Report Release Date: 14 Jan 2010
Analyst: Jessie Yung
Executive Summary
People: Martin Lau is a seasoned fund manager and his local background is an advantage to the fund. He is backed by a well resourced squad of four analysts.
Parent: First State Investments focuses on its key strengths and its compensation plan does a good job of aligning managers’ interests with those of investors'.
Process: The stock selection process here seeks high-quality companies that offer sustainable earnings growth and are available at an attractive price.
Performance: The fund has been a stellar performer, beating both the benchmark and Morningstar category average since inception. Investors should note the inherent single-country risk and choppy returns.
Price: This fund’s TER is a bit below the category median.
Morningstar Opinion
We believe First State Hong Kong Growth is among the best at what it does.
There are multiple reasons why we hold this fund in such high regard, not least of which is its investment team. Lead manager Martin Lau has a wealth of experience and has managed the fund since April 2002. Lau is also co-manager of the shop’s Asia Pacific Fund. Lau is backed by a well-resourced squad of four analysts (with 11 years of investment experience on average) and also leverages the research efforts of the wider First State GEM/Asia Pacific equities team based in Edinburgh, Singapore, and Hong Kong. One of this team’s hallmarks is its leader Angus Tulloch, who has almost three decades of investment experience and has proved to be one of the most astute stock-pickers in the field.
The investment process employed here is not radically different from its peers', but it distinguishes itself in its level of execution. The process has an emphasis on bottom-up stock selection but macro views also play an important role in portfolio construction. For example, the team pared its exposure to industrials in early 2009 in light of oversupply concerns. That said, the team is not prone to making large-scale shifts. Indeed, Lau and the team are disciplined buy-and-hold investors. Consistent with the bottom-up investment philosophy, Lau tends to invest with conviction and is willing to look past short-term noise. One such example is China Mengniu, the milk producer at the heart of the melamine contamination scare in 2008. Lau and the team remained convinced on the stock based on its attractive valuation and growth prospects even after the outbreak of the crisis and throughout 2009.
Country-specific funds will be more volatile by their nature, and the Hong Kong market is closely tied to events from China, which is one of the more volatile markets globally. Investors should be cognizant of this, even though Hong Kong is considered to be a more developed market. That being said, Lau and the team have done a stellar job for investors. The fund has consistently beaten its category median over most time periods since Lau took control. More impressively the fund has displayed a lower level of volatility (as measured by standard deviation) compared with peers. We note, however, the disciplined approach on value stocks may hold it back a bit in momentum-led rallies.
The fund's TER is well below its category average, giving it an edge over more expensive peers. Whilst it’s debatable if investors outside of Asia need a dedicated single-country Hong Kong fund, for those that do First State Hong Kong Growth's impressive investment team, robust process, and enviable track record make it the standout choice.
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