Nowhere in the world are fund managers under more pressure to perform than in the besieged Asian region. Faced with a currency crisis that has sent the vibrant tiger economies into a tailspin, not to mention acting as the catalyst for an equally painful fall in stock markets across the region and the globe, their lives have become far tougher. Double-digit returns will be much harder to achieve as regional portfolios seek to recover; and those fund managers with the best ability to research and analyze Asian companies will come out ahead.
One group that lays claim to an ability to see through the Asian corporate maze and emerge with top-performing stocks is Indocam Asia Asset Management, the international fund management arm of Credit Agricole of France. One of the world’s top ten banks with assets of nearly $500 bn, Credit Agricole has merged its Segespar subsidiary with Indosuez Asset Management to form a fund management company with over $125 bn of assets. With the year-old acquisition of Banque Indosuez, Credit Agricole gains $4 bn of assets under management in Asia and one of the most established investment networks available.
Asian Hub
With all international operations led out of Hong Kong by Ian McEvatt, chief executive of Indocam, the potential for Asian growth is notable. With an Asian history under Banque Indosuez dating back to 1872, the marketing podium is in place to leverage off Credit Agricole’s huge savings and loan style retail banking business in France.
As the one-time central bank for Laos, Vietnam and Cambodia and a regulatory institution in Japan, Indosuez’s Asian connections are of the highest order. Run from Paris since the 1950s and established in Hong Kong in 1982, its Asian activities include full offices in Tokyo and Singapore, joint ventures in Malaysia and Thailand.
‘It is difficult to say how much more money will be directed short-term to our Asian portfolios from the Credit Agricole retail network, or from international institutional investors, given the current crisis the region’s markets are facing,’ notes McEvatt. ‘However, only 5 percent of Indocam’s assets under management are international. Clearly, the development of this global business will be a major focus.’
Currently, most of the Asian money under management is institutional in nature. Indocam has preferred to stay out of the direct path of the likes of Jardine Fleming and Templeton in the highly competitive retail mutual fund market. For the most part, its institutional investor base is served through a series of 16 mutual funds. The largest is the India-focused Himalayan Fund, with assets under management of $245 mn. However, the flagship fund is considered to be the Asian Growth Fund (regional ex-Japan) managed by Marian Li and Winnie Pun with total assets of some $150 mn.
Decisions, Decisions
For companies interested in making their way through the comprehensive stock review process and onto the buy lists of the various Indocam funds it is important to understand the inner mechanics of the decision-making process.
There are two keys to the Indocam investment process. First, the process is highly systematic and disciplined. Second, it is based on an active management, bottom-up, stock-picking philosophy. For instance, in the last five years the Asian Growth Fund outperformed the market by more than 5 percent a year. That was largely a product of the stock-picking ability of Indocam’s researchers and fund managers.
‘Many people believe that Asia and stock-picking naturally go hand-in-hand, but you would be surprised at how many asset allocators and market timers are still practicing out there,’ says McEvatt. ‘Everything we do each day is centered around picking winning stocks for our portfolios. Yet, that doesn’t mean that our stock-picking process is based on taking huge risks. We are very much controlled risk takers. Our portfolio managers know the precise measure of every risk they take versus benchmarks in choosing stocks, sectors and countries.’
Back to Base
The stock-pickers, who meet every two weeks to discuss which companies should be on the recommended buy list, operate around a strategic framework that is based on macroeconomic quantitative analysis released on a monthly basis. In effect, it is the asset allocation framework that mitigates the risk for stock-pickers.
As McEvatt notes, if a fund manager is building up a portfolio from a selection of stocks and the impact on country allocation is inconsistent with the macro view of that country, he or she will brought back to base. Depending on their experience and performance levels, fund managers are allowed certain discretion to step away from central controls but no-one is allowed to hold a major contrarian position.
Indocam prides itself on its ability to find the right companies. ‘Everyone working here is a stock analyst and everybody wants to be a stock analyst,’ says McEvatt. The objective of all this intense analysis is to get a stock recommended for the master list. Overseeing this list is the head of research who chairs the two-weekly stock selection committee meeting. In essence, a company will have most success in attracting Indocam capital if it can bring the head of research onside.
The all-important stock selection meetings consider and evaluate fund managers’ research and recommendations in detail. They review all fundamental inputs, including companies’ balance sheet prospects, future profits and sales growth, as well as management quality. The committee debates the merits of all recommendations and combines these findings with historical price performance and valuation data.
Stocks accepted by the committee are added to the list from which fund managers select for their portfolios. Using the list as a base, country specialists produce a model portfolio for each country; and all regional funds are at least 90 percent invested in stocks on the list. So, once a company has joined the list, it’s important to ensure the country specialist is on board.
In essence the selection process is meant to weed out the anomalies. ‘A stock can be entirely different from the underlying company,’ notes McEvatt. ‘The company can be going down while its stock is going through the roof. Issues of liquidity, supply and demand can affect the stock and can overwhelm what is going on in the actual company, particularly given the often narrow markets within Asia. So you have to consider a combination of factors.’
There have been cases of a fund manager/analyst falling in love with a company and producing a brilliant fundamental report recommending a buy. Then, at the committee level, the price performance and valuation data have shown that the stock price is uncompetitive. ‘Though our mandate is to look for growth companies, we do so at reasonable prices,’ notes McEvatt. ‘In essence, we always set a price target for a stock to stop the falling in love problem.’
In addition to the regular stock selection meetings, every quarter Indocam holds a strategy meeting at which all the fund managers/analysts from the different offices come together. For this meeting each fund manager reviews the market using an analytical framework that results in return forecasts under different market scenarios: ‘most likely’, ‘pessimistic’ and ‘optimistic’. From these forecasts Indocam calculates risk-adjusted forecasts and ranks the various markets.
The results of these quarterly gatherings form the basis for Indocam’s preferences for overall asset allocation. The firm then sets target deviations from its benchmark, which may be, for example, the Morgan Stanley regional index. All portfolios are measured against an internal benchmark and should conform to the house model in structure. The risk profile of the model portfolio and its components against the benchmark is then additionally analyzed by the quantitative team using a combination of in-house and external risk monitoring services. One such external service is purchased from Barra.
Crisis Response
In the wake of the Asian currency crisis, Indocam has added another important element to its analytical structure – currencies. Until the summer of 1997, the currency decision was typically a non-issue as most currencies were effectively linked to the dollar. Forex movements were small and usually had little impact on total returns.
Now Indocam has added twelve currency markets to the twelve stock markets that research must cover, and a chief economist joined the team to handle the task.
Within these larger parameters fund managers and researchers go about picking stocks. So, although companies may not be able to influence the macro vision, they can try to sway the stock-pickers and researchers.
They should be aware, however, that Indocam is a very independent institution. A positive brokerage report won’t necessarily ensure a positive response from the presiding fund manager. Before making it to the stock list each company is analyzed in-house and brokerage research is only used for background.
‘Most brokerage research coming out of Asia just doesn’t make the grade,’ says McEvatt. ‘Many brokers have conflicts of interest between their corporate finance and research departments. In addition, by the time a broker is on to you with a piece of research it’s already circulated in the market. And brokerage research is subject to interference by principals and governments.’
Indocam likes to meet with senior management, CEOs or finance directors when its representatives visit a company. The group’s long presence in the region often means managements will make themselves available for in-depth discussions. In some cases, the IR function of a company helps Indocam fund managers in the stock-picking process. As McEvatt says, Hongkong Bank must be included in most southeast Asian portfolios and fund managers are happy to interface with the bank’s IR team. However, Hongkong Bank is a large cap, highly transparent, structured international organization with multiple listings and a massive corporate governance machine. The same characteristics just don’t hold true for a company like Shanghai Dazhong Taxi.
To make an investment in a company like Dazhong Taxi – and most Asian stocks are closer to Dazhong Taxi than Hongkong Bank – company visits are key. And the best way for an IR department to make its case for inclusion on the Indocam potential buy list is to pitch the various decision-makers – the specialist analyst, country analyst and head of research. If Indocam is impressed by management at the meeting, the group will then conduct its own due diligence.
IR Suspicious
But companies should be aware that having an IR department interact with Indocam does not ensure success any more than a positive broker’s report. Presently, Indocam is suspicious about Asian IR practices.
‘IR is improving in the region, but the practice is still far from western standards and in some cases it should be called investor bamboozling,’ notes a cynical but savvy McEvatt. ‘IR in Asia is embryonic. Groups like Hongkong Bank and Wharf Holdings have good programs. But when you leave the confines of the premier league most companies have no IR at all. Ask management which director is specifically charged with looking after the interests of shareholders and their eyes glaze over.’
Still, IR is important to the Indocam investment process. The group prefers to deal with senior management directly, but IR has a critical role in the area of the creation and dissemination of financial information in Asia.
If the quality of IR is solid, according to McEvatt, fund managers can do more interesting things in their stock research. If the quality is poor, the fund manager must make up for the lack of information before starting to look for reasons to buy the stock.
‘The essence of stock-picking is to form a judgement about a company that is different to what everyone else perceives,’ concludes McEvatt. ‘That is where a fund manager makes money. If the IR task is handled properly, we can look deeper into the future prospects and buy into the company. While proper IR is hard to find in Asia, and poor IR can hinder investment, times are indeed changing.’
Asian Growth Fund
Performing well in one country is a chore for most fund managers. When it comes to running an Asian investment portfolio, a fund manager has to be versed in the ways of many countries.
Since its inception in 1984, the managers of Indocam’s Hong Kong-listed Asian Growth Fund (assets: $150 mn) have done just that. According to Micropal, it has attained 104 percent growth over the five years to end-September 1997, compared to its benchmark growth of 54 percent.
To understand the scope of the efforts of fund managers Marian Li and Winnie Pun, take a look at the asset allocation: Hong Kong and China, 56 percent; Taiwan, 10.2 percent; Singapore, 8.7 percent; Malaysia, 7.7 percent; Korea, 4.8 percent; India, 4.7 percent; Indonesia, 3.2 percent; the Philippines, 2.2 percent; Thailand,1.5 percent; and cash,1 percent.This diverges greatly from the MSCI Index, illustrating a certain sense of independence. MSCI allocates 40.8 percent to Hong Kong and China, for instance; and India is not included at all.
Asian Growth may be a misnomer in the bear market of 1997, but Pun feels that on average Asia will double the growth rates expected in OECD countries over the next five years. The major difference at the moment is that while currencies never had to be considered by Asian Growth in the past they are now the buzz word. ‘Asian currencies were typically classified as part of the US dollar block, but that view is clearly out of date,’ says Pun.
Presently, the average investment size for Asian Growth in a single company is around 2 percent of assets. In the case of stocks like Hutchison Whampoa ( 7 percent) and Hongkong Bank (4 percent) positions can be higher. Still, as Pun points out, the problem in most Asian markets right now is liquidity. Given this, the fund will compromise, placing as little as 1 percent in a stock. ‘It’s difficult to move in and out of a stock,’ explains Pun. ‘The second biggest stock in Indonesia trades only $50,000 on some days. You can get your 2 percent position, but you can never sell. In more liquid markets – like Hong Kong, Singapore and Taiwan – we can take our 2 percent. In other markets, we go for a 1 percent holding in most cases as the exit is critical.’
Pun looks at a number of characteristics when buying an Asian stock. First, the company must have a strong business franchise, such as a brand name, a niche product or a distribution network. Second, management must have a clear and credible strategy; and must initiate contact with fund managers if there are major changes. In other words, investor relations is essential. ‘Management has to be reliable. Once a company lies to us about something we never go back until management is changed.’
Pun believes Asian investor relations is improving, but not fast enough. In a market where families will often float 25 percent of their company and retain the rest, there’s no leverage position for institutions. Majority shareholders believe they do not have to care for minority shareholders. ‘There is nothing we can do. Asia will never be as sophisticated as the west unless this structure changes.’
