Simon Rigby is the quintessential English gent abroad. The newly appointed managing director of Schroder Investment Management (Sim) in Hong Kong seems as at home overlooking Victoria Harbour as he would be striding down Cheapside. As he points out, there’s not quite so much to do in Hong Kong as in London but some things more than make up for the reduced level of social options. Hop on the Victoria ferry across to Kowloon, he suggests, and grab one of the few remaining views of colonial Hong Kong. ‘I usually go second class.’
Perhaps it’s as well that Rigby’s Englishness shines through since the fund management operation he oversees in Hong Kong is a microcosm of the headquarters in London. The businesses are similarly structured, both sitting alongside well-established investment banking businesses; and overall functional control and asset allocation come from London, backed up by regional headquarters in New York and Tokyo.
That said, the Hong Kong operation takes the asset allocation decisions from London and applies its regional knowledge to the northern Asian (ex-Japan) portfolios. In fact, due to the importance of the Hong Kong market this is then split into a view on Hong Kong and then Asia ex-Japan and ex-Hong Kong. This leads to a regional view, into which the London policy is then factored. A fortnightly review is conducted in Hong Kong to ensure the allocation policy remains on track although, as Rigby points out, they are able to be much more fleet of foot than that if circumstances dictate, as they have done in recent times.
Uncertainty in the region does mean that currency hedging is much more of an issue for Schroder’s Hong Kong clients than in other centers. A good chunk remain happy with hedging foreign portfolios back into the Hong Kong dollar but others go in search of more stable currencies.
Analytical strength
Rigby stresses Sim’s heavy reliance on in-house research. Hong Kong is no exception with a ‘distinct, separate research department’. There are five analysts in Hong Kong, three concentrating on the territory itself, one on China, one on the Philippines. The analytical team also ties in with the fund managers in the region to tap into their expertise on Taiwan, Korea and other markets across the northern asia region.
Toby Hudson, head of research in Hong Kong, says the house view is strongly based on bottom-up, fundamental research. Sim makes over 1,000 company visits a year in Asia; 200 or so of these were in Hong Kong alone last year. Most are one-on-ones and the figures exclude presentations, conferences and the like which bump up the ‘out on the road’ stats even further.
The analytical weight is fed through to the fund management teams via an intranet with contact notes updated following each company visit. The system allows any investment professional in any of Sim’s offices to access detailed company research notes as needed.
‘The in-house research is longer-term and stands back a bit,’ says Hudson, pointing to a tendency for three and five-year forecasts. He refers to the approach as fairly classical investment analysis which relies on a careful check of factors such as management strategy, sustainability of earnings and barriers to entry to support the numbers. ‘We’re aiming at low turnover of stock. We make a long-term commitment to the companies we own and talk of core holdings in our portfolios which tend to be dominated by key names. It’s a good mixture of quantitative and qualitative approaches. We’re asking ourselves Do we believe these guys can deliver on their promises?’
All research is actively discussed with fund managers to come to a view on stock selection. Again the intranet helps both sides of the equation build up a cross-market, cross-sector view in line with the need to take more of a global view in some sectors. A global research team in London also feeds its views to the local offices allowing easier comparison of what events in one region may mean for another.
Double-edged
Hudson says his team wants meetings with companies on two levels. First, for the companies they know well, they want traditional, regular updates on figures and, say, what margins to expect in various divisions or markets.
Next up they want what Hudson refers to as ‘the big picture stuff.’ He adds: ‘We get bombarded by mountains of paper and e-mail. We want to see through that and quiz the CEO or CFO on how they see things developing, what opportunities they are looking at, or quiz a company on its competitors. It’s asking them things like, What do you mean by shareholder value? Where are you going? How are you going to see that growth? We do place a lot of store on our perceptions of the quality of management.’
So how exactly to they go about judging that quality? Hudson is quick to respond that he and his team use transparency as a measure. He believes that a good disclosure policy can be a sign of good management. ‘It’s critical,’ he says, and scathingly notes that it’s difficult to get to see some companies from one reporting season to the next.
Opaque out
‘Historically speaking, transparency has been a problem for a lot of companies in Asia,’ notes Hudson. ‘Decision-making has been concentrated in the hands of a key player and we then get to see a functionary or IRO who doesn’t know what the real strategy is, they just know what the party line is. The vast bulk of Asian companies are fairly opaque in their published numbers and in granting access. In the good times fund managers let that through. Standards drop in a bull market. Hopefully that’s one of the big changes that will come about as a result of the crisis.’
Hudson is convinced that something has already stirred in Asian investor relations and that improvements will continue as opaque companies see their transparent competitors benefiting from greater investor attention. ‘The biggest motivating factor is capital. A lot of companies need major recapitalizing. The hope is that the companies which will get access to capital fastest and at the cheapest rates are those which can demonstrate a credible business plan and show investors they are not going to repeat the mistakes of the past.’
One of the biggest long-term fears for Hudson and his colleagues is that Asian economies recover too fast and, as he puts it, companies are let off the hook. ‘At that point the incentive to restructure goes away.’
Still, Hudson sees encouraging signs of more ‘honesty and reality’ creeping into company meetings. ‘I’m looking for a willingness to discuss issues rather than deny them.’
Hudson believes IR departments can help by getting to know the preoccupations of the investment community and feeding those back to management in preparation for likely questions. ‘There’s nothing worse than coming away from a meeting and feeling you’ve just got the gloss. There’s nothing more frustrating than trying to fight with management for an hour, trying to confront them with an issue, or having to ask the same question five times and still have them avoid it.’
Looking at the region from a macro perspective, Rigby adds that the Asian crisis highlighted that Malaysia and Indonesia had a very bad time of things whereas China had it relatively easy. He talks positively about the growth prospects for the Pearl River Delta – Hong Kong, Shenzhen, Macau and Guangdong – in the next five years. ‘They’re within easy physical reach of each other,’ notes Rigby, who expects great things from companies and for the growth of fund management in the area.
Despite this optimism for an area virtually on his doorstep, he realistically notes that Taiwan and Korea still make up roughly half of Asia-ex-Japan portfolios, particularly in the light of the crisis.
‘We’re in a recovery period but we need to be selective about where that is taking place. I certainly think that Korea is looking very interesting and Taiwan is much more healthy. Singapore has also recovered quite well but Thailand is a bit further behind. There has been a recovery in asset values but we’ve yet to see retail sales recover in Hong Kong. This year will be pretty flat on top of an appaling 1998. There’s room for some optimism but it does depend on a healthy Chinese recovery and on Japan not getting any worse.’
