yoon-chou chong has shifted the macro bias of aberdeen's uk equity funds to a more stock-specific methodology
The appointment of Yoon-Chou Chong as head of UK equities to run the UK Growth, UK Blue Chip and UK Mid Cap funds at Aberdeen Asset Management, reflects the group's desire to move away from its growth house reputation.
Chong was the first graduate trainee to work under Hugh Young, managing director of Aberdeen Asia, some nine years ago, and has since developed something of a troubleshooter reputation within the group.
He came to the UK following a two-year secondment to Australia where he was called out to establish a solid investment process.
Chong is keen to build a pragmatic team approach that can outperform over the medium and long term in all market conditions and has made a number of changes to the London office's practices since his appointment in September 2002.
What was the rationale behind your transferring from Aberdeen Asia to the UK?
I have spent the past two years in the Australian office restructuring the investment processes to handle retail and institutional accounts and improve performance.
Then in September, Hugh Young said there was a situation in the UK where performance had been intolerable and there had been manager changes on the UK funds in fairly quick succession. In the UK there was lots of reassuring of clients, but not much tweaking of the process.
It was felt a radical solution was needed so I started laying down a consistent process, which met the requirements of both institutional and retail clients.
Is the Hugh Young-inspired Asian investment process easily transferable to the UK market?
The process is applicable to all markets and has been successful in Japan, Thailand and Australia. It was created in an emerging market where there is always deep-rooted risk at the micro level, but it has worked well in the developed markets of Japan and Australia. They are both similar to the UK, in that they are over-researched and the investment community is always looking to buy the next momentum play. Our process does not allow us to do this so we may miss out on momentum rallies but will outperform over the medium to long term.
The investment process is bottom-up and we do our own research and notes and trust our team members. That initial concept trickles into the methodologies. We do not invest in companies we have not visited and any companies we hold are visited twice a year and their results tracked.
We want the process to be transparent, so all research notes are circulated around the team and filed and logged by compliance.
How does the new investment process differ from what you found when you arrived?
There was more of a focus on the macro, which was a product of the bull market. The process was still very growth orientated and was reliant on broker advice and not very organised.
The Asian investment process avoids reliance on third-party research. The focus is on management quality and buying growth at a reasonable price.
Management quality is a subjective concept and hard to quantify so we have to keep seeing companies and track whether they are carrying out what they say they are going to do. Besides quality, we look at the integrity and skill of the management and how transparent a company's accounts and board are. We also examine business economics and whether a business has any special niches or should be treated as a commodity. We then overlay this with valuation. It is all about finding the right quality stocks at the right price.
What risk controls have you put in place on the UK equity portfolios?
People look at risk in terms of tracking error or beta but we use a more bottom-up approach and define risk through management and valuation criteria.
This means we control the risk from the start at the stock level. Finding good quality stocks with strong management at the right price will minimise stock risk. The benchmark is market cap-weighted and tells you nothing about the quality of the companies. It is a reflection of history more than anything else. In the purest sense of the process, we are benchmark-aware but not benchmark-driven. There are certain clients who do want a limit on the tracking error and my experience in Asia has enabled me to tweak the process to allow for that.
We also have close interaction with Aberdeen's risk management team and when a fund's tracking error is approaching the limit, we can either rebalance our holdings or add benchmark stocks to lower it. Balancing tracking error is always the last part of the process.
Is the new process a more collegiate approach?
We always emphasise the importance of a team approach. I am coming into a market, of which many people will perceive I do not have inside knowledge.
It is a team process, but the process has to be more important than the people.
We are developing team dynamics and ensuring we are generalists before we are specialists on any sector. If a company comes in, nearly all of the team will sit in, which brings different perspectives. Also we see companies we hold twice a year, but the second visit has to be carried out by a different person. People have different views and we want a team of portfolio managers, not just narrow sector specialists.
Is the change in process confined to the UK desk?
It is a process being laid out across the whole group. One of the key drivers of the change is Katherine Garrett-Cox.
The policy of stock note writing and company visits has been introduced across all desks. Notes are centrally filed and we can pick ideas on sectors from them. We sometimes pick things up more quickly than the economists through company visits and will work together to assess the economic outlook.
How will you differentiate the UK Blue Chip and UK Growth funds?
We are positioning UK Blue Chip as a flagship fund reflecting the new Aberdeen style and have institutionalised UK Growth. UK Blue Chip now has a much higher tracking error threshold and is therefore less benchmark constrained. This allows us to fully pursue the investment process and not have to hold index stocks.
That said, on current valuations many of the benchmark stocks are not that bad. The FTSE 100 has faced the toughest sell-down and our preference lies with these stocks. We will later go down the market cap spectrum, which will raise the risk profile of UK Blue Chip and differentiate the portfolio from UK Growth.
Have you changed many of holdings in the UK portfolios since taking over?
Initial turnover has been high, but this will probably fall to 25%-30% with an average holding period of three to four years. UK Growth had 105 stocks, which I felt was far too many and is now 45-50 while Blue Chip had 85 holdings, which has also gone down to 45.
Running 45-50 stocks is a lot more manageable and enables you to take meaningful stakes in companies. When you have stocks that are a fraction of a percent in the fund, they get less care but can have a cumulative negative effect on performance.
I believe weightings are also very important and we will topslice profits and buy into weakness.
Will UK Mid Cap be run along similar lines?
Yes, but the first thing has been to stabilise the portfolio. It is more challenging dealing with the FTSE 250 and we have been combing through the existing holdings and pruning stocks that are expensive, bad or those we are not sure about.
The next step is to add new blood. The portfolio has a lot of growth stocks and we want to buy a number of sensible good value companies and have begun visiting companies one by one.
The turnaround time for Mid Cap will probably be a quarter later. Although the more mainstream funds really carry forward the name and reputation of the desk, this is probably the most exciting fund. We can incubate a lot of stocks and pick the best of these for the mainstream funds.
Is it more difficult to run a concentrated portfolio that invests further down the market cap spectrum?
Given the liquidity issues, we might not be able to buy 3%-4% of a stock we really like, so we will probably have smaller weightings, but nevertheless the comfort level remains between 45-50 stocks in order to gain meaningful exposure. After we have done our work, if we are enthusiastic we will probably buy a minimum 1%-1.5% and when we are more comfortable with the stock we will tend to go to 2%-3%.
Is your secondment here temporary or do you expect to be here long-term?
I am here to restructure the desk, bring performance up and ensure there is a good team here that can carry that performance through. I was only in Australia for two years, but maybe I'll still be here in 10 years, who knows?
FUND MANAGER: Yoon-Chou Chong
Chong joined Aberdeen Asia's Singapore office as a graduate trainee in 1994.
In 1998 Chong was made director of Aberdeen Asia and held responsibility for a number of retail and institutional mandates, including country-specific funds.
From early 2001 to mid 2002, Chong worked in Sydney, Australia where he oversaw the introduction of the Asian investment process.
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