Interview with Ian Huen, Chief Investment Officer and Don So, Portfolio Manager of Striker Asia Opportunities Fund
Founded in 2005, Guardian Capital Management Ltd. is based in Hong Kong and serves mainly HNWI and family offices around the region. The firm’s emphasis lies in finding strategies and asset classes with the highest risk/reward ratio.
CIO and founder, Ian Huen began his career as an equity research analyst at Janus Capital in the United States. He founded Guardian Capital with the aim to generate absolute returns using simple financial instruments and strategies. Mr. Huen is also Vice Chairman of the General Assembly Committee of ICBC (Macau) Capital. In 2007, he represented Mr. Patrick Huen in the sale of Seng Heng Bank in Macau to ICBC. Mr. Huen graduated from Princeton University with a Bachelor of Arts Degree in Economics and is a CFA charter holder.
Mr. Don So is the Portfolio Manager of the Striker Asia Opportunities Fund and follows an Asia-focused credit strategy. Prior to joining Guardian Capital he was a Management Consultant at McKinsey & Co (Greater China) where he served numerous clients in Asia with a focus on M&A transactions, corporate finance, private equity investment advisories, and corporate governance. Mr. So began his career as an engineer and holds a Bachelor of Applied Science degree in Computer Engineering from the University of Waterloo, Canada, and a MBA degree from INSEAD.
2012 has witnessed some significant trend reversals in the market so far – how have your funds performed and what are some of the key themes that have worked for you this year?
As of end-October 2012 our Striker Asia Opportunities Fund was up over 20% net year-to-date. This strong performance is attributed to careful Asian corporate credit selection, strong tail-wind support from technical and regional geopolitical events as well as avoiding naive hedging strategies. We started to buy into bonds issued Chinese developers at the end of 2011 when market valuations diverged negatively from the underlying fundamentals - these companies have outperformed all other Asian corporate sectors by a large margin. On the short side, we believe that a true hedge on Asian corporate high yield bonds does not exist and as such, one must recognise that any attempt to hedge a bond portfolio via financial instruments is a separate directional bet.
What is the reason for the fund's focus in Asian long-biased credit?
We believe that this asset class will outperform other instruments in the region over the next few years given 1) the global repatriation of capital benefiting the Asian fixed income market, 2) the general aim for Asian corporates to strengthen their balance sheets and 3) the low growth, low return environment in the currently challenging macro economy. A carefully selected long biased Asian credit portfolio has a much higher chance of generating returns at this stage of the Asia development cycle. As the Asian credit markets continue to develop, more opportunities are becoming available for investors.
Could you please elaborate on your fund’s strategy?
Our investment strategy is based on a three-dimensional driver: macro development, bottom-up fundamentals and relative value/return.
Macro development: It is important to recognise that when investing in emerging market credit, the single most important driver for determining an investment opportunity is to align with the local government's interest. Unlike developed markets, emerging markets’ corporate governance, transparency and covenants are typically ambiguous and weak. While fundamental work is very important in determining the credit profile of a company, it can only provide one with its past performance. Extra attention is focused in deriving a forward-looking regional macro view from our local knowledge as part of our investment process. For example, the market fell out of favour with Chinese developers USD high yield bonds in the second half of 2011. The default rate implied by the prices of these bonds was over 50%. After studying these companies, we concluded that while operational environment was difficult due to the government's austerity measures; the authorities wanted industry consolidation, not destruction. The top players would become the ultimate winner of the consolidation process.
Fundamental analysis: Given that emerging market corporates typically have a disproportionally large ownership concentration, we ask ourselves, “If I were the owner of these companies given the current operational metrics (e.g. net debt, growth, margin, etc.), how likely would I default or would I have more to gain by staying in the capital markets (e.g. much cheaper to do share placements and issuing debts/loans).” The data we gather and the fundamental analysis help us paint a complete picture of the story surrounding the business owner which helps us to separate bad investments (businesses likely to default) versus good investments (corporate bond price under discount due to different temporary pressure). As such, it is important to review relevant information on both credit and equity markets.
Relative value: Our trading is largely driven by this as we aim to establish a baseline for the industry and identify corporates with potential to improve their outlook. Pricing and yields of comparables across the market provide us with a clear picture as to where value resides. Throughout 2012, for example, while the yields of Indonesian coal miners and single B Chinese developers have been very close, the underlying story was very different. Given that coal prices continued to drop in the region and the sell-through rate/price of Chinese real estate continued to hold up even under the strict tightening pressures from the central Chinese government, we thought that it would make sense to focus on Chinese real estate developers instead of Indonesian coal miners. This turned out to be a great position.
How do geopolitical events and policies impact your investment decisions?
Our attention is focused on regional and global geopolitical events/policies as they shape both our long term investment thesis (e.g. being long-biased in Asia credit) and our short term trading. As an example, in the face of the upcoming US election and the potential US fiscal cliff situation, together with the Asia credit rally we experienced year-to-date, we will lighten up our exposure ahead of the high volatility, low liquidity period. The risk is asymmetrical based on the current valuation - limited bond cash price appreciation with a month’s worth of carry versus a potential five point+ drop in the bond portfolio.
What are the minimum/maximum yields you target and how do you determine companies that offer the best opportunities? Which is the most appropriate benchmark for your fund and what is your relative performance and beta to the index?
About two-thirds of our bond portfolio is in high yield space with yields around 11% and the remaining one-third in investment grade names. For the portfolio as a whole, we aim to target a 10%+ cash yield. As an absolute return fund, we do not pay much attention to relative performance. While our investors do look at Asia bond indices such as the ones from HSBC, ML and Markit, they are more concerned over risk/return.
How flexible is your mandate – when do you move to cash and investment grade bonds? Why do you not employ shorting?
We are very flexible in our mandate. As mentioned in our strategy, we like to move into cash and investment grade bonds in times of turbulence and/or ahead of major geopolitical events - investing based on events which create skewed risk reward opportunities versus making major directional bets with binary outcomes.
While we do not exclude shorting, it is important to recognise its purpose. If it is for protection, there is no effective way to protect/hedge Asian high yield corporate credit bonds other than moving into cash/investment grade.
If it is to express a directional view, there are still a few liquid credit instruments in Asia which we employ ahead of major headline risks. For example, ahead of the election and potential US fiscal cliff risk, it seems that the current level of Asian sovereign and corporate CDS have yet to price in the risk.
What sort of risk control structures do you have in place for your funds? How will your fund fare in an environment of low liquidity, falling markets and low risk appetite – such as evidenced by the 2008 financial crisis?
We start off with our core investment thesis of investing in leaders and names with improving credit outlook. Individual issuers allocation are capped at 10% of the portfolio and we use stop losses in positions - extra attention is spent in maintaining a highly liquid portfolio. As the majority of our portfolio is in higher quality corporates, in times of crisis while liquidity dries up, they will not disappear for the benchmark names.
The Asian credit market was very different back in 2008, thus making a direction comparison difficult. With our investment strategy, in another major crisis the majority of our investments should be in the highest quality names as well as cash. We like to keep our powder dry since, generally speaking, a low risk appetite and falling market environment often presents some of the best investment opportunities.
To what extent and on what basis, do you diversify your fund’s investments across the emerging markets space?
Adhering to our investment strategy, we focus on individual company's fundamental, technical and macro drivers. If they are all lining up to a certain sector, we are not afraid of getting more concentrated in that particular sector. We do not diversify in sectors for the sake of diversification as this is naive diversification. A majority of our investments were in Chinese developers this year as we do not think the risk/reward justifies investing in China industrial names and Indonesia resources names (the two other big Asian high yield sectors). We then use allocation limit to ensure we don't go over 10% at cost for single issuer.
What is your outlook going forward? Any ideas you would like to share?
We expect the current low growth, low interest rate environment to continue at least into the medium term. The debt issues in the developed markets are structural and will remain a major headline risk for a long time. As a result, global investors will continue to be forced into shorter term positions under the risk on/off environment. Simple instruments will continue to be favoured over complicated structure products due to counterparty and liquidity concerns.
Given its strong balance sheet and its fundamental growth story, Asia represents a unique investment opportunity. We believe the Asia corporate credit space will be among the top performing assets, especially if one factors in price volatility.