e-fundresearch.com: Which impact did the Shanghai-Hong Kong Stock Connect have on your investment universe as well as investment strategy? Did you immediately engage in the A-Share market?
Samir Mehta: The big picture here is that the Shanghai-Hong Kong Stock Connect reflects the desire of the Chinese to open up and reform their capital markets.
As for us, we did not participate and have no intention in participating immediately in the ‘A’ shares market. We get access to some of the best Chinese companies listed in Hong Kong or the US. In early 2014, our cyclical exposure to ‘old’ China did go up as we took a contrarian positive view on China.
e-fundresearch.com: In general: What is the most important advice, foreign investors have to keep in mind when entering into the Asian equity market?
Samir Mehta: Asia is not an amorphous mass; each Asian economy has its own characteristics. But investor sentiment within Asia is disproportionately affected by what's happening in the wider global economy.
e-fundresearch.com: What are the main steps in your investment process and in which area is your competitive edge to add value to investors?
Samir Mehta: We have two diametrically opposed approaches. On the one hand, based upon our bottom-up fundamental research, we look for sustainable quality and growth stocks for the long term. On the other, we want to buy stocks that are cheap but that will bounce back. This may sound contradictory, but we believe this is a pragmatic approach that reflects the reality of managing Asian equities.
The core (75-80%) of the portfolio is built on high conviction stocks that can deliver quality, long-term and sustainable growth. We typically expect to hold these stocks for anywhere between three and five years or longer. We look for quality metrics, especially high and rising returns on capital employed and strong cash flow generation. And we are prepared to pay up for this quality.
The remainder of the portfolio (20-25%) is a shorter-term, contrarian cyclical element built on value. This cyclical twist recognises the effect that the global economy can have on Asian market sentiment. There comes a time when pessimism reaches extremes and market perceptions turn overly risk-averse. We aim to buy cheap, knowing that good but currently out-of-favour stocks bounce back quickest when recovery comes.