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An Important Key to ARA Asset Management’s Market-Beating Performance

Since its listing on 2 November 2007 at a split-adjusted price of S$0.792 per share, the real estate fund management outfit ARA Asset Management (SGX: D1R) has gained some 122% to its price of S$1.76 now.

Those returns have soundly beaten the Straits Times Index’s (SGX: ^STI) 11.4% decline to its current level of 3,293 points in the same period. What is behind the company’s secret in producing returns that are in a completely opposite direction to that of the general market?

Warren Buffett’s key investing metric

We’d have to turn to billionaire investor Warren Buffett for an answer to that. Buffett had written in his 1988 Berkshire Hathaway annual shareholders’ letter one important financial characteristic of a business that he often looks at when he’s studying it for a possible investment – the business must earn “good returns on equity while employing little or no debt.”

Such businesses tend to carry strong competitive advantages that allow them to earn high profits over extended periods of time. And, those are the types of businesses that can help deliver long-term share market returns for investors too as a company’s share price tends to track its corporate performance over the long-term (measured in years and decades).

ARA Asset Management’s great track record

With that in mind, the reason for ARA Asset Management’s market-beating performance becomes a little clearer when we look at its returns on equity since its listing:

Year

Return on equity Total debt to equity ratio

2007

58.3% 19.3%

2008

41.5% 25.0%

2009

47.4% 14.3%

2010

42.4%

10.9%

2011 37.7%

0%

2012 33.6%

2.0%

2013 28.5%

10.9%

Average 41.3%

11.8%

Source: S&P Capital IQ

Between 2007 and 2013, the company has delivered an average return on equity of 41.3% while having a total debt to equity ratio of only 11.8%. Those figures suggest that the company has been able to deliver what Buffett requires of the businesses he invests in – it has earned good returns on equity while using very little leverage. 

To put into perspective how remarkable ARA Asset Management’s achievement has been, we could compare the company’s 2013 figures with the current corresponding ratios for the Straits Times Index; Singapore’s stock market benchmark has a weighted-average return on equity of only around 14% while carrying a weighted-average total debt to equity ratio of close to 70%.

Foolish Bottom Line

It’s easy to see how ARA Asset Management’s historical track record has been impressive. But as Buffett once said, “If past history was all there was to the game, the richest people would be librarians.” History is not a perfect indicator of the future and investors would really have to dig deeper into the company’s business to see if it has what it takes to continue churning out great results in the future.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore writer Chong Ser Jing owns shares in Berkshire Hathaway.