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Interview with Kent McCarthy, Senior Portfolio Manager of Jayhawk China Fund (Cayman) Ltd

September 2005

Jayhawk China Fund (Cayman) Ltd is a long-biased hedge fund focusing on investments in Chinese companies. The Jayhawk China Fund is also offered by JP Morgan to clients of the firm's private bank. The fund invests primarily in equities listed mostly in Hong Kong, mainland China and the United States (although the stocks can trade on any exchange). The fund may also invest in certain late stage private equity transactions. The fund's inception date is July 1997 but began its current long/short format in 1999. The fund entered August with approximately US$248 million in assets. From January 1999 through July 2005 the fund has compounded at an annualised rate of 25.8% net of fees and expenses.
  1. Why did you focus on China? How do you define China with regards to your investment mandate?

    I had significant experience investing in the Hong Kong and Japanese markets, both long and short, in the 1980s and early 1990s. When the Chinese stock market opened to foreigners in 1993, I personally bought nearly every B share available at the time. Early on I was excited about the tremendous growth opportunities represented by China. We continue to see China as one of the best investment opportunities available with a number of companies, especially small caps, trading at very low valuations with very high growth rates. Also, the quality of companies and their management teams continues to improve.

    We tend to have a fairly strict definition of a Chinese company. We define a Chinese company as one with the majority of revenue, profits and/or operations in China. We do not care where a company is actually listed and, as such, our stocks trade on markets around the world.

  2. What is your definable edge in strategy and market ability? What sectors do you favour? A or B share markets?

    We are fundamental bottom-up stockpickers. We have a team of analysts and portfolio managers in the United States, Hong Kong and China dedicated to finding undiscovered companies and performing detailed due diligence. We are generalists in nature and build our portfolio on a stock-by-stock basis rather than targeting top-down sector allocations. The same is true for the A and B share markets. This year we invested in A shares for the first time because we finally see opportunities in that market. Most of our current exposure is in H shares and other Hong Kong-listed stocks.

  3. What is the length of direct experience of all core hedge fund team members in a similar strategy? How well do they work together? How well do their areas of expertise fit?

    I have over 20 years of investing experience with a similar amount investing in Asia. My first personal investments in mainland China were made when the markets opened to foreigners in 1993. The rest of the portfolio management team also has significant analytical and investing experience on the buy and/or sell sides. I oversee the entire portfolio, including the co-portfolio managers. This is a very symbiotic relationship and the portfolio management team works very well together. I have had long professional relationships with a number of the members of the portfolio management team prior to their managing capital for the fund. While most investment professionals employ a bottom-up research process with a bias towards value, each manager has a slightly different style. Also, all are generalists but certain managers have more experience in specific industries than others. The result is a large number of company visits and research reports reflecting a diverse view of investment opinion.

  4. How do you define your approach to risk management?

    We focus on long-term investment performance with the goal of high returns. We believe that the best way to preserve capital in the long haul is to compound it at a rapid rate. We believe that having high conviction in our larger positions through detailed investment research is the best risk management tool.

  5. Your fund has witnessed exceptional returns in the last six years since it was launched but at the same time it has had the highest volatility among similar funds focusing only on China. Do you think your strategy is sustainable and at the same time scalable?

    We are a return-oriented fund with a focus on the long term. Month-to-month volatility, especially in emerging markets that are often driven by fear and greed in the short run, is often inevitable for a fund seeking outsized returns. We are also contrarian by nature and buy stocks when others are selling. This often negatively impacts returns in a given month but has been a major reason we have achieved the results we have. As for the future, we believe that, unlike the last six years, the market will be positive and we will be helped by positive beta. The market is also expanding with a number of new, exciting companies coming public. With the expansion of our investible universe we believe we can successfully deploy additional capital.

  6. How much time do you spend looking at or researching macro economic conditions? Do you have ground offices in Hong Kong or China?

    We try to understand the macro environment and how it will affect our portfolio companies as well as investor sentiment. However, we invest based on company-specific fundamentals. Our co-portfolio managers have offices in Hong Kong and Shanghai which are vital in performing the level of research we deem necessary.

  7. Of late there has been a lot of speculation on the positive and negative effects of the revaluation of the yuan against the dollar. Should this have much effect on your performance?

    We believe this will have a positive impact on our portfolio. First, future RMB earnings and cash flow streams will be worth more in dollar terms. Second, a number of companies we own will be positively impacted because they are buyers of dollar-denominated commodities.

  8. Going forward, what is your outlook for China for the rest of the year?

    We see continued strong economic growth with the Chinese consumer playing a larger and larger role. More importantly, we continue to see strong top and bottom line growth in our portfolio companies. With many small-cap stocks lagging the market despite improving fundamentals current valuation levels make us very excited looking forward.

Contact Details
Marcey M. Berges
Jayhawk Capital Management LLC
+1 913 642 2611

An investment in any of the Jayhawk products are not intended as a complete investment programme and is designed only for investors who have adequate means of providing for their needs and contingencies without relying on distributions or withdrawals from their accounts, who are financially able to maintain their investment and who can afford the potential loss of their investment. There can be no assurance that our products will achieve their investment objectives. All potential investors should understand the investment approaches and techniques that Jayhawk expects to use in the management of its products and the particular risks associated with those approaches and techniques. For more information please contact us. All investors should refer to Jayhawk China Fund (Cayman) Ltd. Offering Documents for complete information.


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