Dr. Peng She is the co-founder and CIO of Golden Pine Capital. He graduated from Tsinghua University in Beijing with Bachelor, Master and PhD degrees. In June 2016, he established Golden Pine Capital, the investment manager of Golden Pine Fund. In 2011, he joined Greenwoods Asset Management. He was senior analyst of cyclicals and utilities. He was also directly involved in portfolio management, able to earn rich experience in both domestic and offshore market. From 2006 to 2011, he worked for BASF and Dow Chemical Company, world's top two chemical companies. He was responsible for all the external innovation and technology cooperation in the Greater China District.
- Please share with our readers some background of the Golden Pine Fund and the key personnel in your team.
Golden Pine was incepted in 2016 and it has been operating for three years. Currently we have 14 employees in the company and two offices located in Shanghai and Hong Kong. Our investment team and I are mainly based in Shanghai. It gives us the opportunity to have closer access to Chinese economy and those listed companies which are the representatives of the economy.
I have a dual background in chemical industry and investment management. In 2006, I started my career in the chemical industry. I worked for two multinational companies, Dow Chemical and BASF which are ranked as the top two chemical companies worldwide. The companies regarded the department which I worked for as a venture business which seeks innovative solution and technology in the industry. The job experience built up my broad connection with industry experts and scientists of the chemical industry. I also had a chance to experience the cutting-edge development from the technology side. Those were the reasons why I was invited by Greenwoods and joined them in 2011. I spent five years in Greenwoods Asset Management, a well-known Chinese asset management company. I started as a senior analyst covering cyclical industries mainly in the chemical industry. Later, I expanded my coverage to other relevant sectors including energy, utility and other manufacturing companies. During my last two years in Greenwoods, I also participated in portfolio management. In 2016, I decided to pursue my career and start my own business, so I launched Golden Pine Fund.
- Could you walk us through your investment processes, from identifying opportunities to constructing the fund portfolio? What would you consider as your winning edge against other long/short equities hedge funds focusing on Greater China?
We adopt both bottom-up research and top-down research. The purpose is to ensure we pick the best company in appropriate sectors. Even though China market has been pretty volatile in the past three years, especially in 2016 and 2018, some sectors performed much better than overall market. Our mission is to find these sectors and selectively invest in the best companies within those sectors. We are a stock picker so we spend majority of our time and resources in doing bottom-up research of the company. We estimate a company’s core competency and growth momentum in the next two or three years at least, and we use multiple valuation approaches to assess its intrinsic value. We ensure that we are able to get the company at a good price in the long term so that we can generate returns to investors.
My previous experience is mainly in the cyclical sectors including upstream commodity companies, mid-stream manufacturing companies and utility companies which are all sensitive to the overall financing rates. Thus, this top-down view is also a part of the overall research process which helps us understand where we are at within a credit cycle, and the risks and returns of various sectors in the cycle.
- What are the risk management procedures employed by the team in order to minimise downside risks, which could be significant considering the volatility of China’s equity markets?
Our holdings are moderately concentrated, but we have limitations on single stock and single sector. Generally, we have 15 to 20 names on average for longs and shorts respectively. This can assure adequate dispersion of the portfolio risks. Top five holdings in total may be as high as 35% or 40% of NAV. For single industry, the weight is around 20% to 30% for an overweighing sector. We normally overweigh at most three or four sectors in our portfolio simultaneously.
Our portfolio is diversified by market cap. Roughly 80% of the portfolio are medium and large caps. We also have small caps but we control the size of those positions due to liquidity consideration. We hold smaller caps because it is commonly seen that small and medium caps are less studied, but some small or medium caps, especially in some cyclical industries, are actually leading companies. They already have certain market share in the industry. However, their market size is relatively small compared with Tencent or other large companies. In China in recent two or three years, these traditional industries are experiencing a rapid consolidation process. Thus, there are good investment opportunities in those industries as well. We have some of these small to medium cap names in our portfolio, and they actually bring higher returns because they are less covered and their fundamental are improving significantly. They are off the radar of the big investment institutions. In general, we don’t exclude ourselves from the opportunities in those less covered sectors as long as there is satisfying liquidity on the whole portfolio level.
- What is the scalability of the Golden Pine Fund’s investment strategy?
Our holdings are mainly medium and large caps. Based on the liquidity of our current portfolio, we have no problem in growing the strategy to US$1 billion. However, we will review it and probably soft close the fund at around US$500 million to US$600 million to ensure the fund performance.
Currently our investor base largely consists of offshore investors. 60% of AUM is from the international institutional investors and 40% of AUM is from our shareholders and other high net worth individuals. We have seen strong interests from US and European investors since 2018 and I am optimistic about China market given such a size of market which is still growing.
- What are the primary challenges faced by a long/short equities hedge fund focusing mainly on China, as opposed to investing with a global or developed market mandate?
Based on my own experience, one major challenge comes from the asymmetry in liquidity when we conduct the hedging transactions between onshore market and offshore market. It is easy to go long on both markets. However, short-selling on single stock in the onshore A-share market is not that convenient at present. Although in Hong Kong stock market, it is very convenient to do short selling, the overall valuation is one of the lowest in the world. On the positive side, the availability of stock borrowing in A-share market has been improved in recent years. Although there is still a big gap vis-à-vis a mature market, this trend is promising to continue in coming years.
- From an institutional asset owner’s perspective, how does exposure to Greater China long/short equities mandate sit within their portfolio, relative to other investment vehicles?
Although we had met over 200 international investors on different occasions, the sample size is still limited and our opinions can only serve as a reference. Overall, international institutional investors regard Chinese hedge funds as an important complementary part of their overall portfolio, but not the most significant one by weight, which may be related to the capacity of hedge funds. Among the domestic hedge funds in China, equity long/short is undoubtedly one of the most common strategies.
- Considering what the Greater China markets went through last year, with the escalation of the US-China trade war, what is your expectation on the level of investor interest in Greater China-focused hedge funds in near future?
The recent US-China trade war has grabbed a lot of attention from investors. It is hard to predict the trend in the coming months. I think everyone understands it will last for a while and will not reverse in a couple of months.
There is a Chinese saying, “risks always come with opportunities”. The opportunity is, because of the recent correction, the overall valuation of Chinese equity market becomes quite attractive in the medium to long term. The Chinese government is very likely to further implement stimulus policies. I think the current markets correction has provided a good entry point. This view is also agreed by some international investors who are looking for at least two to three years’ horizon. Historically, China did quite well in challenging environments. However, from the investment perspective, we should be cautious on those sectors directly related to the trade war or some high-tech sectors.
We should stay cautious but not panic when we face such kind of uncertainties. The current valuation implies pretty bearish assumptions by the market. If you look at the next five years, it is difficult to stay away from the Chinese market given it is such a big and growing market.
- The Golden Pine Fund returned 8.88% last year, which proved to be an exceptionally tough year for long/short equities hedge fund managers focusing on Greater China, who ended the year down 14.51% on average according to Eurekahedge database. What were the key factors which allowed your team to achieve such a remarkable performance?
The major reason of our relatively good performance is some major adjustments on strategy during Q2 last year before the market correction. If look at the monetary policy cycles in China since 2005, we see a complete mini-cycle of monetary policy is roughly three years. So currently we are entering into the fifth mini-cycle on the monetary policies. Thanks to what the government had accomplished in 2016, China had entered a recovery process from 2H 2016 to 1Q 2018. During the end of 1Q 2018, from the top-down perspective, we noticed the tone of central bank statement was changing and turned to deleveraging. As a result, we expected a tightening monetary policy in the next few quarters. From a bottom-up perspective, we frequently communicated with the listed companies in the various industries. We also received some warning signs in 2Q 2018 with weakness from developers and the housing market. Thus, combining this observation with top-down and bottom-up analysis, we found the investors’ forecast for the earning growth too optimistic during that period. After the good year of 2017, the valuation of the whole market got much stretched. The underlying assumptions were too optimistic and we expected a market correction.
For long positions, we saw two indicators that made us build up long positions in some defensive sectors. Firstly, we saw the government urged central bank to make adjustment on monetary policy mid of last year. A larger round of easing was expected in 2H 2018. Secondly, we saw commodity price peaked around 1H2018. We believed cost of raw materials was likely to decline. This led to the re-distribution of the profits within the industry chain from upstream to downstream. With these two indicators, we believe utility and some energy sectors will likely benefit. Thus, we added more defensive sectors in our portfolio which were primarily utility and energy. The adjustment of our positions ensured that our fund performed better than the overall markets.
For short positions, we opened shorts in very sensitive sectors such as property developer and construction materials related to infrastructure investment. We expected a reduction in profit margin quickly in the sector along with the declining demand. Also, we opened shorts in some new economy names which provide online-offline service to offline customers. They are recognized as high tech companies but in their business models, their distribution channels are actually offline. Their growth was below expectation because their customers were cutting expenditure. Therefore, last year we made positive return from both long and short positions. The return attributes to our sector allocation largely.
- China’s slowing economic growth has been a major topic asset managers and investors allocation into the region are familiar with. What is your opinion on how this might affect the region’s hedge fund industry over the next few years?
I believe this would create even better opportunity for the regional hedge fund industry. In terms of investment, Chinese economy in transition would lead to more structural opportunity across sectors in both long and short sides. In terms of trading, China's financial reform on onshore market policies would unlock more trading tools for investor especially in stock borrowing and derivatives. Moreover, there is a rapid increase in interests from local customer in hedge funds. All these positive factors will further benefit the development of hedge fund industry in this region.
- Given the recent development of the US-China trade talks, what is the team’s outlook for the rest of 2019, and how well-positioned is the fund to benefit from the development?
I believe China is entering another round of credit expansion phase. The economy has bottomed in 1Q 2019 which can be verified by two approaches. One is the earning growth of listed companies. The earnings in 1Q 2018 decreased YoY by single digit, but this year it rebounded roughly 9% for Asia companies. The trend will last for a while because there are tax and fee reduction and reforming policies. Currently, the inventories in many industries are at a historically low. Looking forward, supply side won’t have too many issues. The uncertainty is the demand side. Of course, the recent trade war has created uncertainty at the demand side, so we saw some harsh correction in some markets. The overall situation is better than that in 2018. I think opportunities will be sector-specific. Some sectors still offer very good opportunities.
I’m still overweighing energy, utilities and consumer sectors in our portfolio based on bottom-up research. Most of these companies can still deliver 20% to 40% growth this year. We think there are opportunities from both long and short sides. We just need to do a better job at sector allocation. Looking forward, after all the emotional shock from trade war, I think investors will gradually find the value in China equity market.