Chinese investors have reason to feel dizzy following the stock market’s recent roller-coaster ride. After drifting sideways for more than two years, the CSI 300 Index of leading Shanghai and Shenzhen stocks rocketed nearly 150 percent in the ten-month period ending in early June, then plunged 43 percent over the next 11 weeks, a sell-off that many local investors called a “guzai,” or disaster. Few fund managers were unscathed.
Yet executives at China Universal Asset Management Co. held their nerve, and stuck to their strategy, through the market’s wild ride. The Shanghai-based outfit has been focusing its equity portfolios on consumption plays. China’s economy may be slowing, but the company is betting that the country’s much-vaunted shift from an export-driven growth model to one geared toward domestic consumer demand will pay dividends over the long term. It has been loading up on stocks of companies involved in e-commerce, consumer data services, and products and services targeting wealthier retirees while eschewing capital-intensive industries such as infrastructure, steel and heavy industrials.
“We remain long-term bulls on the Chinese economy,” says Shelley Yang, head of the international department at China Universal. “We are identifying new forms of consumption and wealth creation. The rise of the middle class will drive growth in consumer plays in years to come.”
The company’s 2.14 billion yuan ($335 million) Mobile Internet Equity Fund delivered a return of 84.6 percent in the 12 months ended November 19. The fund’s largest holding is Sinodata Co., a Beijing-based, Shenzhen-listed provider of applications software, data centers and e-commerce services; its shares closed at 91.60 yuan on November 19, down from a peak of over 160 yuan in June but almost four times the 23 yuan level of mid-January.
Such performance is the reason China Universal wins top honors in China Equities in Institutional Investor’s Asia Investment Management Awards. It also explains the firm’s rapid growth since its founding a decade ago. China Universal currently manages some $37 billion in assets in 50 mutual funds and segregated accounts.
II reviewed data provided by Morningstar on thousands of asset managers across Asia and selected winners in 22 categories based on a combination of short- and long-term performance. Honorees include E Fund Management Co. in China Fixed Income, Nomura Asset Management Co. in Japan Equities, Macquarie Group in Asia ex-Japan Equities and Franklin Templeton Asset Management (India) in India Equities.
Across the region several other managers are delivering strong performance by sticking to their strategic convictions and focusing on consumer-oriented plays.
Mirae Asset Global Investments, which wins the award for South Korea Equities, is also tilting toward consumer stocks. “The premise to our investment themes is that the growth engines of traditional manufacturing powerhouses in Korea have lost steam, and corporate earnings, especially of capital-intensive, cyclical industries, have generally flattened out since 2011,” says the firm’s chief investment officer for equities, Lee Tuck Chung. “All the while, consumer and service exports have displayed astounding growth in the wake of structural changes from within and outside of Korea. Consequently, our main focus is on investment opportunities arising from such structural shifts.”
Mirae Asset’s Korea Equity Fund includes some of South Korea’s leading tech blue-chip stocks among its big holdings. Its two largest holdings are Samsung Electronics Co. (8.36 percent of assets), the maker of smartphones, televisions and appliances, and Naver Corp., the country’s leading search engine service. Samsung Electronics’ shares closed at 1.289 million won ($1,115) on November 19, up 5.8 percent over the past 12 months; Naver’s shares stood at 609,000 won, down 22.6 percent from a year earlier but up 32 percent from its early September low.
“Mobile platforms and digital content have become more important as everyday lives of consumers and businesses are changing through increased interconnectivity of various devices,” Lee says. “Social media, e-commerce and mobile games are disrupting physical boundaries of entertainment, advertisement and traditional retail.”
-Although the firm looks at macro factors to set broad strategy, it takes a bottom-up approach to equity selection. “We believe a successful company has competitive advantages in terms of market positioning, business model, corporate governance and financial strength,” Lee says. “The best way to identify companies with sustainable competitiveness is by attaining an in-depth understanding of the firm’s fundamentals through vigorous bottom-up analysis and research.”
Mirae Asset, which is South Korea’s largest fund manager, with $73 billion in assets, also takes the top position in South Korea Fixed Income. Kim Sung Jin, CIO for fixed income, says his team’s watchword is diversity: “Capital preservation — an essential component of the team’s strategy — is targeted through diversification, market analysis and risk management.”
According to company disclosures, Mirae Asset’s Maestro Fixed Income Fund, which yielded 3.99 percent in the 12 months ended November 19, invests about 60 percent of its assets in Korean government and corporate paper and up to 40 percent in overseas bonds. A bond from leading credit card issuer Lotte Card Co. is the fund’s largest corporate bond holding, making up 4.14 percent of the fund’s 232 billion won in assets.
Fixed-income investors in South Korea and across Asia are facing a challenging environment of mixed signals: Slowing global growth is exerting downward pressure on domestic interest rates even as the rate hike by the U.S. Federal Reserve threatens to tighten global monetary conditions and increase volatility. CIO Kim says he and his team are more than ever keeping a watchful eye on global markets and constantly searching for investments that will bear higher yields for Mirae Asset’s fixed-income investors.
Growth has also been flagging recently in Japan, notwithstanding the stimulative program known as Abenomics. For the past three years, the government of Prime Minister Shinzo Abe has been trying to revive the economy and end nearly two decades of deflation with aggressive monetary easing, fiscal stimulus and structural reforms, but the economy slipped into recession again with output declining in the second and third quarters of 2015.
“Much of the recent volatility has been due to concerns about external factors such as the slowing Chinese economy and U.S. interest rate uncertainty,” says Tomoyuki Takahashi, CIO for Japanese equities at Nomura Asset Management Co. The $319 billion firm wins top honors for Japan Equities. “We should still see robust aggregate profit growth for Japanese companies, while equity valuations have returned to attractive levels,” he adds.
Nomura’s top equity funds delivered benchmark-beating performance by targeting companies with a high return on equity. “With an increasing emphasis in Japan on efficient capital management and measures such as return on equity, our growth strategy since 2009 has been to apply a stock selection approach that focuses on sustainability of future return on equity,” Takahashi says, adding that companies that offer sustainably high ROE ratios are more likely to have a competitive advantage and good governance. “We are able to identify quality companies that can maintain profitability and growth prospects over the long term,” he says.
Takahashi declines to name specific stocks. According to public disclosures, Nomura’s Japan Strategic Value Fund, which has 399 billion yen ($3.25 billion) in assets and is one of the firm’s top performers, returned 15.79 percent in the 12 months to November 19, well above the 13.92 percent rise in the Nikkei 225 Index over that period. A good part of the gains were driven by the fund’s top stock holding, Mitsubishi UFJ Financial Group. Making up 4.55 percent of the fund, the diversified banking conglomerate posted a return of 7.38 percent in the 12 months ended November 20. The stock closed at 829.3 yen that day, up 25 percent for the year to date.
One of the key beneficiaries of Abenomics has been Japan’s real estate market, which suffered 20 years of falling prices until rebounding about three years ago. That recovery still has room to run, says Katsumi Takagaki, head of the real estate investment trust division at Sumitomo Mitsui Trust Asset Management Co., which takes the honors in the Japan REITs sector. Takagaki says he believes Japan’s benchmark J-REIT Index could rise another 20 to 25 percent in 2016 and that the value of property in the firm’s J REIT Research Fund could appreciate by 5 to 10 percent next year. The $3.72 billion fund, the largest in Japan’s REIT sector, returned 5.82 percent in the 12 months ended October 30, beating the index by 1.76 percentage points.
Japanese fund managers performed well not only at home but also around the region. Nomura wins the award for Taiwan Equities, beating dozens of domestic fund managers. “Our strategy remains focused on selecting equities based on companies’ success with products, which generates visible margins and real earnings,” says Vincent Bourdarie, chief investment officer of Nomura Asset Management Taiwan. “The current economic environment is marked with many uncertainties for revenue and earnings expectations, so the investment team harnesses more of its own ideas to validate the fundamental scenario and to try to avoid crowded trades that lead to earnings disappointments.”
Nomura has been overweight in the past year on Taiwan’s technology sector, with a bias toward small- and midcap names, Bourdarie says.
Nikko Asset Management Co. takes the honors for Singapore Equities. The Japanese firm, which has $161 billion in assets under management globally, set up an outpost in the city-state in 1982 and greatly expanded its presence through the 2011 acquisition of DBS Asset Management; it now manages eight funds there.
The company maintains a positive outlook for the Singapore market notwithstanding the fact that the economy has slowed sharply, putting pressure on corporate earnings, say Lai Yeu Huan and Kenneth Tang, senior portfolio managers and co-leaders of the Singapore equity portfolios at the firm. The economy expanded by just 0.1 percent in the July–September quarter from the preceding period, and many companies have had to cut costs in the face of challenging business conditions. Many Singaporean companies have extensive business in China, and they have felt the full force of that country’s economic slowdown. Eleven companies in the Straits Times Index reported lower-than-expected earnings in the April–June quarter, while only eight managed to beat forecasts, according to analysts. Nevertheless, Lai and Tang contend that the Singaporean economy will bottom out in the coming few months and that corporate earnings will stage a modest recovery in 2016.
Nikko’s Singapore funds have focused portfolios of 30 to 40 stocks and invest with a three-year view. Lai and Tang say the firm favors what they call the “New Singapore,” which includes fast-growing service sectors such as logistics, tourism, financial services and health care.
Besides the Japanese, other global fund managers also figure among the winners of the Asian Investment Management Awards. Eastspring Investments, the Asian asset management arm of U.K. insurer Prudential, takes the honors for Asia-Pacific Fixed Income and Malaysia Fixed Income. Like bond investors everywhere, the firm is increasingly considering how certain distant events could roil its markets.
“Events in recent months have raised uncertainties over global growth and the course of monetary policy action in the U.S.,” says Boon Peng Ooi, Eastspring’s Singapore-based chief investment officer for fixed income in the Asia-Pacific region. “This has resulted in heightened volatility in Asian financial markets, including in the currency and bond markets. Despite this, however, we are inclined to take a more optimistic view.”
The good news is that economic and consumer sentiment is holding up relatively well in the U.S. and the euro zone, Ooi says, adding that he expects these economies to grow at a moderately healthy pace for some time to come. He also contends that although there are growing concerns about the impact of a slowing Chinese economy on emerging Asia, he anticipates China’s growth rate will strengthen as the nation’s property market begins to rebound. A moderately expansionary fiscal policy by the central government in Beijing and healthy consumer spending should also sustain solid growth, he adds.
“In this environment we believe that the U.S. Federal Reserve can afford to pick up the pace of its tightening in 2016, although the gradient of rate increases is likely to be fairly moderate,” Ooi says. “We expect Asian bond markets to withstand the moderate rate increases, even as some knee-jerk volatility could be triggered.”
Among local-currency bond markets, Ooi says, he continues to favor the Indian rupee and Indonesian rupiah markets because of their attractive yields and what he regards as a stable-to-improving economic outlook for the two economies. He also believes many currencies are oversold after depreciating against the dollar over the past 18 months and could rebound, even if the Federal Reserve Board goes ahead and raises interest rates in December or shortly thereafter. “In the Asian local-currency bond market, the gains could also be supported by better currency performance,” he says.
Currency weakness has been a particular factor in Malaysia, driven by concerns about global growth and a political scandal over ties between an indebted state-run investment fund and Prime Minister Najib Razak. In August the Bank Negara Malaysia let the ringgit break through the floor level of 3.80 to the dollar, which Malaysia had defended ever since the 1997–’98 Asian financial crisis. The ringgit was trading at 4.36 to the dollar in late November.
Ilene Chong, director of fixed-income investing at Eastspring in Kuala Lumpur, says she has responded to the volatility by shortening duration in the firm’s fixed-income portfolios. “We are also overweight corporate bonds and underweight government bonds,” she says.
In contrast to the gloom that pervades much of Asia, India stands out as a bright spot. The economy is projected to grow by 7.3 percent in 2015, exceeding China’s pace for the first time in decades. Yet the government of Prime Minister Narendra Modi has so far failed to fulfill many of the ambitious reform objectives it set out 18 months ago, and prices on the Bombay Stock Exchange have drifted modestly lower this year.
Sukumar Rajah, Singapore-based CIO of Asian equity for Franklin Local Asset Management Group, an arm of San Mateo, California–based Franklin Templeton Investments, believes the setback is only temporary. He sees growth staying robust, driven by infrastructure spending and urban consumption and helped by an accommodative interest rate environment. India has “ample room” to grow at a high rate because its relatively low income levels give it plenty of space to catch up to other Asian countries, he adds.
The buoyant economic outlook will eventually feed through to equities, Rajah contends. “We continue to expect increased domestic demand in the medium to long run, driven by more favorable regulations for investors and demographics that cater to a growth environment,” he says. “We also see foreign investor flow recovering as investor sentiment toward emerging markets improves and India continues to stand out among its peers as a strong growth and investment story.”
Franklin Templeton, which has more than $844 billion in assets under management globally, wins the award for India Equities. Its Franklin India Fund, a $3.67 billion fund that is managed by Rajah, had a negative return of 1.31 percent in the 12 months ended October 31, compared with a decline of 8.06 percent for the MSCI India Index. In the past three years, the fund delivered a 37.22 percent return, versus a 19.73 percent gain for the benchmark.
“Our portfolio construction is based on our rigorous bottom-up stock selection criteria of growth, quality and sustainability,” says Rajah. The firm is currently overweight on financial, health care and industrial stocks, and underweight on consumer staples and utilities, he says.
Asia’s other giant, China, is a different story; there is no question that the economic going is getting tougher. “China’s development is in transition as structural changes are occurring,” says Liu Ludan, head of fixed income at Beijing-based China Asset Management Co. The firm, the nation’s second-largest fund manager, with more than 800 billion yuan in assets, wins in the China Money Market category. “Growth — as well as returns on investments — will face increasing downward pressure. So will bonds and other fixed-income products. China’s central bank more than ever needs to lower rates in order to moderate market risk,” Liu says.
China AMC’s Caifubao Money Market Fund, which is distributed through the WeChat social media platform of Internet giant Tencent and has 79 billion yuan in assets, delivered a 3.45 percent seven-day annualized yield in the 12 months to November 19. It handily outperformed rival e-commerce giant Alibaba Group’s Yu’e bao money market fund. That 603 billion yuan fund, run by Alibaba affiliate Tianhong Asset Management Co., returned a yield of only 2.83 percent during the same period.
Caifubao delivers high returns by investing in high-yielding interbank instruments as well as short-term corporate bonds, says Liu: “Nevertheless, we need to constantly monitor credit risks and avoid taking unnecessary risks.”
Despite the challenging environment and the stock market rout of the past summer, China Asset Management remains confident about the future of money market funds, Liu says. “In the coming year we see China’s growth slowdown continuing, with downward pressure on prices and the central bank continually implementing a monetary easing policy,” he says. “In this type of investment environment, money market funds offer the best solution in terms of delivering stable returns.”
China’s slowdown will have a ripple effect across all emerging markets, but it may contain a silver lining, says Bob Baur, chief global economist at Des Moines, Iowa–based Principal Global Investors. “Yes, China is no longer the major engine of growth that it was for 15 years, and for 60 years the U.S. has been by far the biggest economy in world and a major growth engine as well,” he says. “Those engines are still out there; they are just not churning as many revolutions as they did in the past. Growth is still pretty good — just lackluster, not superduper fast. In some sense, this level of growth might last longer.”
That would no doubt be welcomed by Asia’s Money Masters. •