Grace Yan, Nikko Asset Management
Since its launch in January 2017, Yan’s Asian Small Mid Equity Fund has outperformed the category of Asia-Pacific equity funds available for sale in Hong Kong (chart below). She believes the consumer holdings in the portfolio are the key driver.
The fund invests in companies in Asia (ex-Japan) with market capitalisation of $200m-$13bn. In certain cases, she would consider companies outside the range.
“If we have high conviction in a stock, then it is expected to eventually grow to meet the market cap threshold,” Yan said.
The current allocation has a bias toward stocks that are closer to the lower-end of market cap. “It is easier for smaller companies to double [in size] than the bigger ones,” she explained.
She believes the financial strength of a company and its scale do not necessarily correlate. “It depends on how they manage their loan profile and whether they are net cash or not. It could be a large-scale company with a very high gearing ratio.”
Apart from market cap, she also measures a company by average daily trading volume over the past three months to evaluate the trading liquidity.
Fan economy
The largest allocation goes to a Hong Kong-listed designer brand JNBY Design, which Yan described as “the Chinese version of Dolce and Gabbana” and sees loyal customers from the online platform.
“Roughly 60% of sales are derived from returning customers who are fans of the brand and closely follow the company’s social media platform.”
This number of customers in this segment is 140,000 and they spend on average RMB 5000 ($730) with JNBY annually, she estimated. This “fan economy”, which is unique in China, has generated continuous spending for the designer brand,” she added.
Another driver for outperformance has been a department store operator that has a strong Hong Kong presence.
Yan admitted that the department store as a consumption format is dying globally because people feel that they are stale and the preference is for a shopping mall, which comes with a cinema and restaurants. However, the company she’s invested in has taken an innovative approach, she said.
“The operator uses consumer psychology to rearrange the section and floors within the mall. It is innovative in the way of keeping the format alive. The company also actively revamps their membership programme and encourages repeat traffic,” she added.
Yan said that the fund has an overweight position in companies mainly operating in Hong Kong and China, two markets that have a bigger universe of investible stocks than other regional markets.
Her portfolio is underweight companies in Asean and India. She admitted that can be a risk to her investment thesis. But she does not intend to neutralize the weighting among the markets because the fund is run on a bottom-up basis.
“We will actively research more on these markets, but we will not deviate from our process and purposely buy in the stocks only aiming to neutralize the portfolio.”
Despite the tariff war between the US and China, Yan believes domestic consumption is relatively unaffected.
However, China’s continuing slowdown in GDP growth could have a negative impact on spending habits.
Top ten holdings
|
JNBY Design |
1.9% |
| TCI |
1.9% |
|
Vitasoy International |
1.8% |
| Huazhu Group |
1.8% |
|
Dentium |
2.7% |
|
Hope Education Group |
2.5% |
|
Shanghai Jin Jiang International Hotels |
2.3% |
| Chailease |
2.0% |
|
Cafe24 Corp. |
2.0% |
| Haier Electronics Group |
1.8% |
Source: fund factsheet
Performance of the Nikko AM Asian Small Mid Equity Fund since its inception
