14 Jan 2020
It’s not often that you get to travel to meetings on a ferry! Arriving at my meetings in Hong Kong Central on the Star Ferry was a dramatic experience with the most stunning views.
My meeting with Fidelity presented an opportunity to get an update on the Fidelity Asia Fund from Teera Chanpongsang. Since he took over the management of the fund in January 2014, it has been a strong performer and an excellent core holding within the Asia Pacific region. Like all Fidelity managers, Teera frequently travels to companies in the region, in India and Korea. Hyundai motor has recently been added to the fund as it has become more shareholder-friendly since the son of the chairman instigated improvements in governance at company level.
One of the more interesting projects for the long-term at Hyundai is the development of a hydrogen car. It's not yet ready to be scaled into mass production, but some of the managers on the research trip were able to test drive the car and commented on the speed and smooth acceleration. Seeing the business looking to diversify away from the traditional combustion engine is encouraging, as is the trialling of autonomous vehicles. At the top end of the market, Hyundai are also rolling out a new model for the Genesis, which will be competition for Lexus.
Teera recognised that Asia was experiencing a slowdown in growth and as a result of the trade tensions between the US and China, has cut stocks exposed to the US and other international markets. Within China, Teera prefers domestic companies that aren’t linked to the United States like the dairy producer Mengniu and he has increased his holding in Tencent. He’s also invested in Sunny Optical, a producer of dual and triple cameras for iPhones which also holds a strong position in vehicular cameras and advanced driver assistant systems. Axis Bank, the third largest private sector lender in India, has been purchased as a turnaround story. Under Teera, the fund has delivered consistent outperformance utilising the manager’s flair and the strong analyst resource in the region.
The Fidelity Emerging Asia Fund invests in the less developed markets in the region which excludes Hong Kong and Singapore. Fund manager Dhananjay Phadnis does focus on high quality, growing businesses, but at the heart of the portfolio are companies with strong investment franchises with the ability to reinvest at attractive rates of return. DJ as he is known, was also on the research trip to India and commented on the two shocks that the economy has suffered. The first of these was de-monetisation and the second, the introduction of nationwide GST. Unfortunately, the economy is now suffering from the rapid growth of unsecured consumer lending by non-bank financial companies and the subsequent credit crunch is affecting the entire economy, particularly in the housing and auto sectors. Despite the economic slowdown, Indian large cap companies, especially if operating with strong management, have remained relatively insulated. Companies such as TCS are US$ earners, while banking names such as HDFC Bank and Axis Bank continue to trade reasonably well. Power Grid is a state-owned transmission utility and India remains significantly under-invested in this electricity transmission network. After a favourable regulatory review, this stock was added to the fund when the Indian market sold off. Container Corp of India has also been added to the portfolio and this company will be a beneficiary of the new high-speed rail cargo freight network currently under development.
The fund holds three stocks in Vietnam,which is one of the fastest growing economies in the region. Included are the dairy business Vinamilk and Vinacom, a retailer with strong positioning in malls, together with a holding in Tech Bank. Vietnam is currently enjoying significant FDI flows, a trend accelerated by the US China trade tensions. In Indonesia, both BCA and Bank Rakyat are held and this economy continues to have excellent long-term potential. These banks will benefit from the rising penetration of financial products and they have a strong deposit base and subsequently a low cost of funding. China International Travel Services should benefit from the secular increase in international travel from China and rapid growth in duty free shopping. It’s now amongst the top five global duty-free shop operators, having won concessions in Hong Kong and Beijing airports.
The fund has developed a strong record under DJ and is an interesting satellite addition to investors’ holdings, focusing on some of the region’s fastest growing economies.
The BlackRock Asia Fund is managed by Andrew Swan, head of the Global Emerging Market team. As a result of the Asia and Emerging Market team’s merger, there is now a common research platform with 20 members dedicated to stock research, one of whom is a dedicated ESG analyst. The research effort has now been reorganised into six pods, with three North Asia sector pods and three regional pods. In North Asia, the pods have been organised around industry clusters as these export-orientated economies have shown increased integration with global supply chains. In North Asia, returns have increasingly been driven by sector and industry factors rather than being country-related. In addition, there are country/regional research pods covering India and South East Asia and other parts of the emerging region.
The fund continues to operate with a flexible investment style, with the portfolio tilted between growth and value, utilising the research of the large investment team. The team also try to identify inflection points in the macro economic and political cycles.
2018 was a difficult year for the fund, where the macro positioning was wrong, but in the fourth quarter of last year, the portfolio was repositioned into more defensive names with Andrew Swan recognising that Asia and the global economy were slowing. In Q4 2018, the portfolio was rotated away from value cyclicals into quality growth stocks, which has benefitted performance in 2019. Some consumer discretionary names purchased included CTrip and MOMO. The fund also topped up on technology names, which were hit in the selloff, including Sunny Optical, Win Semi and SK Hynix. These tech hardware companies bounced strongly in the first quarter of 2019. In the third quarter an overweight to domestic names in India benefitted from the cut in corporation tax and the announcement of government stimulus has helped performance. Some of the top performers have been Li Ning the, sports apparel distributor, which has been owned for over three years and Hengri a China ‘A’ share, a producer of cylinder pipes, together with China Resource Land. New Oriental, the education stock, purchased in the fourth quarter sell off, also rebounded strongly in 2019. Amongst defensive names, Singapore Telecom has been purchased.
Since Andrew Swan took over the portfolio, performance has been strong. The repositioning of the fund into growth names has benefitted the portfolio in 2019 and it remains a useful satellite addition to investor portfolios, utilising the full strength of the research platform at BlackRock.
Asia remains an important area for Baring with 35% of external AUM accounted for by assets in the region. The Baring’s Eastern Trust has now passed on to Soo-Hai Lim and is aided by the China team. This fund focuses on reasonably priced growth businesses and takes into account the quality of management, accounting practices and transparency, including ESG factors. The fund has a growth-orientated approach and looks for franchises with a sustainable competitive advantage.
Within the portfolio, there are several investment themes. The first is Asian consumption, and an understanding of what millennials want, including entertainment, e-commerce and concerns about the environment. Beauty, health and wealth-related stocks fit this theme. The second is technological ubiquity taking in digitalisation and connectivity. Baring believes that content will be vital and that there will be continued strong demand for memory due to the age of the cloud and deep learning. The third theme is reform and structural growth encompassing environment and clean energy, together with the rise of global Asian brands and world-class manufacturers. Some of these will re-locate out of China to the ASEAN region. As the Asian middle class continues to become better off, Baring expect life insurance density to increase significantly, together with private healthcare expenditure and Ping An is well placed to benefit from this. There are 415m people in China aged between 16 and 35 years meaning that Chinese millennials now outnumber the working population of the US and Western Europe combined. Li Ning, a number one Chinese sportswear brand with a diversified portfolio of running, basketball, sports casual and training wear, is well placed to take advantage of these trends. Within the ASEAN region and with the Seven-Eleven franchise, CP All is the number one convenience store in Thailand and is much larger than its closest competitor. Store expansion has driven growth over several decades and going forward, better product mix should lead to margin improvement. Amongst smaller companies and through expansion of their product lines, Hartalega has grown strongly over the past decade, compounding revenue of over 25% p.a. Producing 30bn pieces per year, Hartalega is the largest nitrile glove manufacturer with the world’s most efficient production lines. The company is a small cap listed in Malaysia and is likely to continue to grow rapidly in the future.
The Barings ASEAN Frontiers Fund is a more specialised vehicle focusing on some of Asia’s fastest growing economies. Some parts of the ASEAN region are benefitting from trade tensions, whilst others are seeing increased levels of infrastructure spend on toll roads and mass transit rail networks, likely to run for many years. Within the fund there are several key investment themes. The continued rise of the middle class, favouring names such as CP All and SPA in tourism and local brands such as Vinamilk in Vietnam are well placed. Hartalega is held within this portfolio and Airports Corporation of Vietnam is a favoured name in terms of infrastructure assets. The fund is looking to benefit from the expected strong growth consumption in the ASEAN region where Vietnam and the Philippines, together with Indonesia, should see many years of above average growth. Whilst this fund is a specialised vehicle, it is managed by a team with proven expertise in the area and is an interesting satellite holding in portfolios. Overall Baring have a strong investment resource in Asia and both this and the Eastern Trust remains an excellent choice for investors looking for a growth-orientated mandate. The fund is also suitable as a core holding in the region.
October 1st is China National Day and a public holiday in both China and Hong Kong, giving me the opportunity to explore some of the more remote parts of the New Territories close to the Chinese border. There is a perception that Hong Kong is all high rise but, in reality, one third of the landmass is national parks. Plover Cove in the north-west has beautiful, unspoilt countryside and offers great hiking.
TRowe Price have been investing in emerging market equities since 1985. The firm is better known for its growth-orientated strategy managed from London, but also operates a value strategy which has now been running for three years from Hong Kong. Lead manager for this strategy is Ernest Yeung who has 17 years investment experience, 15 of which have been with TRowe. The portfolio managers are backed by the emerging market analyst team, which in Asia is based in Hong Kong and Singapore, Latin America and EMEA are covered in London. Whilst this is a value strategy, it is not deep value and the manager looks to avoid toxic stocks. The mandate doesn’t invest in the highest quality businesses in the emerging world but avoids the lowest quality ones. In emerging markets, corporate governance in value names is vital. Many businesses on depressed valuations are state-owned and therefore not run for minority shareholders. The fund focuses on stocks that are not well-researched and are under-owned, so the manager argues that there will not be a lot of future sellers, even if short term news disappoints.
Country positioning shows India as a significant underweight, which is unsurprising as this fund avoids the more expensively-valued stocks in the emerging world. The large country overweights are to South Africa and China, which are both relatively unloved markets. Favoured sectors are industrials, real estate and materials and financials with greater exposure to domestic economic plays than global exporters.
In South Africa, Naspers was bought in the fourth quarter of 2018 when the stock was trading at a 50% discount to NAV, with one of the attractions being its large stake in Tencent. When the internal Tencent analyst upgraded the view on this stock, it pointed to investment in Naspers, particularly as the management of the company is now felt to be more focused on improving returns in the business. Naspers might not be a classic value-stock but it was cheap and there was evidence of change. There are also two banks held in South Africa with exposure not just to that country, but also to other parts of the Continent including Nigeria. In India, there is a focus on less highly valued names such as State Bank of India and ICICI. In China, one of the larger positions is in Tsingtao Brewery, which was the first China stock to be listed in Hong Kong, but the company lost its way and the shares de-rated. While beer consumption in China has been flat, the management of this SOE has now re-focused away from gaining market share to increasing profitability which will involve some capacity reduction. Ernest believes that improving margins can result in strong earnings growth, even without significant volume gains. Ping An Insurance is also listed in China and with strong secular tailwinds for protection and savings products, has also been a successful investment for the fund.
Most funds within the emerging market universe have a growth approach, so this fund is a differentiated offering for investors who want a more value orientated strategy. It’s a fund to watch, especially if the value investment style returns to favour.
After the pessimism at the start of the year, global markets including Asia, have delivered excellent returns to investors with China performing strongly. Now investors must decide whether the bulls located in Stock Exchange Square will be celebrating at the end of 2020!
Graham O'Neill, Senior Investment Consultant, RSMR
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