This week I want to pull together some of the ideas I’ve discussed in this column with reference to a new Hidden Gem fund. The fund is called the Asian Prosperity fund and I’ve written before about it in my Financial Times column over the years.
Annoyingly soon after I first mentioned the fund many years back in the pink one, it closed to new investors as the manager Greg Fisher didn’t want to raise too much cash for his very focused stock picking strategy. The good news is that in the last few weeks, he has reopened the fund and I shall most certainly be putting more money in myself.
Why? You’ll remember that I believe that we might be approaching that bit of the stock market cycle where value stocks could outperform compared to growth stocks. I also think that emerging markets are especially interesting as are Asian stocks more generally and especially Japanese equities (Japan is not of course an emerging market).
But to capture these potential shifts you need a very focused, active stock picking strategy if only to avoid the legion of rubbish stocks within these varied markets which look cheap but are in fact dead dogs that will never bark again.
One last observation. Over the Christmas break the New York Times ran a smart editorial which suggested that equity investors focus less on broad regions and more on individual nations and their markets. The idea here is that some countries – the Philippines, Malaysia and Vietnam for instance – have been dragged down by worries about China, a bubble in technology stock valuations and concerns about debt levels.
These smaller Asian markets were, the economist argued, 'anti-bubble' markets which might bounce back more sharply. I’m not so sure about the anti-bubble argument but there’s a fair amount of work which suggests that focusing on national stock markets that are cheap but enjoying strong domestic growth pays off as a stock picking strategy.
What can’t be denied is that this kind of contrarian strategy – cheap stocks in cheap markets – most definitely did not pay off in 2018. The Asian Prosperity fund, run by Fisher, former chief investment officer at Morgan Grenfell, had an absolutely terrible 2018.
In sterling terms, the fund lost 13% in 2018 as opposed to big gains in most previous years - 24% in 2017, just under 20% in 2016 and 11.9% in 2015. Since inception in late 2012, the total sterling gain from holding shares in the fund has been 118%, on a compound return of 13.7% per annum.
What hit Greg’s strategy particularly hard in 2018 was the relative underperformance of cheap, value driven, small-cap Japanese small caps, which were crushed. Yet within this broad trend there were huge variations with some stocks relatively unchanged and others down 40% to 50%.
If we look at his very concentrated portfolio as it stands now, it looks dirt cheap. According to a note to investors by Fisher 'our holdings now look incredibly inexpensive, many now trading on price earning (PE) ratios of five times to six times or less, few above book value, all clearly profitable and debt free, and with the prospect of raising shareholder returns through higher dividends and share buybacks'.
Fisher argues that this represents a brilliant opportunity – as you’d expect – which is why he’s ungated the fund. He needs new cash, as he doesn’t know which shares to sell to buy cheap stuff in Japan and Malaysia.
Now the cynic could of course suggest that this all this value-driven stuff might go unrewarded and the market will continue to ignore the latent potential in Fisher’s tightly concentrated portfolio. But I think this not only ignores the fact that this strategy has made money in the past but also passes over the fact that Fisher looks for businesses where there is an obvious catalyst for turning the share price around.
Take his biggest single holding, which is a Tokyo-based property developer and manager. According to Fisher, 2018 was 'another strong year for the company, and the company now trades on a prospective PE of about five times, 0.8 times official book value, but nearer 0.5 times genuine commercial value'. He now expects substantial share buybacks in early 2019 and the dividend yield is now over 3% and is likely to increase again in 2019, for the seventh year in a row.
This brings up another key consideration. The average yield on the portfolio is just under 5% and many holdings are like the third biggest holding, a Vietnamese power producer which churns out a huge cash dividend. The business is debt free and benefiting from the liberalisation of the electricity generation regime locally. Fisher’s fund has held this position for five years during which time 'we have now been paid as much in dividends as our initial entry price. I suspect the same will happen over the next five years, but I also expect the shares to be rerated from their currently very low level'.
Looking at the small portfolio of stocks you can clearly spot the value bias. The fund is 59% invested in Japan and 18% in Vietnam, with Malaysia at 14%. Industrial stocks amount to 25% of the portfolio followed by cheap utilities at 17%. The average market cap of a holding is between the $100 million to $1 billion level, while the average PE ratio is a startling eight times earnings, with the average price to book ratio at 0.8 i.e most shares trade below their book value.
So, proper ballsy, conviction-driven Asian equity investing with a massive value bias. I’m sure it’ll be a rollercoaster ride for investors and this is absolutely not one for widows or orphans, but this is a proper active strategy with real credibility and a great track record. Buy in while you can.
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