12 Feb 2021
04 February 2021 | William Lam, co-Head of the Asia & Emerging Markets Equity team, Invesco
Question: You say you are a contrarian investor. If we look at your top holdings in the Invesco Asian Fund (UK), such as Taiwan Semiconductor Manufacturing (TSMC) and Samsung Electronics, they don’t seem very contrarian ideas. Have your philosophy and process changed?
Answer: Absolutely not. The process and philosophy have not changed.
The thing about being contrarian is that when you own an out-of-favour stock, the whole point of owning it is that you hope it will one day turn into an in-favour stock.
This is what we mean when we talk about “riding the transition from contrarian to popular”. Back in 2007, I clearly remember that TSMC and Samsung were very much out of favour. The kinds of stock that were in favour back then were Korean shipbuilders, Chinese steel and Chinese cement.
Now in 2021 it is fair to say that TSMC and Samsung have never been as popular, while many of the popular stocks of 2007 have never recovered to their 2007 highs. We have held both TSMC and Samsung all the way through this transition.
This is evidence of the process and philosophy working – it is not evidence of the process changing.
Of course the process is ongoing, and part of our process is to sell when a holding reaches our estimate of fair value and use the proceeds to buy stocks which are currently out of favour. And then we hope that together with our clients we can ride a similar transition over time with those newer holdings.
Figure 1: Market Divergence in 2007
Today some of our newer, more out-of-favour holdings include:
China Overseas Land – a Chinese property developer trading on 5x P/E with a 6% dividend yield; we expect both its earnings and dividend will grow steadily from here.
Largan Precision – the world-leading maker of lenses for smartphones. Huawei was one of its major customers; the sanctions on Huawei have hurt Largan’s share price in the short term, which provided us with an opportunity to buy at an attractive price. Largan remains the best company in this field in our view and we expect it will successfully transition to other customers over time.
Autohome – the leading internet content provider in the autos segment in China. Automakers and dealers rely on Autohome as the best source of information on consumer trends and preferences, while consumers rely on Autohome as the best source of information on auto products and performance. Also, we believe Autohome can benefit from other structural growth drivers in its favour due to the low penetration of auto ownership in China and the potential for rapid growth in second-hand vehicle purchases.
Investment risks
The value of investments and any income will fluctuate (this may partly be the result of exchange rate fluctuations) and investors may not get back the full amount invested.
Invesco Asian Fund (UK):
The fund invests in emerging and developing markets, where there is potential for a decrease in market liquidity, which may mean that it is not easy to buy or sell securities. There may also be difficulties in dealing and settlement, and custody problems could arise. The fund may use derivatives (complex instruments) in an attempt to reduce the overall risk of its investments, reduce the costs of investing and/or generate additional capital or income, although this may not be achieved. The use of such complex instruments may result in greater fluctuations of the value of the fund. The Manager, however, will ensure that the use of derivatives within the fund does not materially alter the overall risk profile of the fund.
The Fund may use Stock Connect to access China A Shares traded in mainland China. This may result in additional liquidity risk and operational risks including settlement and default risks, regulatory risk and system failure risk.
Important information
All data is as at 31.12.20 and sourced from Invesco unless otherwise stated.
Where individuals or the business have expressed opinions, they are based on current market conditions, they may differ from those of other investment professionals and are subject to change without notice.
Where individuals or the business have expressed opinions, they are based on current market conditions, they may differ from those of other investment professionals and are subject to change without notice. This document is marketing material and is not intended as a recommendation to invest in any particular asset class, security or strategy. Regulatory requirements that require impartiality of investment/investment strategy recommendations are therefore not applicable nor are any prohibitions to trade before publication. The information provided is for illustrative purposes only, it should not be relied upon as recommendations to buy or sell securities.
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