Regional knowledge essential to building successful strategy

Jerry Wang, who founded the Asian fund of hedge funds, Vision Investment Management in 2000, believes it is difficult to maximise possible returns from his region with long-only investments.

“Asia is a market where absolute, rather than relative return makes a lot of sense,” says the Taiwanese-born, American-educated investment manager, who ran Merrill Lynch’s Asian asset gathering operation from Hong Kong in the mid 1990s. “Asian indices do not represent economic development. They tend to be top-heavy and sector-biased.”

Typical behaviour

In this way, Asian economies behave like typical emerging markets, says Mr Wang, who gives the example of high, single-digit annualised growth in Chinese gross domestic product from 1995 to 2005. “Despite this, at the end of 2005, the Shanghai index was at a nine-year low,” he reflects, describing the relationship between Shanghai stockmarket performance and GDP as generally “all over the place”.

He also points to Tokyo, where the Nikkei has fallen from 38,000 to 9,000. Despite well-documented difficulties over the last 20 years, it would be ludicrous to conclude that the Japanese economy has contracted by three quarters. The Taiwan stockmarket is also 33 per cent below its 1990 high, despite continued, strong economic growth.

Underlying sector rotation of the market makes a huge difference to those benchmarked to the index, with banks and real estate always receiving the highest allocations when a bubble occurs, believes Mr Wang.

“The last 50 per cent of an increase before a bubble should never happen, as it is typically driven by greed and borrowed money. This is why investors should not just buy an Asia ETF, but have a diversified and hedged approach.”

A combination of both sector and stockpicking disciplines, with a keen eye on government policy and regulation is key to successful investing in Asian markets, he says. “In Asia, you can’t just go bottom up. If you close your eyes and do this, you’ll get killed, as government policy and macro events have a major influence over the ultimate outcome.”

Going mobile

One striking example is China Mobile, which as the original monopoly holder in the country’s mobile phone sector was “always the darling of every fund manager investing in China,” enjoying a controlled profit margin.

Yet in 2009, China Mobile was the only constituent of the Hang Seng index not to be in positive territory. And this was despite $37bn of cash on the balance sheet, negligible debt and access to 500m subscribers in the world’s largest growth market.

The change in fortunes is down to the awarding of three new 3G licences, to China Telecom and China Unicorn as well as China Mobile. One of the problems, says Mr Wang, is that the two new competitors launched a price war to steal accounts from their rival, whose share price was then severely dented and provided a decent short position for Vision’s Asian hedge funds.

Despite this development, some managers selected by Mr Wang have covered their shorts on the falling China Mobile shares and then gone long on the stock, which still had a trick up its sleeve. This was the purchase of the Pudong Bank in Shanghai, which will help it develop mobile-based payment technology, using a Visa-like swipe of the phone at terminals to make purchases. Competitors do not have the same scale to keep up with this technology and China Mobile is already up 12 per cent in 2010.

Studying the key demographic and population movements of the immense Chinese nation is also vital when putting together investment portfolios, believes Mr Wang, who talks about an effective economy of “two Chinas”, the 350m strong urban population, earning an average annual income of $10,000 per household, and the 950m rural majority, bringing in just $2,500.

“If China continues to rely on exporting as a source of productivity growth and revenue, then potentially, industrial unrest can become quite problematic,” he says. But the slowdown of G7 economies and China consuming an increasing slice of what it produces, since the financial crisis, has led to a change in the picture.

“Stimulus packages from the Chinese government since the crisis are concentrating on freeing up more money from people’s wallets, so they can buy more of their own goods.”

The domestic consumption story told by Mr Wang, with 12m cars sold last year in China, against 9m in the US, is boosted by China’s increasing wages, the centre of the debate about inflationary pressures in the country.

“If most of what you are making is sold domestically, what is the problem with inflation? Purchasing power parity is still there. The key question is, what level of wages are you prepared to pay?

“Beijing has been very impressive in the way it is side-stepping and managing a lot of issues, while having the Americans breath down their necks, claiming they are manipulating currency,” he explains.

Ongoing struggle

Despite the positive outlook for Asian economies envisaged by Mr Wang, he works in a fund selection environment where numbers of hedge funds have shrunk from 800 running $200bn before the crisis to around 600 managing $130bn today. His group has struggled like the rest, with its $1.3bn pre-crisis high now just shy of $1bn.

Most of the business is institutional, coming from major US pension schemes such as CalPERS, for whom Vision has been running a $300m Asian hedge funds portfolio since 2005, although Mr Wang believes Chinese banks will eventually catch the alternatives bug. “The Bank of China and Bank of East Asia are not yet keen to direct wealthy clients to hedge funds, but I can see it happening in the near future,” he says.

“Wealth management is a new business they are setting up, while China is creating new billionaires every day. Investing for preservation of capital, for the long-term, doesn’t happen overnight.”

He is convinced that private bankers coming through the ranks in Hong Kong, Taiwan and Singapore will be recruited by Chinese mainland operators. “Given the fact that the language barrier is largely removed, you can get a whole team of Taiwanese wealth management professionals to move over to Shenzen and build up an entire group for a Chinese bank.”

Before 2008, Mr Wang and many others may have favoured expatriate Asians keen to return to their homeland, but local knowledge is today at a premium and that goes also for the type of strategies selected within Vision’s fund of hedge funds, now biased to domestic managers.

“Domestic managers have a better take on what is going on locally,” he says. “Previously, their infrastructure, internal operations and compliance were not up to the standard we would like, but over the last five years, that has developed rather quickly.”

Jerry Wang, Vision Investment Management