With dynamic markets in Asia, portfolio turnover has run high -- 285.9% for the year ended Dec. 31, 2003, versus 92.5% for other funds that invest in Asia. Volatility, as measured by standard deviation, is slightly higher in this fund versus its peers, while expenses run lower: 1.70% versus 2.10% for the average fund investing in the Asia Pacific region.
Ranked 5 Stars by Standard & Poor's, Strong Asia Pacific outperformed its peers in the one-, three-, five-, and ten-year periods ended September 30. In effect, investors have been paid for the added volatility with strong returns. For the three years, the portfolio rose 21.3% annualized, versus a gain of 11.0% for its peers. For the five years, it returned 2.6% on average, versus a loss of 1.1% for its peers.
Cragg has run Strong Asia Pacific since its inception in January 1994. To identify promising candidates, the manager draws on long personal knowledge of the region, and numerous business and press contacts. As of September 30, the fund invested in 16 countries; with Japan (24.2%), Singapore (18.9%), Malaysia (7.3%), Thailand (5.8%), and Bermuda (5.0%) representing the top five country weightings.
The Full Interview:
S&P: How would you describe your investment strategy on the fund and your basic investment philosophy?
CRAGG: I rely on long experience. It's my eleventh year on the fund, and my twenty-fourth year running Asian funds. I lived in Asia for 10 years. I travel twice a year to Asia, and try to see most of our companies.
Our philosophy is to use local information, and not rely on Wall Street or conventional inputs. I rely on a wide range of contacts, business people and journalists. We believe in active management, and in trying to add value by providing different ideas and stocks than you would get if you just bought an index fund or a country future. We don't have a committee process, which I think strengthens the fund.
S&P: Is it a purely bottom-up approach?
CRAGG: We generally invest in about 12 or 13 markets. The mission of the fund is to provide broad exposure around the region. We take top-down factors into consideration, such as policy and currency. If they're bad enough, we'll avoid a country. Typically, however, we're invested in a full range of countries. Then, it becomes very much a stock-picking exercise. If we can find growth at a reasonable price, it would probably be our preference. But in many markets, in different phases of their cycles, we need to look for value as well.
S&P: Do you have any restriction on market cap?
CRAGG: We have broad range of market cap exposure, and own very small companies up to very large ones. What we buy depends on the size of the market that we're interested in. I'm told that the average Asian fund has an average market cap of $3 billion to $4 billion. Outside Japan, that is virtually impossible, since there are much fewer large-cap names.
S&P: What are your specific buy criteria?
CRAGG: It depends on the sector, and varies from market to market. If we're looking at a property company, then we're looking at it from a value perspective. With regard to growth, we're looking for a reasonable PEG ratio. We are trying to add value with stock picking based on years of visiting these countries, and thousands of companies.
S&P: Over the past twelve months portfolio turnover ran at 285.9%. Is that typical for this fund?
CRAGG: That's slightly high for this fund. We are normally at around 150% to 170%. However, we've had very dynamic markets in Asia, and needed to react to that.
S&P: What are your specific sell criteria? Are they mostly based on valuation?
CRAGG: It depends on why we bought the stock in question. On a growth basis, it will be P/E relative to the industry average. We try to set P/E targets at the time we buy. They could be relative to a world industry, if that comparison is appropriate, or relative to a company's specific history.
S&P: How are the fund's assets typically allocated, and what's your cash position right now?
CRAGG: We tend to operate fully invested, typically with 3%, 4%, or 5% cash. We'd have to be extremely bearish to put liquidity into the fund as an asset. At this precise moment, we're at about 5.5% cash. We were fairly fully invested running into the early spring. We took quite a lot of profits. That turned out to be the right thing to do, since we went into a dull, slightly downward summer.
S&P: How many stocks are in the fund? Is it concentrated?
CRAGG: Typically we have about 70 to 75. With a major, liquid name, we feel comfortable with a 2% to 3% weighting. With a higher-risk name, typically we would have a 1% position.
S&P: What benchmark do you use?
CRAGG: We use a blended benchmark: 25% MSCI Japan, and 75% ex-Japan Asia.
S&P: Are you mandated to keep a certain minimum in Japan, or do you not follow any restrictions?
CRAGG: I am not mandated, but I keep that 25% weighting in mind. If I'm gung-ho, we might go as high as 35% to 40%. During the dark days in Japan, we were as low as 10%. We have a certain amount of flexibility.
S&P: You said you control risk by putting some limitations on how much a stock can represent in the fund?
CRAGG: Yes. We have two safety checks. One is not to go too heavy in any particular name. I can't even think when we've been close to 5%. A big weighting would be 2.5% to 3%. Likewise on country allocations. We might go up to 8% or 9% in Thailand, which is above the MSCI weighting. But we're not going to go 15% or 25%.
S&P: Is Singapore heavily overweight? Are you moving there because other markets have become weaker?
CRAGG: Yes. Singapore tends to be slightly countercyclical with the rest of Asia. When other markets go a bit sour, Singapore and Australia come into their own. They're more defensive, transparent, and stable. The governments are very efficient.
S&P: How has your allocation changed over the past year?
CRAGG: Recently, we moved out of Japan. We had about a 32% exposure in the spring. Having been close to a 10% weighting in Australia, we're now at about 4.5% there, largely because of commodity resource cycles. We've been adding to Hong Kong/China plays. Many of the places we're investing -- Thailand, Taiwan, Korea, Singapore -- we're looking through them to China.
S&P: Are you concerned that a slowdown in China will negatively impact its neighbors?
CRAGG: Not at all. China was growing at 9% to 10%. It overheated, and slowed down to 7 or 8%. The now so-called slower growth is actually extremely strong. China will eventually end up as the second-most important economy on earth.
S&P: What is your outlook on Japan. Do you believe that the economy has recovered, or is it just an illusion?
CRAGG: No, I don't think the recovery is an illusion, but it's incremental, and slow. Japan has the most intense bureaucracy, and the stodgiest politicians, so it really cannot turn around in the same way as some of these other markets.
I think there have been real fundamental changes in Japan, related to how companies are oriented, they are now far more profit focused.
S&P: Let's talk about the Wells Fargo acquisition, which has come about due to the New York attorney general's indicting five Strong funds for market timing. How will your fund be affected by the change of ownership?
CRAGG: I will continue to run the fund from Colorado, just outside Denver. The fund will change its name to the Wells Fargo Asia Pacific Fund and add one analyst based in San Francisco. I will also have use of a nighttime trader, which would give us 24-hour trading. Wells Fargo has a bigger infrastructure, bigger client base, and this will be the only Asian fund in that portfolio.
The Wells Fargo deal has also laid to rest any concern that anybody might have about the investigation. It's a very high rated bank, with an extremely good reputation. Even Morningstar, who were very anti-Strong fund family on that basis, have now taken us off their health warning.
S&P: Was the Asia Pacific fund implicated in the investigations?
S&P: What impact have the investigations had on your fund, in terms of redemptions or inflows, and in terms of management style or practices?
CRAGG: Absolutely zero in terms of management style and practices. We run the fund exactly the same. There were redemptions out of the whole strong family when the news first broke, but I would say that since then, the asset base has been very stable.
S&P: Knight Ridder reported that high levels of trading in the fund led to share redemptions worth 460% of its average assets in 2002. That August, four Strong funds, including Asia Pacific, implemented a 1% redemption fee on shares held less than 15 days. It is now 30 days. Was this in response to concerns about market timing?
CRAGG: International funds have been prey to fast movement of money in and out. People did it through third parties, and through advisories. We did a lot to discourage or even blackball people who we felt were taking advantage of the fund.
S&P: Did the imposition of the fee reduce turnover?
CRAGG: Absolutely. We've been extremely stable since then, and we've had very small inflows or outflows.
S&P: What type of investor is your fund suitable for?
CRAGG: It's suitable as one's main Asian exposure, though the level of exposure is up to the individual. From my partisan viewpoint, I would say that American investors are hugely underweight in Asia.
I look at my own country -- England -- at the beginning of the 20th century. While the fortunes of Britain declined, one of its saving graces was its involvement in this dynamic emerging market called America. I'm not saying that America is declining, but China will emerge whether we like it or not. And the smart thing to do is to get on board.
Contact Bob Keane with questions or comments at: .