Quick Take: Amid the gloom shrouding global markets, the Far East has provided some solace for weary investors. Led by the burgeoning economy of South Korea, markets in the Pacific Rim have held up nicely this year. One portfolio that invests in this region, the Investec Asia Focus Fund (IASMX), has gained 8.1% year-to-date through July 31, while the average regional emerging markets portfolio has declined 5.2%. Based in Hong Kong, portfolio managers Robert Conlon and Agnes Chow seek out undervalued stocks throughout the Asia-Pacific region, excluding Japan.
The fund is the surviving entity of a merger between two other Investec portfolios — Investec Asia New Economy Fund and the Investec Asia Small-Cap Fund — which occurred in January 2002. Conlon and Chow managed both funds prior to the merger. With assets of only about $4 million, the New Economy Fund was not deemed a viable investment vehicle, so it was folded into the Asia Small-Cap Fund, which then changed its name to Asia Focus Fund.
The Full Interview:
S&P: What are your buy criteria and what kinds of stocks do you look for?
CONLON: We use a strictly bottom-up approach to find undervalued stocks in Asia, excluding Japan, in which the underlying business is earning excess returns on invested capital. We also look for companies with positive earnings revisions. We use a proprietary screening methodology to score every stock in our universe. We then focus our research efforts on selecting from among the higher-scoring stocks.
To illustrate how undervalued Asian stocks currently are, the weighted average P/E for this portfolio is about 9.9 relative to this year’s projected earnings.
S&P: How concentrated is the fund and how large?
CONLON: We currently have about $22 million in net assets and 38 holdings. We typically hold between 35 and 40 stocks.
S&P: Why do you keep the fund so concentrated?
CONLON: We believe in a systematic approach to investment management. We are looking for exceptional stocks that we believe are being mispriced by the market. When we find these companies, we want them to contribute materially to the portfolio’s performance. We don’t want to dilute potentially high returns by owning too many stocks.
S&P: When you merged the New Economy Fund into the Asia Small-Cap Fund, did you change your investment styles in any way?
CONLON: Our investment process did not change, but the investment objective of the surviving fund was widened to include large-cap companies.
S&P: How has the fund performed this year relative to its benchmark?
CONLON: Through the end of July, the fund was up 8.1%, while the index, the MSCI AC Far East Free (Ex-Japan) Index, rose 0.2%.
S&P: What are your top holdings?
CONLON: As of June 30, the fund’s ten largest holdings are Samsung Electronics (8.9%); Kookmin Bank (5.1%); Taiwan Semiconductor (4.1%); Hong Kong Electric Holdings (3.4%); Hyundai Mobis (3.4%); Shinhan Financial Group Ltd. (3.4%); Texwinca Holdings Ltd (3.3%); Resorts World Berhad (3.2%); ChinaTrust Financial Holding (3.1%); and Posco (3.1%). These ten stocks represent 41% of the fund’s total assets.
S&P: Your largest holding, Samsung Electronics, has performed extraordinarily well this year. Could you discuss this company?
CONLON: Based in Korea, Samsung Electronics is Asia’s largest company. As such, for our fund to post excess returns from Samsung Electronics, we like to keep a relatively large weighting in it. Despite its strong price gains this year, the stock is still only trading at about 7.2 times this year’s consensus earnings and, consequently, we consider it to be quite cheap.
S&P: How does Samsung compare with their global rivals such as Nokia, Micron Technology and Sony?
CONLON: They compete with Nokia in manufacturing mobile handsets. In this regard, Samsung has a higher margin than Nokia and they are gaining market share more quickly. Samsung competes with Micron Technology in the manufacture of dynamic random access memory, or DRAMs, a type of memory used in most personal computers. Samsung keeps its costs lower and is the more profitable producer, while Micron is incurring losses. Samsung competes with Sony in the consumer electronics arena. Samsung is more profitable and is the leader in new technologies such as flat-screen display panels.
S&P: A few weeks ago Taiwan Semiconductor gave a somewhat gloomy outlook for the second half of this year.
CONLON: Taiwan Semiconductor announced a lower-than-expected forecast for its third quarter 2002 results, which sent the entire semiconductor sector into a tailspin. Fortunately, we had already reduced our exposure to the company about two weeks before that announcement. Moreover, in the same week, we eliminated entirely our position in United Microelectronics (UMC), another Taiwan company that directly competes with Taiwan Semiconductor. In both cases, we sold or reduced our positions because the earnings revisions had turned negative.
S&P: On the whole, how is the Asian semiconductor industry faring this year? What is your outlook for the sector?
CONLON: The industry, as a whole, provided positive surprises during the first quarter of 2002, performed in-line with expectations in the second quarter, and has disappointed analysts with its outlook for the third quarter. We don’t really have an outlook for the sector for next year. However, we will look at the change in consensus expectations on a company-specific basis.
S&P: Tell me about Texwinca, the Hong Kong garment maker?
CONLON: Texwinca manufactures clothes in China for a diversified customer list of retailers, which sell their wares globally. The stock is currently trading at a P/E of about 10, and has averaged an annual return on equity of 25.9% for the last five years, while sales growth has averaged 23% per annum.
S&P: Can you discuss any recent additions to your portfolio?
CONLON: Recently we added to our position in Resorts World Berhad, a Malaysia-based casino operator which is earning high returns on investment. They have recently been surprising on the upside, having increased the number of hotel rooms at their site.
S&P: What are your top industry allocations?
CONLON: As of June 30, the fund’s top industry allocations included electronics (14.6%); commercial banks (10.3%); retail (9.6%); airlines (4.6%); finance (4.4%); semiconductor components (4.1%); and computer equipment (3.6%).
S&P: What are your top country allocations?
CONLON: As of June 30, the fund’s top country allocations were South Korea (32.1%); Hong Kong (23.4%); Taiwan (15.8%); Malaysia (11.0%); Singapore (4.7%); and Thailand (3.1%).