Performance Review 2005Bill Sung: "The Pacific Rim Equities outperformed the benchmark. The fund rose 16.2% versus the benchmark which was up 14.8%. Our country allocation was quite successful. The fund significantly raised the weighting in Singapore in 2005. This proved to be a good decision as did the decision to maintain the overweight in off benchmark China related Hong Kong listed stocks, as both markets outperformed the benchmark. Similarly, the decision to underweight Hong Kong and New Zealand stocks was also successful as both markets underperformed the benchmark. The one misjudgment was our increased underweighting of Australia´s market, which outperformed the benchmark.
In addition to country allocation, the fund´s performance also benefited from our sector allocation and stock selection. The cyclical orientation, which included a consistent overweight position in materials, and particularly resources and energy related stocks, was very positive. Resources had a very strong year as energy and commodity prices continued to soar and led to outstanding earnings results by resources companies. Some of our major holdings including BHP Billiton rose over 40% while Rio Tinto leapt over 70% and Woodside Petroleum jumped over 90%. We also made a very successful, non consensus call, to overweight Singapore property stocks in anticipation of the approval of the integrated resort and casino as well as to take advantage of the undervaluation of Singapore´s property sector. Our best performer, Raffles Holdings rose over 100%.
Similarly, the other non-consensus called to overweight China related property stocks proved to be very fruitful. China Resources Land jumped over 40% from our average cost. The underweight in the heavily weighted banking sector in Australia was also a prudent decision as the sector underperformed. Our overweight in Hong Kong domestic retailers was less successful than anticipated, particularly at the end of the year, as the inflow of Chinese tourists eased, Disneyland failed to attract as many tourists as expected and retail stocks were hurt by concerns about rising rent.
In terms of specific changes to the portfolio, in Australia, the fund maintained its overweighting in the materials sector over the course of the year. We added OneSteel, an Australian steel manufacturer which we correctly anticipated would benefit from its exposure to a vibrant non-residential sector and its plans to develop a major iron ore project. We also raised the fund´s weighting in Alumina, the alumina miner, and in Jubilee Mines, a pure play nickel miner, which has one of the world´s highest quality nickel ore bodies. Later in the year, the fund started to reduce its overweighting in the material sector by taking profit and cleared its position in OneSteel and Bluescope Steel, after Chinese steel production increased and we correctly anticipated that this would lead to downward pressure on global steel prices. In energy, the fund increased its weighting in Santos, the oil exploration and production company, because of our expectation that oil prices would continue to stay high. We also participated in a placement for Energy Resources Australia, the world´s third largest miner of uranium as uranium is in short supply globally and higher energy prices are encouraging the development of a growing number of nuclear power plants. We also participated in the IPO for Goodman Fielder, Australia´s largest listed food company which has plans to grow further through acquisition and by focusing on new high margin business segments. The fund also added John Fairfax holdings, a newspaper publisher on the prospects of a deregulation of the media sector and its potential to benefit from corporate activity. At the end of 2005, we increased the fund’s exposure in the Australian financial sector. We raised our position in Westpac Bank, as the outlook for the Australian banking sector remained quite positive, despite a slowing economy. We also increased our holdings in AMP, the life insurance company, which we anticipated would benefit from the strong Australian stock market. Finally, we added a new stock, Insurance Australia Group, Australia´s largest general insurer, principally because of an ambitious expansion plan in Asia.
The fund cleared its holdings in News Corp, because it was being removed from Australian indexes following the company´s decision to shift its registration from Australia to the US. The fund also took profit and cleared its holding in National Food, as the company was acquired. We also cleared our holdings in Telstra, Australia´s largest telecommunications company, which suffered from profit downgrades and likely restructuring following the arrival of a new CEO. Finally, we took profit on Tabcorp, the casino operator, as smoking bans and other regulatory concerns were affecting earnings.
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In Singapore, the fund had a portfolio that was heavily concentrated in property and hotel related stocks. In non property related stocks, the fund invested in the Singapore Exchange, Singapore´s listed stock exchange on excellent yield and the potential for more capital management and in Sembcorp Industries, which has exposure to utilities as well as a major regional logistics business. We cleared our position in Venture Corp, the contract manufacturer, as we expected that it would suffer from margin compression, as well as in Mobile One, the mobile telephone operator due to increased competition, and Suntec REIT, as we saw greater potential in other property related holdings. We also reduced our position in OCBC Bank and cleared our position in UOB Bank.
In Hong Kong domestic stocks, the fund added Giordano, a manufacturer and distributor of mid-priced clothes throughout Asia, which benefited from the robust consumer sector as well as Moiselle, a manufacturer and distributor of women´s fashion in Hong Kong and China. The fund cleared its position in Playmates, the toy licensor, as earnings were somewhat disappointing and the firm´s auditor resigned over a disagreement about accounting practices. The fund also reduced its holdings in some of the Hong Kong blue chips, including Hang Seng Bank, Hutchison Whampoa, the conglomerate, CLP Holdings, the utility and Oriental Press, the publisher of Chinese language publications.
In Hong Kong listed China stocks, we participated in the IPO of Dynasty Fine Wines, one of China´s largest wineries and wine distributors. We also increased the weighting in Lianhua Supermarket, China´s largest supermarket chain, as well as in CNOOC, which is China´s largest producer of oil and natural gas. We also made a controversial call and became quite positive about the prospects for China´s property sector, outside of Shanghai, by adding China Resources Land, which proved to be an outstanding performer. We took profit and cleared our holdings in Singamas, the world´s second largest manufacturer of shipping container boxes as competition increased and also cleared the fund´s holdings in Citic International Financial and the Industrial and Commercial Bank of China. The fund also cleared its position in Silver Grant, the only listed firm in Hong Kong which was participating in the resolution of NPLs in China, as the management failed to deliver on its targets."
Performance Review 2006
Bill Sung: "The fund substantially outperformed its benchmark, the MSCI Pacific free ex Japan, which saw the fund returned 46.7% versus the benchmark of 33.2%. Our country allocation had a positive affect on our performance. During the year, we increased our overweight position in Singapore as well as our off benchmark bet in Hong Kong related China listed stocks which were good decisions as these were the two best performing markets in developed Asia. We consistently underweighted Hong Kong and New Zealand which both underperformed. We increased our underweight in Australia, which performed in line with the benchmark.
In terms of sectors, our property holdings, where we increased the weighting, in both Singapore and China had an exceptional year and contributed substantially to the fund’s outperformance. Our underweighting in the banking sector, in Australia, which underperformed was also a good call as were our holdings in the Singapore and Hong Kong stock exchanges which strongly outperformed, but our holdings in Australian insurers was mixed.
During the year we substantially lowered our overweight position in resources to a nearly neutral position, as we believed that share prices had outrun fundamentals. Our decision worked out well as resources outperformed in the first part of the year, but underperformed in the second as commodity prices corrected. At the same time, we offset the weakness in diversified mining companies, by increasing our exposure to pure play mining stocks, which had an exceptional year and enhanced our performance. Our overweight position in energy and energy related stocks had mixed results with our holdings in Australian oil and gas companies tending to underperform, while our energy related holdings in Singapore and China did well as did our holding in an Australian uranium miner, Energy Resources of Australia. Our consumption oriented holdings had mixed results."
Performance Review 2007
Bill Sung: "In 2007, the Fund significantly outperformed the index. The Fund rose 49.2% versus its reference index, the MSCI Pacific ex Japan index (the “Index”), which was up 31.7%. Country allocation and sector and stock selection both contributed positively to the fund’s performance. The fund benefited from underweighting Australia and New Zealand, which both underperformed.
It received an enormous boost from the overweight in Hong Kong listed China related stocks, which was Asia’s strongest performing market. The underweight in Hong Kong was counterproductive as Hong Kong outperformed and the overweight in Singapore was also not a productive call as Singapore was a slight underperformer.
The major source of the fund’s out performance was the investment in energy, resources and resource related stocks. We also benefited by increasing our already overweight position in the sector. In resources, the proposed takeover of Rio Tinto, where the fund was heavily overweight, and Jubilee Mines provided a large boost to performance, although our exposure to smaller pure play mining companies was detrimental. The underweight position in the heavily weighted Australian banks was generally helpful as the sector underperformed. The fund’s investment in stock exchanges in Hong Kong, Australia, and Singapore to leverage off of the booming stock markets was a very successful move as the exchanges were the best performers among our holdings in Hong Kong and Singapore and was one of our best performers in Australia. Our retail holdings in Australia were quite successful on excellent performance by Woolworths, but our retail exposure in Hong Kong and Hong Kong listed China stocks had a more mixed result. We benefited substantially from our property holdings in Singapore, Hong Kong and China, particularly early in the year, and then made a good decision to reduce our weighting in Singapore and China property as the sectors weakened in the second half on profit taking and concerns about government policy measures."
Performance Review 2008
Bill Sung: "The Pacific Rim Equities fund underperformed the benchmark MSCI Pacific Free ex Japan index in 2008, declining 54.7% versus the latter’s fall of 50.5%.
Attribution from country allocation was marginally negative, with the underweight in Australia, which outperformed, working against fund performance. On the other hand, other allocation decisions including the off benchmark bet on Hong Kong listed China related stocks as well as the overweight position in Singapore, the strongest performer in developed Asia for the year, did help mitigate some of the negative effects.
Sector and stock selection was the primary factor in underperformance for the period. The stock exchanges, our strongest performers in 2007, faltered as trading volumes dwindled amidst continued deterioration in market conditions. Investments in the China and Singapore property sectors produced mixed results. The fund received positive attribution from its Chinese property exposure, some of which it had taken profits on at opportune times. Chinese property stocks also rebounded strongly in the last quarter as the Chinese government unveiled a slew of stimulus measures including a series of rate cuts. Singapore property stocks, on the other hand, generally underperformed, although active paring down of the exposure helped reduce the negative attribution.
In Australia, our energy and resources exposure initially gave the fund a big boost as commodity prices hit historic highs during the year, although the positive impact of our resources holdings was significantly reduced subsequently as commodity prices retreated on the deteriorating global economic outlook, with pure play mining stocks generally faring worse in comparison with energy stocks. Diversified resources giant BHP Billiton’s cancellation of its pursuit of rival mining company Rio Tinto late in the year exacerbated share price weakness in the latter and provided a considerable setback to the fund, in which both companies are portfolio heavyweights. Engineering and construction companies also languished as the industry outlook took an about turn in light of the sharply falling commodity prices, tightening global credit conditions and deteriorating investor confidence. In view of the circumstances, the fund cleared some engineering and construction companies as well as the pure play resources holdings, including Aditya Birla Minerals, a pure play copper miner, Perilya Limited, a zinc mining company, drilling company, Boart Longyear, and Walter Diversified, a mining and engineering company. On the other hand, the fund added gold exposure as a hedge against inflation as well as for its safe haven appeal amidst global financial turmoil, buying the two largest Australian miners, Newcrest Mining and Lihir Gold, moves which generally helped to limit losses. The fund also added soft commodity related stocks including grain trader AWB, grain handling company ABB Grain, as well as pesticides and herbicides manufacturer Nufarm Ltd."
Performance Review 2009
Bill Sung: "The Pacific Rim Equities fund significantly outperformed the benchmark MSCI Pacific Free ex Japan index in 2009, soaring 82.1% versus the latter’s rise of 73.0%. Attribution from country allocation was negative, principally due to the overweight position in Hong Kong and the off benchmark bet on Hong Kong listed China related stocks, as they both lagged the benchmark. The underweight in Australia, which outperformed, also contributed negatively.
Sector and stock selection was the key to outperformance for the period. Investments in the property sectors of Hong Kong, China, and Singapore proved extremely rewarding, as real estate markets across the region rebounded sharply on increasing optimism and plentiful liquidity, although cooling measures by the respective governments did moderate performance somewhat in the second half. Other strong performers in our holdings for these markets included Chinese truck engine manufacturer Weichai Power, benefitting from infrastructure expenditure, retail operator Lianhua Supermarket, as well as Singapore healthcare provider Parkway Holdings. In Australia, the overweight in resources stocks was also beneficial to performance, as growing signs of global recovery and US dollar weakness helped spur commodity prices. On the flip side, an underweight in the country’s banking sector, which did well as investors turned more confident about a domestic recovery and banks reported solid results, was somewhat counterproductive.
A number of changes were made to the fund during the year. In Australia, the fund sold engineering company Ausenco and media company Fairfax Media early in the year, on concerns of cutbacks in mine expansions for the former and a more difficult advertising environment for the latter. Takeover target ABB Grain was also cleared near the eventual takeover price from Canadian grain handling giant Viterra. In their place, uranium miner Paladin Energy was added on expectations of an improving outlook for uranium pricing with increased demand for nuclear power plants and limited new supply of uranium, as was iron ore miner Murchison Metals, which should benefit from strong demand and higher than expected iron ore prices. In Hong Kong, the fund increased its property exposure through developers Sun Hung Kai and Henderson Land, and to fund this, cleared insurance company Ming An Holdings and telecommunications provider PCCW, the latter after failure of a planned privatization initiative. The fund also upped its weighting in China’s consumer sector, which is being targeted for growth by the Chinese government, by buying television manufacturer Skyworth Digital Holdings and participating in the initial public offering of Ausnutria Dairy, a supplier of high quality Australia-imported infant milk powder in China. Another new addition was MOBI Development, a supplier of components to rapidly growing segments of the global telecommunications sector. Petrochina and Honghua Group were cleared. In Singapore, the fund exited CDL Hospitality Trusts early in the year on the back of uninspiring tourism numbers. As the outlook improved, the fund added Pan-Asian retail play Capitamalls Asia, and with the imminent openings of the two integrated resorts, also added Genting Singapore, developer of the Resorts World Sentosa integrated resort."
Performance Review 2010 - Year to Date
Bill Sung: "The Absolute Asia AM Pacific Rim Equities fund outperformed during the first three quarters of 2010, rising 9.70% while the benchmark, the MSCI Pacific free ex Japan, rose 8.08%.
Country allocation was modestly negative. The overweight in Hong Kong listed China related stocks which underperformed, and the slight underweight in Singapore which outperformed, hurt performance, but this was largely offset by the contribution from our overweight in Hong Kong domestic stocks which outperformed and the underweight positions in Australia and New Zealand, which underperformed.
On the other hand, stock and sector selection had a large positive impact on performance. Our overweight in Australian resources and soft commodities, supported by an improved outlook for China’s economy, a weakening USD as well as M&A activity among our gold and soft commodity holdings and our underweight in Australian banks were the largest contributors to performance. Singapore holdings were the next most important contributors. Singapore’s performance was underpinned by the opening of two integrated resorts and record tourism numbers. Our holding in Genting Singapore, which operates one of the resorts was a top performer. Our Singapore property holdings as well as our holding in Parkway Holdings, which was acquired, also performed well. Hong Kong listed China related stocks also added to the outperformance led by the mid and luxury automobile dealership Zhongsheng Group and heavy duty diesel truck engine manufacturer, Weichai Power, on continued infrastructure spending. Hong Kong domestic stocks rebounded late in the period on growing confidence in China’s economic outlook, expectation that US interest rates would remain low for a longer period, the appreciation of the RMB and an acceleration in property sales. Lifestyle International, the department store owner and operator and Hong Kong Aircraft Engineering, which was the subject of a takeover along with holdings in property developers, modestly contributed to the fund’s performance.
During the period, in Hong Kong listed China related stocks, the fund added Zhongsheng Group, and cleared China Railways Construction. In Hong Kong, the fund participated in the IPO of L’Occitane International, a French distributor of high end perfume and cosmetics and cleared its position in Mobi Development, a supplier to the wireless industry. In Australia, the fund increased its position in Murchison Metals, an iron ore play, and also added Gloucester Coal, a thermal and metallurgical coal miner, while reducing its position in the ASX, the Australian stock exchange. It cleared its position in Lihir Gold, after it was acquired by Newcrest Mining, another fund holding, and reduced its position in Nufarm, an agricultural chemicals company. In Singapore, the fund cleared its position in Parkway Holdings. In New Zealand, the fund cleared its small position in Contact Energy, a utility company and replaced it with Fletcher Building, a building materials company which should benefit from an eventual pick up in the New Zealand’s housing market as well as repair from the recent massive earthquake in Christchurch."
Performance since 2005
Investment Process and Strategy – How does the Fund Manager Invest?
The philosophy of the Fund’s management team can be summarized into 5 points:
• Long term share prices are driven by company fundamentals.
• A market oriented style, not constrained by a particular style bias, provides flexibility to seek outstanding opportunities throughout the relevant markets.
• In depth country knowledge and top down country allocation produce higher returns in Asia.
• Fully invested portfolios in equities help to generate substantial long term benefits.
• Trend identification can be of considerable importance in investing in Asian markets and is therefore integral to bottom up security selection and top down allocations. Identifying key trends leads to investable themes and specific sectors which benefit from those themes.
This active investment process combines top down country allocation with bottom up stock selection. The process emphasizes early identification of emerging trends, which is an important source of alpha. Security selection is driven by fundamental research, while country allocation is a combination of qualitative and fundamental inputs. The process is all cap in nature and is not constrained by a growth or value bias. The portfolio is relatively concentrated to maximize potential from all investment ideas.
Investment Process of the Relative Return approach
By prospectus, the investment objective for the Fund is long term growth of capital. While the Fund’s Prospectus provides for no quantified performance objective, the following is provided for informational purposes only: the investment team’s target performance objective for the Fund is annualized excess returns of 2-3% measured over a long term time horizon of a full market cycle (3-5 years). The managers seek to limit the ex-ante tracking error using the Barra Aegis System Portfolio Manager (“Barra”) and the information ratio objective is 0.5. There is no guarantee that the fund will reach this target. This target is not based on past performance of the fund.
Complete description of investment process
Universe and universe construction
The Fund’s universe consists of publicly traded equity securities of companies domiciled or principally operating in developed Asian countries excluding Japan as defined by the country constituents of the MSCI Pacific Free ex Japan Index. This index includes Hong Kong, Singapore, Australia, and New Zealand. Companies need not be constituents of the benchmark for universe inclusion. Quantitative screens are not used in universe generation. There are approximately 4,500 stocks in the universe.
Research emphasis is macro economic, and on industry developments and company fundamentals. The investment team generates its investment ideas internally supplemented by external research resources.
Ideas often result from a general awareness of macro economic and industry trends. This awareness is borne out of experience in the local markets, finance and related industries, as well as internal discussions among the investment team, press/industry publications, and contact with industry specialists, sell side, and company management. Common practice is to identify trends in individual industries and their interrelatedness with related industries within and across markets.
The entire investment team plays a significant role in the research process since portfolio managers are also analysts. The investment team devotes significant energy to researching corporate, industry, economic, and political developments. Scott Davidson is the Director of Research and has 30 years of research experience in a range of sectors.
The research process consists of collecting, analyzing and reporting the results of our research. Collecting data and information uses a combination of primary and secondary resources for country, trend and company information. Primary research consists of company visits and management meetings, as well as meetings with industry specialists and analysts, brokers’ conferences and a review of company financials and government documents. During the course of a year, the research team typically meets with 650 – 700 companies a year. Secondary sources include broker reports and periodicals.
The second step of analyzing the data involves collating statistics as well as compiling notes and other information gathered during the course of the research.
The third and final step of the research is producing reports. These reports consist of country reports, which are detailed, monthly analyses of the countries in our portfolios and are used as a basis for the fund managers to do country allocation. These are produced in conjunction with investment strategy committee meetings. We also produce trend maps, which provide an indication of our view of the key investment opportunities in terms of sectors. Finally, we prepare buy reports for companies, which explain why we decide to make a particular investment.
Fund Outlook (till end 2010)
We maintain our optimistic outlook for developed Asian economies and markets. While we expect that there will be ongoing market volatility, most of the drivers for solid performance in developed Asian economies and stock markets remain in tact.
We believe that the prospects for Asian economic growth remains bright and more attractive than that in the US and Europe, which continue on a fragile path towards recovery. The likelihood of US led quantitative easing combined with higher interest rates in developed Asia, particularly Australia, relative to other developed markets should enhance already ample liquidity in Asia, and attract greater fund inflows. While currency appreciation is a byproduct of the fund inflow and poses some headwinds for exporters, we think that a sluggish recovery in Western economies and the strength of intra Asian trade will be sufficient to prevent significant near term weakness in export growth. In light of stronger currencies and the possibility of growing inflationary pressures in Asia, central bankers and governments will have to continue to grapple with balancing inflationary pressures and tightening measures without undermining sentiment, but we anticipate that they will be successful in this task. While valuations are somewhat less compelling than at the beginning of the third quarter, the corporate earnings outlook in most Asian economies remains quite positive which should provide further support for market upside.
Fund Positioning: (over/underweights)
Overweight China— China’s economy should continue to perform well with GDP growth around 9%. Government emphasis on consumption should keep the sector strong and we will continue to increase our position.
Overweight Hong Kong-Economic strength, a stronger Chinese economy, lower US interest rates and internationalization of the RMB, should attract more capital to Hong Kong and foster more growth in the property and consumption sectors.
Slightly underweight Singapore-- Buoyant economic conditions, driven by robust tourism and a strong property sector, will likely persist, although the strengthening Singapore dollar and potentially weaker developed country demand may offer some headwinds.
Underweight Australia: Good Australian economic performance, USD weakness, evidence of a bottoming in China’s economic growth, and ongoing M&A activity are likely to drive Australia’s economic growth, particularly in the resources sector, where we remain overweight. We will remain underweight the Australian banks due to the prospects of slow credit growth and the threat of increased competition.
Underweight New Zealand--While we are hopeful that tax cuts and soft commodity prices will help to stimulate economic performance, we have become more cautious about the pace of a turnaround.