personally been a beneficiary of that compounding.

We feel the trust reflects the kind of value creation that we're able to generate with our active investment philosophy, that has remained unchanged since the trust was established.

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A few years ago, I invested in a hospital operator in India and there were few reasons why it was a big mistake, because I didn't follow my usual rules.

Firstly, we don't usually invest in recently listed companies, because they don't have a well-established track record.

Secondly, the person running the business was a doctor, and while he obviously knew medical processes and had noble intentions, he wasn't a businessman and he did not have capital allocation discipline.

He expanded too fast using debt, the balance sheet became increasingly leveraged.

When covid hit, fewer people came in for checks and footfall declined. The debt made the business unviable and it went into quite a vulnerable position.

I eventually sold at a loss and the business was subsequently bought by private equity, who brought in the discipline that was needed to run the business well.

It has since gone on to do very well, as it wasn't an issue with the underlying business model or anything wrong with the company.

It was more to do with the person running it, the lack of discipline and capital location and the willingness to expand with leverage.