by Jake Moeller.
Lipper’s Jake Moeller presents highlights of a presentation by Anna Ho, fund manager, Nestor China Fund and Nestor Far East Fund, June 23, 2014.
China and the Far East are, for an active stock picker, arguably some of the most fertile alpha – or outperformance – hunting grounds in the world. Companies here are not covered as widely by stock analysts as developed markets and the ability for a fund manager to discover “rough diamonds” is potentially much greater.
The trade off for this broad opportunity set is of course, a potential increase in risk. We as investors often take for granted the high standards of governance in developed Western markets that are exerted through high levels of regulation, listing rules and company structures. By comparison, many companies in China and the Far East are characterised by high levels of family ownership (which means corporate timelines are multi-generational) and influenced by strong cultural traditions which Westerners struggle to understand.
Table 1. Three Year Performance of Nestor Fernost Fond B within Lipper Global Equity Asia Pacific ex Japan Sector Quartiles (to July 31, 2014 in Local Currency).
Successful investing in this region therefore requires a fund manager who not only is able to undertake traditional stock picking analysis e.g. understanding valuation metrics and financial statements etc but also who has a deep appreciation of its distinctive characteristics. Anna Ho certainly has this understanding. Her background in Asian studies, being a native to Hong Kong and her considerable analytical pedigree with twenty years experience, is a very impressive advantage.
Table 2. Three Year Performance of Nestor China Fond B within Lipper Global China Sector Quartiles (to July 31, 2014 in Local Currency).
When choosing a fund manager, some investors prefer a large house which has considerable analytical resources at its disposal with a large team. Groups such as JP Morgan, Fidelity or BlackRock come to mind. Alternatively, some investors want exposure to the intellectual capital of a manager who hunts for alpha alone. This of course means you have to accept a high degree of key person risk and there does not appear to be a surfeit of infrastructure supporting Ms Ho at Nestor. It may be no surprise then that she describes herself as a “marathon runner”, which reflects not only her predilection to keeping portfolio turnover low but also her roles as both analyst and portfolio manager. It is perhaps her lack of resources that means Ms Ho concentrates on a small universe of stocks and ends up with a highly concentrated portfolio of 30-40 best ideas. Similarly, her thematic approach to investing allows her to pinpoint a particular sector (e.g. she is currently fond of big banks), with minimum input from others.
Table 3. Three Year Risk/ Return of Nestor China Fond B within Lipper Global China Equity Sector (to July 31, 2014 in Local Currency).
When you meet Ms. Ho, the first thing you discern is her high level of expertise, passion, and experience. She has a calm and considered temperament, which is well suited to investing in a region many find chaotic. There are some areas for which I did not get a clear understanding, for example, how she implements “conviction” into her portfolio (i.e., the size of each position relative to the others). Other than understanding how she deals with liquidity risk (being able to liquidate a stock within five trading days), it is not obvious how potential factor or style risk is monitored or avoided. However, her risk/reward outcomes are very favourable (see Table 3 above), and if you are comfortable with the high degree of key-person risk these funds contain, her pedigree in the Far East region is certainly compelling.
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This material is provided for as market commentary and for educational purposes only and does not constitute investment research or advice. Refinitiv cannot be held responsible for any direct or incidental loss resulting from applying any of the information provided in this publication or from any other source mentioned. Please consult with a qualified professional for financial advice. The author does not own shares in this investment.