Ground­work pays big in small-caps

Fund man­ager puts suc­cess down to chai with farm­ers

The National - News - Business - - The Markets - Kana Nishizawa

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.”

Anin­dito Mukherjee / Reuters

HSBC’s Elina Fung went bullish on In­dian dairy af­ter fly­ing to the cen­tre of the coun­try and talk­ing to lo­cal farm­ers.

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