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JOHCM: digital disrupters will forge ahead

The Covid-19 pandemic and its economic consequences are accelerating trends already in progress, according to a JOHCM Asia ex Japan senior fund manager.
Samir Mehta, JO Hambro Capital Management

“The best‑managed private companies in Asia have thrived in an environment surrounded by government. That history combined with the use of technology could help many businesses to continue doing what they do best, albeit with lower returns on capital,” Samir Mehta, senior fund manager at JO Hambro Capital Management (JOHCM) told FSA.

Mehta, who co-manages the JOHCM Asia ex Japan Fund, believes that the companies in the region best able to survive and prosper in the wake of the dire consequences of the Covid-19 pandemic are leaders in technology, large enough to absorb the shocks, or able to use the current period of uncertainty to consolidate and then take advantage of future opportunities.

“The big will get bigger, the strong will consolidate as the weak falter, digital disrupters will forge ahead,” he said.

On the other hand, businesses with high leverage, especially banks and other financial institutions, will struggle most, according to Mehta.

The fund has sold its holdings in Bank Central Asia and China Merchant Bank, despite their perceived quality in the sector, according to Mehta.

“If I focus on those businesses that have liquidity in the short run, should remain solvent over the next year and have the ability to grow their top line by meeting demand for their products or services, on balance we should be fine with our holdings,” he said.

Hard times

The JOHCM Asia ex Japan Fund has experienced some difficulties, which has tarnished its medium-term performance. But a reexamination of strategy by Singapore-based Mehta and co-senior fund manger Cho-Yu Kooio, who have a combined 55 years of investment experience, seems to have improved its fortunes.

The fund has posted a -7.73% three-year cumulative return, underperforming its MSCI AC Asia ex Japan benchmark (7.52%) and its sector average (-2.35%), according to FE Fundinfo data.

However, it has shown some resilience this year, relative to both measures. The fund is down -11.95% this year to 15 April, compared with -14.22% by the index and -17.84% by its peers.

Mehta concedes that his fund had a tough 2018 due to unfavourable macro developments, especially the US-China trade dispute, but he also blames poor stock selection.

“We entered the year positive about the asset class, but misfortune and mistakes harmed performance,” he said.

In May last year, he and Kooi determined they would develop a clearer conviction for the fund.

“We chose to focus on leading companies that were embracing disruptive technologies to strengthen their business models, and companies that were resilient, able to thrive during good times and survive in bad times through the solidity of their balance sheets and market position,” said Mehta.

Conviction shift

In the first category are companies such as Tencent, which the fund already owned, and Alibaba, which Mehta bought because it is a “disproportionate beneficiary of the technology that is reshaping commerce”.

“Resilient” companies that the fund has added since its strategic overhaul last summer, include Orion, a Korean branded confectionery business, which derives 47% of its revenues from China and is growing its business in Vietnam and elsewhere.

“During the self-isolation regimes imposed in many countries during the past few weeks, people have perhaps been tempted to become ‘couch potatoes’, snacking on sweets and ‘comfort’ packaged foods,” said Mehta.

“Orion’s sales growth is up in the high double‑digits, and the company’s factories are running at 120% utilisation levels,” said Mehta, who met the management recently.

He identified similar resilience among companies in India, despite his caution abut the country’s near-term macroeconomic prospects.

Nestle and soft drink producer Dabur are both in the fund’s top 10 holdings, and Nestle along with Orion and long-time fund portfolio winner, Chinese sporting goods manufacturer Li Ning, made positive contributions to the fund’s performance in March, he said.

The fund’s cash level is higher than usual at about 5%, which cushioned it from some of the volatility in March.

However, an 11.5% weighting to China A-shares and good stock selection in India and Korea account for the fund’s relative outperformance so far this year, according to Mehta.

Most recently, he has reduced the fund’s exposure to Southeast Asia (except Singapore), because “most of the Asean region lacks the healthcare infrastructure and budgetary resources to cope with the Covid-19 outbreak.

Confidence maintained

But, elsewhere in Asia, Mehta is more optimistic.

He saw strong interest in his fund and Asia ex Japan equities in general from global investors at the start of the year, but it tailed off as the coronavirus spread from China to the rest of the region.

Other asset and wealth managers have also retained their optimism in the region’s equities markets, even during the worst of the sell-off last month.

Newton Investment Management is confident about a consumer-led growth recovery in China, JP Morgan Asset Management remains convinced about Asia’s structural transformation, and UBS Wealth Management expects a recovery in Asian corporate earnings in the second half of this year.

Meanwhile, BNP Paribas Asset Management predicts an early resumption of normal economic growth in China to support their “secular growth” theme, Citi Private Bank’s belief in “unstoppable trends” in the region is unshaken, Aberdeen Standard Investments has taken advantage of market slumps to buy “quality stocks at cheap valuations”, as has Pictet Asset Management, with a preference for consumer stocks.

“Now that China appears to moving to a semblance of normality, interest in Asia ex Japan equities is returning,” said JOHCM’s Mehta.

JOHCM Asia ex Japan Fund performance breakdown for March 2020**

Source: Fund factsheet, 31 March 2020. **Relative return to MSCI AC Asia ex Japan index

JOHCM Asia ex Japan Equity Fund vs MSCI AC Asia ex Japan index and sector average

Source: FE Fundinfo. Three-year cumulative returns in US dollars.

Part of the Mark Allen Group.