Update: Henderson Horizon Fund – Pacific Equity Fund
Q&A with Andrew Beal, Fund Manager
Year to date, the Fund has delivered +44.9% vs. the benchmark return of +31.4%. Can you share with us what have been the key drivers for the Fund's outperformance?
Stock selection has been the key to performance. The Fund has been overweight in Chinese property shares. One property stock that has done very well from its depressed levels is Agile Property, which is a land developer with its business mainly focusing in Guangdong Province, China. It's been a key beneficiary from government infrastructure spending plans and lower interest rate environment. The Fund also has a large overweight in Chinese stockmarket which has helped performance. China accounts around 37% of total assets.
There has also been noticeable success in Indian stockmarket. Indian economy has hit bottom and recovered since 2008. We held key positions in banks and infrastructure. For example, ICICI – India's second-largest bank is recognised for its strong capital positions and exposure to strongly growing financial services markets in India. Another example, Bharat Heavy Electricals – largest engineering and manufacturing enterprise in India in the
energy-related/infrastructure sector. Bank Mandiri (Indonesian-listed stock) has also performed well. The Fund has significant underweight position in Australia. We do not own Australian banks, and the companies that we do own (e.g. Rio Tinto) are tied to Asian growth.
All the above areas have driven the Fund's outperformance.
With the recent rally you have seen in Asian markets, are you worried about the valuations?
No, if you refer to the 'Price to Book' valuation chart below, P/B was trading at around 3x at its peak, versus P/B of around 1.6x today (following the recent rally). Valuations are not at distressed level and there’s still head-run for valuations to increase. We expect a return to previous levels of profitability in Asia over the next couple of years suggesting that book
value can grow at around 15% per annum. 3 years out book value could be 50% above the current level.
On a peak price/book multiple of 3x that would imply a 185% market return from here. While we have seen a good run in markets but there's still a lot of money in the sidelines. Investors are just starting to invest back in equities. The key is to stay focus on long term with 2-3 years time horizon.
Do you see this as a sustainable recovery?
Yes, I believe so. There has been a significant shift in policy in central banks and Asian governments. Over the last 10 years, Asia was driven by exports. We have seen the structural weakness given its reliance on exports during Q4, 2008. With the sharp slowdown and the poor outlook of growth in Western markets, we have now seen a big shift in
policies. Policymakers are now focusing on domestic growth. It’s been 10 years (since 1990s) that we have domestic consumption push in Asian markets. In our opinion, it's just starting.
What's your view of the earnings cycle for Asian companies?
We are positive on the earnings cycle for Asian companies. There is a combination of factors driving earnings. Firstly, it's margin. Companies have cut costs in the downturn. With the stabilisation of economy, companies with businesses tied to Asian growth, would benefit
from the strong recovery in margin which will drive strong earnings growth. We expect a strong split between the 1st half and 2nd half of this year. 1st quarter has been difficult; we expect some rebound in the 2nd quarter. In 2010, the market consensus predicts 30% earnings growth, we think it could be considerably higher. Hence, we are just at the turning point for earnings.
What's your current positioning of the portfolio?
In terms of country allocation, the Fund is currently overweight in China, India, Singapore and Indonesia.Remember, we manage the Fund using bottom-up stock selection. Hence, we are less worried about macroe-conomy. The overweight positions are built around key stock positions.
• For China, reflation is occurring. We have key positions in Bank of China, Industrial & Commercial Bank of China. For property, we have invested in Agile Property and Guangzhou R&F. We also have key positions in high growth industries – e.g. Tencent (Chinese Internet company with online gaming), Suntech Power (solar power company).
• In India, we own Indian banks – such as ICICI, which is growing its deposit franchise. Loan growth is expected to pick up, and at present, it's trading at compelling valuation.
• In Indonesia, we expect interesting development following the Indonesian election. The key is to build infrastructure to reduce inflation and create employment. We are hopeful that this will happen.
• In Singapore, we are playing the exposure via DBS Bank, which has a fantastic regional franchise in Asia and is also doing well in its core market.
What about sector allocation?
The Fund is currently overweight in sectors such as financials, industrial and IT. Out of the 46% exposure to financials, property (China/Hong Kong) accounts around 15% and banks account around 30%. Asian banks have been punished unfairly and the Asian banking system is healthy as compared to Western parts. This creates good investment opportunities – particularly when they are cheap, in good shape, and geared to domestic recovery over the next few years.
In terms of industrials, the key stock positions include Suntech Power, Bharat Heavy Electrical and Hyundai Engineering and Construction. For IT, we have overweight positions in Mediatek and HTC. Inventories in technology are currently at low level. We are starting to see a pick-up in ordering from Western companies over the last quarter. As we go through a
normal seasonal pattern, we should see further earnings upgrade from technology companies in the 3rd and 4th quarter. Other stocks that we like within IT include Tencent (China internet) and Samsung Electronics (exposure to flat panel, DRAM, mobile handset).
Is the Fund currently fully invested? What’s the current cash level?
Yes, the Fund is currently fully invested. Cash level is around 2%.
We are bullish at this point, and will stay focused with the portfolio of around 40 stocks.
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