The Great Wall of Money

No mat­ter how much Trump bel­lows, the Sino-Amer­i­can trade war will even­tu­ally pass, and Asha Me­hta and the smart quants at Aca­dian As­set Man­age­ment will cash in on China.

Forbes - - INSIDE - By Ken­neth Rapoza

No mat­ter how much Trump bel­lows, the Sino-Amer­i­can trade war will even­tu­ally pass, and Aca­dian As­set Man­age­ment will cash in.

OOn March 1, 2018, Asha Me­hta’s firm, Bos­ton’s Aca­dian As­set Man­age­ment, an­nounced it would be launch­ing a new China strat­egy, fo­cused on in­vest­ing di­rectly in main­land Chi­nese com­pa­nies. Her tim­ing could not have been worse. Three weeks later Pres­i­dent Trump launched an all-out trade war, vow­ing to place tar­iffs on tens of bil­lions of Chi­nese im­ports. It was the be­gin­ning of a nearly con­tin­u­ous stream of China-bash­ing from the White House, which—no sur­prise—has wreaked havoc on Chi­nese eq­ui­ties. In the 18 months since, MSCI’s China Stock In­dex is down 16%, while the S&P 500 has gained 11%.

“China has been a hard sell,” says Me­hta, 41, as she stares out over Bos­ton Har­bor from her Franklin Street of­fice, “but you have to ig­nore the noise. China’s lo­cal mar­ket is be­com­ing a net cap­i­tal im­porter. You have con­tin­ued mar­ket lib­er­al­iza­tion.”

The novel quan­ti­ta­tive China-fo­cused strat­egy Me­hta is charged with lead­ing has grown from $15 mil­lion un­der man­age­ment, in April 2018, to more than $138 mil­lion today. Big in­vestors are pour­ing money into Aca­dian for two rea­sons. First, de­spite the rhetoric, China’s volatile eq­uity mar­ket is finally

open­ing up. Un­til re­cently, most for­eign­ers could in­vest only in H-shares of se­lect big com­pa­nies, which were traded on the Hong Kong Ex­change. Now non-Chi­nese in­vestors can di­rectly buy so­called A-shares. “All the ma­jor bench­marks be­gan adding the A-shares to their emerg­ing mar­kets in­dices last year,” Me­hta says, “so there will be a wall of money mov­ing in.”

The other rea­son has to do with Me­hta’s track record. The China-heavy small-cap emerg­ing mar­kets strat­egy she also leads, with $2.4 bil­lion un­der man­age­ment, has re­turned 10.9% on av­er­age per year since its in­cep­tion in 2011, beat­ing its bench­mark by 8.6% points per year on av­er­age. Her new China A-shares strat­egy is down 5.1% amid the cur­rent tur­moil, but that’s only half as bad as her bench­mark, which is off 10%.

“China rep­re­sents just 5% of global mar­ket cap and could rise to 20%,” Me­hta says. “Our clients see this as a strate­gic op­por­tu­nity to get ahead of the flow of cap­i­tal com­ing to China.”

Me­hta and her co­man­ager, Bin Shi, use al­go­rithms to screen some 3,500 stocks listed in Shang­hai and Shen­zhen for 100 fun­da­men­tal and tech­ni­cal pa­ram­e­ters rang­ing from price-to-book value and earn­ings sur­prises to rel­a­tive strength and “ab­nor­mal­i­ties” in cor­po­rate ac­count­ing.

Their fund cur­rently has 100 hold­ings, mostly large- and mid-caps. In­cluded among them are red chips like Kwe­i­chow Moutai and Wu­liangye Yibin, two gi­ant state-owned liquor com­pa­nies that make grain al­co­hol known as bai­jiu. Many seem re­ces­sion-proof. Kwe­i­chow has gained over 90% this year. Yibin is up over 150%.

Me­hta’s route to global money man­age­ment was atyp­i­cal. She was raised in Gainesvill­e, Florida, by two re­search physi­cians, her fa­ther from In­dia and her mother the daugh­ter of Ger­man and Rus­sian Jewish im­mi­grants.

When Me­hta was in grade school, she would some­times stay with her grand­par­ents in the small desert town of Bhi­wani, west of Delhi, where her fam­ily was trans­planted after In­dia and Pak­istan were par­ti­tioned in 1947. Her grand­par­ents’ three­room house had in­ter­mit­tent elec­tric­ity and no run­ning wa­ter. Sewage ran through the streets.

“I lived among chil­dren beg­ging in the streets, in homes with poor san­i­ta­tion, and was greeted daily with mon­keys, pigs and cows me­an­der­ing into our home,” she says about her sum­mer vis­its to In­dia. “I was fas­ci­nated by my same­ness with them [the chil­dren], yet our dif­fer­ences were so big. This in­tel­lec­tual cu­rios­ity from child­hood fu­eled my ca­reer in emerg­ing mar­kets.”

For col­lege Me­hta headed to Stan­ford think­ing she would pur­sue medicine, but in 1999 while in ru­ral In­dia on a Unicef-funded in­tern­ship in pub­lic health, her fund­ing fell through.

“[It] got me think­ing that if you re­ally want to sup­port de­vel­op­ment there, it’s not go­ing to hap­pen through medicine. It had to hap­pen through fi­nanc­ing,” she says.

After grad­u­at­ing from Stan­ford in 2000 with a de­gree in bi­ol­ogy and an­thro­pol­ogy, she be­came an an­a­lyst in Gold­man Sachs. A few years later she got her M.B.A. from Whar­ton, land­ing at Aca­dian in 2007 as an an­a­lyst.

Aca­dian was founded in 1977 as a re­search firm by a Put­nam In­vest­ments alum known for build­ing the world's first in­ter­na­tional in­dex-match­ing strat­egy for State Street be­fore get­ting into money man­age­ment in the 1980s. Today the Ph.D.-heavy firm has $94 bil­lion un­der man­age­ment.

The firm re­jects the idea of a per­fectly ef­fi­cient, per­fectly priced mar­ket, es­pe­cially in China, where 80% of play­ers are mom-and-pop in­vestors who treat the stock mar­ket like it’s a Ma­cau casino. “The word for stock mar­ket in Man­darin is ‘stir fry,’” Me­hta says. “There is this no­tion that it’s hot. It can move on things peo­ple read on WeChat.”

“Some of our peers be­lieve China is too sen­ti­ment-driven or idio­syn­cratic for quant to work,” she con­tin­ues. “But mar­ket mis­pric­ings ex­ist be­cause of be­hav­ioral er­rors. We can gen­er­ate al­pha by sys­tem­at­i­cally tar­get­ing com­pa­nies that are at­trac­tive on fun­da­men­tals.”

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