fund manager david astor believes asian financials, particularly banks, will benefit from a pick up in domestic and us economies
Despite launching just before the 1997-1998 Asian crisis, the FPK Far Eastern Financial Fund from Hiscox has managed to significantly outperform its benchmark. The portfolio is managed on a bottom-up value-based approach and offers a concentrated list of 20-30 financial stocks in Far Eastern markets excluding Japan.
The objective of the portfolio is to achieve capital growth in the medium/long-term through investment of banks, insurance companies and other financial shares that derive a substantial proportion of their profits from Far Eastern markets outside Japan. The fund is not benchmarked and performance is shown relative to the Datastream Asia ex-Japan Financials Index.
The fund aims to give investors exposure to a basket of Asian financial shares. In practice, it has invested predominantly in banks as there are far fewer insurance companies in the region.
The manager of the portfolio is David Astor who is specialises in investing in financial shares. Astor was at Fox-Pitt, Kelton, an international investment bank focused on the financial sector, for 10 years and worked closely with the analysts there. Based in Hong Kong, five analysts covered banking and insurance stocks in the region.
In December 2002, Astor moved to Hiscox Investment Management when Fox-Pitt, Kelton's fund management business was sold to Hiscox. As part of the transaction, Fox-Pitt, Kelton continued to provide investment advice for an initial period of three years and will be a major source of research ideas for the fund.
Astor said: 'Implicit in the investment process is a macro economic view on the region the fund is investing in. Financial shares are sensitive to economic conditions and consensus forecasts are used to assess whether the economic variables are improving or deteriorating in a particular country. Stock selection is based on a combination of strategic and tactical considerations which gives a qualitative view on a company and a quantitative one.
The manager considers a number of criteria such as market position, efficiency, capital strength, management quality and the growth prospects of a company. The tactical consideration is principally one of valuation using FPK's valuation models. Relative valuation against a stock's recent history and its peer group is also a consideration. The strategic assessment will normally take precedence over the tactical consideration as Astor would rather own a good company at a higher valuation than a cheaper but lower quality company.
Asian markets offer above average economic growth prospects especially in comparison to US and European economies. This should lead to better loan growth than in developed countries. Many of the banks in the region have liquid balance sheets and low loan to deposit ratios and their profitability is set to improve when economic activity picks up.
While there are fewer opportunities in the insurance sector, premium growth should be stronger in higher growth economies and there is plenty of scope for the development of the life insurance industry in the region. A number of Chinese insurance companies are expected to come to the market in the next 12 months which could offer some attractive investment opportunities for the fund.
As loan demand normally tends to outpace GDP growth, Astor thinks that investing in financials is a good way of capturing growth in Asia. Additionally, valuations of financial shares in the region are undemanding both in absolute terms and relative to other financial stocks elsewhere in the world. Asian banks are cheaper on both a price to book basis and price to earnings basis than their US and European counterparts. Higher growth at a lower price is an appealing combination.
The fund was launched in December 1996 and was set up in response to investor demand to gain exposure to the so called tiger economies of Asia.
'However, its launch came shortly before the Asian financial crisis that gripped the region in 1997 and 1998,' said Astor. The crisis took a heavy toll on bank stocks in particular. However, the portfolio has managed to outperform the benchmark significantly since its inception. As of the end of May the fund is up just 1.22% since launch. This compares with a decline of 48.45% in the Datastream Asia ex-Japan Financials Index.'
The index is used purely as a measuring guide as the fund is not managed against a benchmark. Over the past three years to 31 May 2003, the Net Asset Value of the fund has increased by over 39% compared with an 8% fall in the index.
During the financial crisis, the fund maintained higher than usual cash balances (up to 20% of the portfolio) and concentrated the portfolio on the well-capitalised and solvent banking stocks in Hong Kong and Singapore. Additionally, the fund had the ability to short stocks during this phase and made good profits from shorting a number of banks in Thailand that were clearly insolvent.
The ability to short stocks in Thailand, however, was curtailed by the authorities. Thereafter it was decided that the fund would be a long-only fund both because the manager's strength lay in picking stocks and because of the risk of political intervention.
'Different countries resp- onded to the crisis in different ways,' said Astor.
'With South Korea seemingly being the most committed to reform the fund, increased its exposure there in 1999 and 2000. The stronger banks in South Korea were in a tremendous position to gain market share from the weaker competitors provided the government did not interfere. There was also likely to be consolidation in the market at very attractive valuations.'
In 2001, the fund duly benefited from consolidation and recovery in South Korea, as Kookmin and Housing and Commercial Bank merged. Mergers and acquisitions in other countries also occurred and added value to the portfolio as OUB and UOB in Singapore combined and Development Bank of Singapore acquired Dao Heng Bank in Hong Kong which was part of the Guoco Group.
More recently, the fund has been increasing its exposure to Thailand and Taiwan. The restructuring process after the Asian crisis has taken longer in Thailand but the benefits are now coming through as restructured loans start to pay interest and the level of provisions come down. This has a powerful effect on profitability.
Taiwan is more susceptible to political interference and while the banking system is fragmented and in need of reform it is likely to take time to achieve.
Presently, the portfolio has around 40% of its assets invested in Hong Kong. This is mostly in small to mid-size companies that pay good dividends and are modestly valued. There is also likely to be consolidation in the Hong Kong market among the smaller banks and valuations generally should rise when this occurs.
Astor said: 'The proximity of China provides another reason for optimism. While the fund does not currently invest directly in China, the region is likely to benefit from the high growth rate of the Chinese economy.'
The impact of Sars is likely to be a short-term one and economic growth in 2004 will probably be unaffected. Astor views banks in the region as warrants on economic growth and expects them to benefit from a pick up in their domestic economies as well as from a recovery in the US economy.
FPK Far Eastern Financial Fund Ltd is a Cayman registered open-ended fund (an OEIC) and is listed in Dublin. There is a 2% initial charge and 1% annual management fee, plus 10% performance fee above a high water mark. The minimum investment is $100,000.
About the manager: david astor
Astor graduated from Bristol University, joining Kleinwort Benson in 1982, working in their Eurobond and Swaps group. In 1989, he joined Ampton Investments, a private company which advised and invested in unquoted companies and was appointed a director of Dartington & Co, a regional merchant bank, in 1990. He joined Eldon in 1993. David joined Hiscox Investment Management in 2002, where he manages the four Hiscox FPK Financial Funds, (US, Far East, Insurance, European).
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