While Swan is reluctant to reveal his holdings in detail, a look at the Asia Special Situations Fund’s top-10 reveals exposure to index mainstays such as Samsung Electronics and Tencent.
Can these stocks really be defined as special situations? Swan said the three foundations for the strategy are that it is concentrated, flexible and mid-cap in nature – the “sweet spot” for the size of stocks he holds is between $1bn (£800m) and $10bn.
“You back your conviction, you don’t care what is in the benchmark and you are open-minded about where you find opportunities. If you look at the history of the fund, sometimes it does look like other funds, but that’s because we like those stocks.”
He added: “Special situations means being very focused on what is happening at a stock level and why we see upside to a company’s earnings. Sometimes they are beneficiaries of structural growth or technology change.
“But right now we are seeing companies that are very cheap, which are going to see an improving profit environment because of the situation in their industry, in particular. We are seeing less supply and more demand for the first time in five years.”
Swan explained that the portfolio is very different today compared with two years ago, with bigger dispersion across Asia suggesting bigger bets.
He points to opportunities in companies benefiting from disruption in technological changes while, in late 2015, the team increased its exposure to energy and materials, which was a strong performer last year.
Across the commodities spectrum, steel-related investments helped the fund in 2016, and the team currently has investments in aluminium. Swan is also looking at an opportunity with overcapacity in diesel refining and synthetic rubber.
However, he is most excited about the potential recovery in financials, a sector he sees as the “last big value opportunity in Asia”.
Banks in particular have performed better in recent months, while remaining cheap versus their history.
He said: “People think there is a credit cycle still to emerge in places such as China, with non-performing loans perhaps understated in the Chinese banking system and getting worse.
“We think there has been some generous accounting but overall the direction of non-performing loans has turned more favourable. Chinese banks are a big opportunity in terms of value, which we need to look at closely through the course of this year.”
