The sharp reversal in the Japanese economy in the second quarter of this year has fueled doubts about Abenomics, as the reflationary policies of Prime Minister Shinzo Abe are known, but Yuji Sujino isn’t having any of the pessimism. Sujino, general manager of the equity investment division at Mitsubishi UFJ Asset Management Co. in Tokyo, believes the government’s program of fiscal and monetary stimulus and broad-based economic reform has put the economy back on a sustainable growth path and created a buoyant environment for Japan Inc. The Nikkei 225 index has risen by nearly 54 percent since Abe came into office in December 2012, and Sujino sees even better days ahead.
“Corporate earnings of Japanese companies will grow strongly, driven by the growth of overseas sales, mainly in the U.S. and Asia, and also the growth of domestic sales and improvement of profitability backed by the virtuous cycle in the domestic market,” Sujino says. “Sustained yen depreciation backed by the difference of monetary policy between Japan and the U.S. is also positive, particularly for the corporate earnings of the exporting companies.”
Such optimism, combined with astute stock picks, has proved rewarding for investors in Mitsubishi UFJ’s Japan Blue Chip Fund. The fund, which had ¥29.2 billion ($267 million) in assets at the end of September, invests in undervalued stocks of blue-chip and small-cap companies. Thanks to significant holdings in the electronics, information and telecommunications, services and transportation machinery sectors, the fund delivered a gain of 138 percent over the three years to the end of September, beating the Tokyo Stock Exchange’s Topix index by 52.6 percentage points.
Such stellar performance is the reason Mitsubishi UFJ Asset Management takes the crown in Japan Equities in Institutional Investor’s first-ever Asia Investment Management Awards. Investors clearly appreciate the firm’s performance: Mitsubishi UFJ’s assets under management grew by 49 percent in the 12 months ended March 31, to $636 billion, the largest increase of any of the 25 Japanese fund managers in II’s Asia 100, our annual ranking of the region’s largest asset managers.
II screened performance 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 ICBC Credit Suisse Asset Management Co. in Chinese Fixed Income, First State Investments in Greater China Equities, Shinyoung Asset Management Co. in South Korea Equities, Reliance Capital in India Equities and Public Mutual in Malaysia Islamic Fixed Income.
Asia Investment Management Awards Here are the money managers recognized for delivering
impressive results in Asia markets.
CHINA Equities Fixed Income Money Market Equities Equities Equities Asia Ex-Japan Equities Asia-Pacific Fixed Income Equities Fixed Income Real Estate Investment Trusts | SOUTH KOREA Equities Fixed Income Money Market Equities Fixed Income Equities Equities Islamic Equities Fixed Income Islamic Fixed Income Equities Schroder Investment Mgmt (Singapore) |
Like money managers around the world, executives at these firms struggle to find good risk-adjusted returns in today’s low-rate environment. In addition to doubts about Abenomics, concerns about a slowdown in Chinese growth have rippled across the region recently. Managers also worry about the potential for a spike in volatility because of global growth uncertainties and expectations that the U.S. Federal Reserve Board will begin raising interest rates at some point in 2015.
Such concerns have generated a fair bit of volatility this year. The MSCI AC Asia Ex Japan Index was up just 1.4 percent for 2014 as of late October, but that seemingly listless performance incorporated a drop of nearly 8 percent in the first five weeks of the year, followed by a rally of more than 19 percent by early September and then a fresh tumble. In the face of such swings, many top managers are keeping their eyes focused firmly on the fundamentals of both the economies in which they operate and the individual companies they hold.
“We may see the short-term decline of Japanese equities in the wake of concern about risky assets due to the outlook for an early rate hike in the U.S.,” says Sujino, a 28-year asset management veteran who joined Mitsubishi UFJ in 2004 from Mitsubishi Trust & Banking Corp. as head of Japanese equity and who sets broad strategy for the firm’s team of portfolio managers. “However, we expect Japanese equities will rise sustainably in the medium and long term based on the strong corporate earnings.”
Fund managers in Hong Kong, arguably the financial capital of Asia and home to the third-largest stock market in the region after Tokyo and Shanghai, have one more thing to worry about these days: political stability. The pro-democracy protesters of the Occupy Central movement have periodically blocked some of the city’s main thoroughfares since late September, casting a cloud over the local economy and raising fears of a crackdown by China. The Hang Seng Index fell more than 9 percent after hitting a high for the year at the start of September.
The social turbulence struck the market at a time when investors were growing anxious about the main economic drivers, says Toby Hudson, fund manager and head of equity research for Asia ex-Japan at Schroder Investment Management (Hong Kong). The local arm of the U.K. investment manager wins the Asia Investment Management Award for Hong Kong Equities.
The Hong Kong market, Hudson notes, tends to be driven by the economic outlook in China, which fuels top-line growth at most local companies, and trends in U.S. interest rates, which determine the cost of capital under the special administrative region’s fixed exchange rate.
“Over the past few years, the Hang Seng Index has struggled to make new highs, at least partly because both these influences have been very mixed,” says Hudson, who points out that Chinese growth has been slowing steadily since 2009. “As China inevitably rebalances toward a slower, less credit-intensive, more sustainable growth path, investors are being forced to come to terms with a different trajectory for earnings for many of the listed incumbents in the Hong Kong stock market — many of which are more geared to the old growth model than the new.”
Schroder is a bottom-up, research-driven manager that looks for companies with strong franchises that can generate superior returns and tries to buy their stocks at a discount to fair value. “We remain focused on picking stocks that can survive and thrive in this uncertain environment rather than betting on a renewed upswing in local asset prices or a reacceleration in Chinese growth,” Hudson says. “We are not looking to trade stocks week to week or month to month based on shifts in the macro backdrop but to identify longer-term winners at the individual company level.”
The firm also seeks to exploit one of the key advantages of the Hong Kong market — its geographical diversity. Hudson aims to invest in companies that have broad regional or even global businesses, as opposed to those that operate locally. The three largest holdings of the Schroder International Selection Fund Hong Kong Equity, for example, are AIA Group, a pan-Asian insurer that was spun out of American International Group; Hong Kong– and London-listed global bank HSBC Holdings; and Hutchison Whampoa, the conglomerate controlled by Li Ka-shing.
Hudson says he has adopted a defensive posture for the fund in case conditions deteriorate: Companies with established brands and financial strength should outperform in difficult circumstances. The HK$23 billion ($3 billion) fund was up 4.43 percent in the first nine months of this year.
Martin Lau, Hong Kong–based director of greater China equities at First State Stewart, a global arm of Melbourne, Australia–based First State Investments, is also keeping a wary eye on social and economic developments in the region. The firm’s strong performance makes it the winner in the Greater China Equities category, which includes markets in mainland China, Hong Kong and Taiwan.
The recent Hong Kong protests appear to be “a symptom of rising social tension across the region, aggravated by increasing wealth divisions,” says Lau. He has been encouraged by the recent stability in the Hong Kong market, however, and says the events are unlikely to have a long-term impact on corporate results: “We believe the Asia-Pacific ex-Japan markets offer a selection of high-quality companies, which should provide good returns for investors over the long term.”
Weakness in the Chinese economy has the potential to be a much bigger issue. “We remain concerned about the Chinese economy, where there is significant oversupply in the property market and overcapacity in most industries,” Lau says. “We are also worried about deteriorating working capital in businesses across the country. The slowdown in China is likely to continue, although the economy may stabilize in the short term.”
The fact that the Chinese government has not launched a major stimulus package so far despite signs of slowing momentum shows that officials are determined to push ahead with the transition from an export-oriented economy to a more consumer-driven one and to come to grips with industrial overcapacity, Lau says.
He sees growth opportunities arising from the opening of sectors currently controlled by state-owned companies. Of particular interest is the recent plan announced by Beijing to liberalize cross-border investment between the mainland and Hong Kong. Under a program called Shanghai–Hong Kong Stock Connect, which is expected to begin in coming months, Hong Kong investors will be able to buy stocks directly in China’s A-share market, starting in Shanghai, and mainland investors will be given direct access to invest in Hong Kong. Currently, investors have to go through various quota-limited vehicles, such as the renminbi qualified foreign institutional investor program.
“We believe that there are good-quality companies in the China A-share market that are trading at attractive valuations, especially with a longer-term view,” Lau says. “The reform efforts relating to the China A-share market, more market-based competition and new incentives for state-owned-enterprise employees should be beneficial for long-term investing. We continue to focus on identifying companies with sustainable competences, proven management and healthy financials.”
Lau says First State Investment is inherently conservative, focusing on capital preservation as well as growth. “Companies that we invest in typically exhibit lower levels of gearing, stronger cash flows and lower earnings volatility than the peer group,” he says. “While our prudent style may lag in very strong liquidity-driven or momentum-led markets, this approach produces consistent long-term outperformance.”
The outlook for Taiwan’s tech-heavy market looks more uncertain of late, Lau says. Strong results from companies such as Taiwan Semiconductor Manufacturing Co., computer power management systems maker Delta Electronics and industrial computer manufacturer Advantech Co. have driven a strong rally since the end of 2011, but the local market index has fallen nearly 9 percent since late August. “It is difficult to forecast similar performance for the second half of the year, considering that valuations are by no means cheap and that technology is inherently cyclical,” Lau says. “Nevertheless, we believe in investing in well-run companies for the longer term.”
Despite recent signs of a softening in the Chinese economy, veteran investment strategist and fund manager Jiang Mingbo says he is cautiously optimistic that the country’s equity market may finally be pulling out of the doldrums.
The Shanghai Shenzhen CSI 300 Index benchmark is once again trading at the 2,400 level, the same as about a year ago, up from a low of about 2,000 in March. “In the second quarter we saw how the markets began to benefit from economic reforms, giving rise to the hint of possibility that we may be entering another phase of bull markets,” says Jiang, who heads investment at Beijing-based ICBC Credit Suisse, winner in the China Fixed Income category.
The firm, a venture between Industrial and Commercial Bank of China — the country’s largest lender — and Switzerland’s second-largest bank, was founded in 2005 as the first joint venture between a Chinese bank and a foreign fund manager. It had $67 billion of assets under management at the end of June and is one of a dozen companies that manage funds on behalf of the National Council for Social Security Fund, China’s biggest pension fund and largest domestic institutional investor.
President Xi Jinping has a long economic reform agenda. It includes liberalizing the state-owned corporate sector, developing the country’s social safety net, building a national municipal bond market, deleveraging highly indebted local governments and increasing financial market access for private enterprises.
China’s leaders appear to be “determined to accelerate reforms, and these reforms will take root and lead to longer-term economic growth,” Jiang says. But don’t expect any immediate windfall, he adds. “We can see that the dividends of reforms are beginning to pay off, but we have to say in the short term we won’t see a bountiful harvest.”
China isn’t the only nation embarking on reforms. In South Korea the government and the private sector are boosting investments to drive economic and technological innovation, and to diversify the economy away from its reliance on a few export-oriented conglomerates. One reform has particular salience for money managers: Many employers, including government agencies, are putting more money into corporate pension plans to help offset the obligations that will come with a rapidly aging workforce.
Chief among the beneficiaries as South Koreans plan for retirement is Seoul-based Mirae Asset Global Investments, the nation’s largest independent asset manager. The firm wins in the Korea Fixed Income category.
“Our objective is to outperform the benchmark, and we strive to achieve this objective by diversifying into various alpha strategies with lower relative volatility,” says Sung Jin Kim, chief investment officer in charge of fixed income at Mirae Asset. One third of the group’s $65 billion in assets is in fixed-income securities.
“After thorough macro analysis we set the risk-on and risk-off ratio — the weight to invest in risky assets and safe assets,” Sung says. “Subsequently, we decide the portfolio composition in terms of individual risky and safe assets.”
South Korea has one of the most-liquid bond markets in Asia and features a wide range of hedging tools, including Korea Treasury Bond futures, interest rate swaps and cross-currency swaps. Foreign investors increasingly perceive the country’s bond market to be a safe haven because of South Korea’s large current-account surplus, projected to hit $84 billion this year, and foreign exchange reserves ($364.4 billion in September). The country has even been running a trade surplus with China, its largest trading partner. That surplus topped $24 billion in the first six months of this year.
Elsewhere in the region emerging Asia continues to enjoy healthy growth. According to the Asian Development Bank, the five major economies of the Association of Southeast Asian Nations — Indonesia, Malaysia, the Philippines, Singapore and Thailand — will grow by an average of 4.8 percent this year and 5.6 percent in 2015. Malaysia is expected to closely track the average, with growth accelerating to 5.7 percent next year. With per capita gross domestic product of $10,500, second only to Singapore’s in the region, the country offers plenty of investment potential. But policy issues cloud the outlook in the near term. In early October, in a bid to narrow the country’s deficit, Prime Minister Najib Razak announced a budget for 2015 that includes cuts in energy subsidies and the introduction of a 6 percent goods and services tax.
“We expect Malaysia’s stock market performance to have an upward bias toward the end of 2014” as investors build positions for the year ahead, says Chen Fan Fai, chief investment officer and country head at Eastspring Investments, which wins in both the Malaysia Equities and Malaysia Fixed Income categories. “However, the journey is not expected to be smooth sailing, as we expect more efforts toward subsidy rationalization to be made, which could include addressing petrol, diesel and gas subsidies. The follow-through cost pressures on the economy will be inevitable, and the issue of how quickly companies can pass on these cost increases to the end consumer will be reflected in reported profit margins.”
The coming year may see economic growth slow as a result of the cumulative effects of the new budget policies, which could weigh on consumer spending, Chen says, although private investment in infrastructure projects and improvements in exports should cushion any weakness. He welcomes the government’s measures. “While the picture painted for the rest of 2014 and into 2015 is relatively cautious, we believe the difficult step the government is taking toward fiscal consolidation is a necessary one,” he says.
For Eastspring, the $115 billion Asia investment arm of U.K. insurer Prudential, the way to deal with policy-driven uncertainty is to take a fundamental, research-driven approach. “Our primary focus is on stock selection, complemented at times by asset, country and sector allocation decisions, which we believe is particularly effective at adding value during periods of extreme valuation or sharp swings in investor sentiment toward a particular asset class,” Chen says. Malaysian companies that Eastspring likes include Matrix Concepts Holdings, a developer that stands to benefit from government incentives for affordable housing and sales of industrial lots, and mobile service operator DiGi Telecommunications. Shares in Matrix were up 65 percent in the 12 months to October 27; DiGi, meanwhile, has risen nearly 20 percent.
Malaysia is distinguished by its well-developed market for Islamic finance: finance that is compliant with shari’a religious law, which forbids interest-bearing instruments. Kuala Lumpur–based Public Mutual, the largest private unit-trust company in Malaysia, wins the category for Islamic Fixed Income, outperforming rivals in terms of returns for its clients.
“The outlook for the domestic bond market will depend on the movement in global bond yields and the timing of the U.S.,” says Yeoh Kim Hong, chief executive officer of Public Mutual. “Sentiment for domestic bonds is also expected to remain cautious in anticipation of further hikes in the central bank’s overnight policy rate in the year ahead. As such, our fixed-income portfolios will continue to be rebalanced to lower their respective portfolio duration.”
Malaysia isn’t the only country facing uncertainty. Thailand has enjoyed economic growth rates of between 4 and 7 percent for much of the past decade. Yet the nation has suffered from political turmoil stemming from the long-running struggle between two rival camps: supporters of the Thai royal family, who include much of the country’s urban middle and upper class, and supporters of former prime minister Thaksin Shinawatra, a telecom billionaire who spent heavily during his time in power in the previous decade to develop the country’s poorer northern regions. The struggle culminated in a May 7 military coup that overthrew Shinawatra’s sister, Yingluck, who had won election as prime minister in August 2011.
Since then Thailand has been ruled by a military junta led by Prime Minister Prayut Chan-o-cha, who until August was commander in chief of the Royal Thai Army. Top executives at Bangkok-based BBL Asset Management Co. are cautiously optimistic that economic stability is finally returning to the nation.
“The Stock Exchange of Thailand Index undoubtedly performed above our expectations given the political uncertainty that persisted throughout the first half of this year,” says Peerapong Jirasevijinda, chief investment officer at BBL, which wins the award in the Thailand Equities category. “The military control has led to a much more stable environment for citizens and businesses alike, a condition which is necessary to induce foreign investments and to promote growth in the market as a whole.”
Jirasevijinda says BBL is confident that corporate earnings have bottomed out and that foreign investors will slowly return to Thai stocks. “The company continues to believe that experienced professionals and a disciplined investment process can consistently add value to the portfolio,” he says. “In addition to the strong investment philosophy, we believe that the urbanization theme will continue to create a ripple effect affecting many sectors, lasting for the next five years. Looking ahead, we continue to like companies with strong brand power that are capable of benefiting from the ever-growing ASEAN market’s increase in purchasing power.”
Thailand, known as the Land of a Thousand Smiles, may have something to smile about economically: The ADB forecasts that growth will rebound to 4.5 percent in 2015 from a coup-depressed 2.9 percent this year.
Jirasevijinda’s optimism about Thailand is representative of the attitude of the winners of II’s Asia Investment Management Awards. The economic and political environment may present challenges, but a disciplined investment approach can still deliver results from Tokyo to Beijing and from Hong Kong to Seoul. • •
Follow Allen Cheng on Twitter at @acheng87.
