Groundwork pays big in small-caps
Fund manager puts success down to chai with farmers
Whether she’s sipping tea with Indian dairy farmers or interrogating company executives in a Hong Kong skyscraper, Elina Fung brings the same techniques to finding stock market winners.
During several trips to central India, and many cups of masala chai, Ms Fung says she questioned farmers about cow numbers, the variability of the monsoon season and how their milk is collected. It’s intelligence she then used to go bullish on Indian dairy company shares, and reflects an almost forensic approach to investing informed by her time as an auditor.
Four years at EY gave the Hong Kong-based fund manager some handy skills to navigate her current universe – the at times murky world of Asian small-cap investing. Now at HSBC Asset Management, Ms Fung’s $1.3 billion fund, which invests in smaller companies from Singapore to South Korea, is streaking ahead of its peers with demand so strong she’s had to stop taking new money.
“In the small-cap space, the first thing that comes to investors’ minds is corporate governance,” Ms Fung said.
That is why you have to get on the ground, she says, whether in rural India or factories in China. “If you don’t go there, you would feel like you’re just investing based on what you understand on paper. You don’t get the sense of how it impacts on people.”
Far from the radars of most traditional investors, small caps often get little analyst coverage, and receive less attention from the financial media. Ms Fung takes advantage of that shortfall. She and the two colleagues on her team visit more than 1,000 companies across Asia every year.
It’s a level of diligence that’s paying off, as her HSBC GIF Asia ex-Japan Equity Smaller Companies fund beat 97 per cent of its peers over the past five years with an annualised return of 17 per cent. Its gains are almost five times those of MSCI’s Asia ex-Japan Small Cap Index over the same period.
As this week’s rout in Hong Kong small caps showed, it pays to do your homework when it comes to smaller companies.
“Research is not just working on the numbers based on what the management tells you,” said Ms Fung, who worked on some of the first Chinese companies to list in Hong Kong during her time at EY. “You have to crosscheck with different channels and people in different parts of the supply chain to confirm your understanding of that trend or that company.”
She focuses on the bottom 25 per cent of Asia ex-Japan equities by market cap. She zeros in on those she views as having good growth prospects, while steering clear of stocks with questionable corporate governance. But FMs ung doesn’t just analyse data, she makes a point of meeting and observing management.
One of her tactics is to throw hardball questions and watch for changes in their expressions. “When I meet up with the company, I put myself in the auditor’s shoes and imagine – if I were your auditor, would I be able to be comfortable with the company’s business model?” Ms Fung said. “If the CFO is always trying to stop the CEO from elaborating further, then that would be one of the red flags.” She would know: Ms Fung was chief financial officer of a Chinese auto-parts manufacturer after a stint as an analyst and her time at EY. One of the HSBC fund’s top holdings, according to its latest fact sheet, is Lonking Holdings, a Chinese construction machinery maker listed in Hong Kong that has more than doubled over the past year. They also invest in Brilliance China Automotive Holdings, which hit a two-year high this month. Not all of Ms Fung’s holdings are star performers: BGF retail, a South Korean convenience store operator the fund said it held in May, has plunged 25 per cent since then.
Ms Fung first shortlists potential investments by valuation and other criteria. Then she scrutinises the company’s fundamentals and sees how it sizes up versus some macro elements – such as the economy and the sector the firm is active in.
That equates to a firmly bullish position on China and a budding interest in South-east Asia. Companies in Hong Kong and China make up 36 per cent of her fund. On India, she likes the dairy plays, but says small-cap valuations have risen a lot already.
A crash in 17 Hong Kong-traded small caps this week wiped out $6 billion of value, reinforcing anxiety over risks in one of Asia’s most important equity markets.
In April, she said the fear and uncertainty that often dog small caps could be fortuitous. “Usually the client would choose to take out their money at the bottom of the market – when you need it the most,” Ms Fung said. “But if it’s something that is just due to noise or market turmoil or other companies being attacked by a short seller and there’s nothing within the earnings model that I could change, then it’s a good buying opportunity for us.”
HSBC’s Elina Fung went bullish on Indian dairy after flying to the centre of the country and talking to local farmers.