Category Winner: Best Hong Kong Equity Fund - First State Hong Kong Growth Fund - Class I USD Acc
Key Stats
Inception Date: 2000-02-22
Total Net Assets (Mil) (2019-02-28): USD 168.64
Manager: Martin Lau, Richard Jones
M: Morningstar F: First State Investments
M: Can you highlight any major changes you made to the portfolio over the course of 2018? Were there any particular holding(s) that drove the fund’s performance for the year?
F: Significant purchases over the year included China Overseas Grand Ocean, a property developer focused on third-tier cities in China, where property prices remain relatively low. We also purchased Standard Chartered, a corporate bank with a heavy presence in emerging markets. Conversely, we divested JNBY Design, which had performed well, and disposed of MTR Corporation on expensive valuations.
In terms of performance drivers, top contributors included ENN Energy, which strengthened on future growth expectations. China’s ongoing commitment to environmental policies should continue to fuel higher levels of gas consumption. Shenzhou International was boosted by a positive read-across from Nike’s earnings results, as China sales accelerated across both apparel and footwear segments. Nike is one of Shenzhou’s largest customers, contributing around 30% of sales. Vitasoy strengthened after announcing strong earnings results.
M: What is your outlook for 2019 specific to the markets you cover, and how are you positioned to take advantage of opportunities and/or mitigate potential risks?
F: After an insipid year for Hong Kong equities, with a large number of companies correcting sharply in 2018, the opportunity to acquire quality companies at reasonable prices has broadened. In general, we have added to portfolio holdings on weakness and have started to reassess previously-owned companies which look more attractive on valuations. On the other hand, we remain cautious in our outlook for the coming year, particularly as the risk of a US and China-led slowdown has intensified. Hong Kong’s economic growth has slowed; and higher interest rates are likely to have a dampening effect on property prices. Meanwhile, Hong Kong’s exports, mostly re-exports from China, could continue to face pressure from weaker regional trade flows and global trade war concerns.
M: How have financial market risks, such as the ongoing trade war between the United States and China and tightening monetary policies in major economies, impacted your recent investment decisions? What are some underreported risks that could surface in 2019 or beyond?
F: We are under no illusions about our ability to predict macro events, nor do we pay too much attention to the gyrations of the market. We prefer to spend our time researching companies and talking to management instead. We remain resolutely-focused on quality (of management, franchise and financials), which has helped our Asian portfolios remain relatively defensive amidst the market volatility. While we understand that such periods are worrying for clients, they provide us with opportunities to top up our holdings and buy into quality companies at cheaper prices – thus contributing to better long-term absolute returns.
M: How is your investment team organized? Have there been any changes to the investment team or structure over the past year? Do you anticipate adding to the team in the near future?
F: Everyone on the investment team is first and foremost considered an analyst and this includes all portfolio managers. Every team member performs a broad ranging investment analyst role and is encouraged to participate in the generation of ideas for all client portfolios.
While we have no specific hiring plans, we are always on the look-out for talent that share our investment philosophy and would fit with the team’s culture
M: Where do you feel that the investment team or the investment process can be improved upon in the future?
F: We take great care to evaluate the investment team and our investment process on a regular basis to avoid falling into complacency. That said, our investment philosophy (which is centred on identifying quality companies, buying them at a sensible price and holding for the long term), has remained largely the same since the launch of the team’s first Asia Pacific equity strategy in 1988.
We place strong emphasis on high quality proprietary research and direct contact with the companies in which we invest. The consistency of our investment approach and our absolute return mind-set aims to avoid being influenced by the market – whether that be market euphoria or pessimism. Our reputation as successful long-term investors and the framework we operate means that are able to look past the quarterly numbers and focus more on secular drivers of risk and return.
View all Morningstar Hong Kong Fund Awards 2019 articles here.
