A-share advocate keeps faith
Aaron Boesky, the chief executive of Marco Polo Pure Asset Management, is upbeat about mainland equities despite all the data on the growth slowdown and market declines. He's not just taking a long-term view; he thinks the turnaround is around the corner.
'The A-share market has been going up recently on days bad news has been released, and that's a big change,' says Boesky from his office in Central. The talkative American, 37, co-founded his firm's sole fund, the Marco Polo Pure China Fund, in 2004 with Chris Tang, Marco Polo's chief investment officer.
Boesky, cousin to convicted inside trader Ivan Boesky (the inspiration for the Gordon Gekko character in the 1987 film Wall Street), launched the fund with backing from his mother's side of the family, the Rosenbergs, an old-money clan with a long record of investing in the US.
The Marco Polo fund invests solely in A-shares (yuan-denominated, mainland-listed stocks). The fund is completely identified with this market, which means life is easy when the market is rising and tough in decline, as has been the case for the past few years.
Marco Polo invests through intermediaries that belong to China's qualified foreign institutional investor (QFII) scheme. While Marco Polo does not have any QFII quota of its own, all its money is invested through QFII-approved brokers, says Boesky.
Tang, who manages the US$80 million fund, focuses on a portfolio of between 22 and 28 stocks. The fund does not track an index but simply invests in favoured firms.
Boesky thinks the decision by the People's Bank of China to cut interest rates on June 7 was a clear sign the market has bottomed.
He says that authorities wanted to cool an over-stimulated economy and that its slowdown is merely a successful outcome of that policy. But with Xi Jinping due to become president next year, authorities will soon steer the economy back to former growth levels, he says.
'Xi will be the first president to take office with China as a superpower,' Boesky says, adding that Beijing will want the economy and the markets to be strong during this handover of power. Boesky thinks the rate cut was the beginning of an easing cycle. Inflation has cooled, and after the A-share market fell 15 per cent in 2010 and 21 per cent last year, he says the market is poised for a 'technical breakout'.
Boesky says the A-share market is liquid and large - it is the biggest in Asia-Pacific, with a market capitalisation of US$3.8 trillion.
But the mainland market is driven by small individual investors who he perceives act as a unified mass. He says that A-share investors are overwhelmingly Han Chinese, urban and male, and that they all respond to the same information published by the state-controlled press. His message is that an outside investor operating with a different perspective and data might be able to outsmart the market.
Marco Polo has had an annual average return of 11.61 per cent against the Shanghai A-share index's 6.4 per cent. Of course, the message that a fund can outperform the general market is meaningless if the fund is losing money.
Marco Polo has dropped 15.49 per cent over the past 12 months, according to the firm's May progress report, largely in line with performance of an ailing A-share market. However, one could easily argue that this just represents a massive buying opportunity for China equities, and that is indeed the case Boesky makes.
Boesky pulls out a chart to put the situation in perspective. He points out the price-to-earnings ratio of A-shares is at 9.9 times against a historical 10-year average of 25.97 times - a discount of 60 per cent in a market that Boesky contends has been vastly oversold.
When one is invested purely in A-shares, it is difficult to not be a booster for China equities. 'We are fully allocated already in Shanghai A-share stocks. Every dollar we have and then some are pushed all in at this point. We, Marco Polo, feel that Shanghai has bottomed this month in July, and that we are headed for a multiyear comeback for the markets,' said Boesky on Bloomberg TV on July 15, 2010.
A-shares indeed caught an impressive rally immediately after that call, but the Shanghai A-share Composite Index has since dropped about 7 per cent.
But no one invests in A-shares for their stability. It's all about the long-growth outlook.
Since its inception, the fund has posted a total return of 134.18 per cent against an index benchmark of 63.31 per cent. And that's the performance that keeps Marco Polo going and Boesky talking.