Quick Take: The $106-million Strong Asia Pacific Fund (SASPX) invests in a variety of stocks throughout the Asia Pacific region, ranging from small- to large-cap issues in countries as diverse as Australia, India and Taiwan. Manager Anthony Cragg strives to pick winning stocks in the region as the world economy changes rapidly.
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.