Resisting the temptation of short-term tinkering, Edmund Harriss has proved to be a champion of foresight
INVESTEC ASSET Management's Edmund Harriss likes to be one step ahead of the chess game known as financial markets.
Like a grand master thinking through the next 20 moves, he spent some quiet moments working out his strategy as last year's third quarter gave way to the fourth. The result was a revamp of the holdings in the GSF Hong Kong Equity Fund he runs.
Names such as Cathay Pacific, clothing retailer Giordano, micromotor maker Johnson Electric and trading firm Li & Fung were trimmed back. Holdings in interest-rate sensitive counters, such as Sun Hung Kai Properties, Henderson Land Development, Dao Heng Bank and Dah Sing Financial Holdings, were beefed up.
'That was a product of sitting back because the market was drifting sideways and downwards,' said Mr Harriss. 'It was a case of turn off the screens and think 'in six months' time what is going to have changed. What could be different?'
'It had to have been a cut in interest rates and an improvement in the real-estate sector, which banks would certainly benefit from too. So it was really that which drove a shift into those sectors.'
Taking a look at how the big picture will shape up months ahead and then making unhurried moves into the stocks which will benefit most is the way Mr Harriss likes to run his fund.
'I have not done any trading this year. I am quite pleased that we have not had to be chasing. [I was] not forecasting for one instant that the United States would cut interest rates on January 3 but nevertheless, with an interest rate cut being on the cards it seemed sensible to be there.'
There are always temptations to tinker with the fund, particularly with brokers ringing to pitch ideas that are flavour of the moment.
'It is so easy to get caught up in the news day to day,' said Mr Harriss.
For example, at the end of October the Hang Seng Index fell from 16,000 points to 14,300 as bad news from the rapidly slowing US lapped on Hong Kong's shores. Brokers told Mr Harriss: 'We are recommending China Light and Power, Hongkong Electric has a good yield.
'And you just think 'no', this is drumming up business. A few years ago I might have been bamboozled by that [but] you have got to hold the line of what you think is going to happen in three or six months time.
'Normally by the time you are getting these suggestions it is too late and then the market will have a snap rally. And it did. Sitting in China Light and Power was definitely not the place you wanted to be,' Mr Harriss said.
The place you still want to be is in the interest-rate sensitives, though they have had a healthy run already leading some top brokerages such as Salomon Smith Barney to claim there is little upside left. But Mr Harriss does not see it like that. While there are plenty of differences in Hong Kong's economy between then and now, he thinks it is instructive to look back 10 years to the last time the Fed was aggressively cutting interest rates.
'The Hang Seng Index in 1991 went up 42 per cent, with real estate up around 60 per cent plus and the banks up about 100 per cent plus,' he said.
In 1991, banks had full loan books and plenty of willing customers. This time around they are flush with cash and 'deposit rates are as low as they can be so you are going to get some margin compression', said Mr Harriss.
And unlike 1991, the real-estate sector is still struggling to get into gear with a supply overhang and cautious consumers.
'The parallels are not exact but nevertheless I still do not see how cuts of around 2 or 2.5 per cent over this cycle, which is likely to be quite compressed, can fail to have an impact on Hong Kong and the interest-rate sensitives,' said Mr Harriss.
While bank and real-estate stocks looked pricey on present assumptions, once the rocket fuel of rate cuts started kicking in, those assumptions would quickly change. Analysts would quickly revise up the net-asset values of the developers and loan-growth projections for the banks.
When it comes down to the nitty-gritty of running the fund, Mr Harriss likes to keep a 'compressed' list of only 30 holdings. That allows his bets to bring clear results.
'It is the top 10 or 12 positions, that is really what is going to drive the performance,' he said.
He has outperformed the Hang Seng Index since putting his interest-rate sensitive bet on. For the three months to January 26 the fund was up 9.01 per cent against 6.99 per cent for the benchmark. Last year the fund lost 4.81 per cent against an 11.31 per cent decline for the benchmark. Curiously the fund and the index are neck and neck over the three years to January 26. The fund is up 77.53 per cent against the benchmark's 77.55 per cent gain.
Fewer holdings also makes it possible for Mr Harriss to draw up his own earnings models for his holdings rather than relying on brokers' research. That has helped him in his stock selections on the interest-rate theme. For the banks, 'everybody is now recommending three, Dao Heng, Dah Sing and Wing Hang Bank, and they have for some time,' he said. 'But I would like to think we were into those banks before they became fashionable.'
Mass-market developer Henderson Land and Sun Hung Kai Properties, which concentrates on the luxury end of the flats market, are his top property picks.
'They are the purest developers with the strongest balance sheets. Once you start moving down to the smaller end of the scale, their balance sheets are stretched and there is a high possibility of a placement.
'Until one is confident that the market is starting to move it might be a bit early to be fiddling around in Sino [Land] and New World Development and some of the high-beta plays.'
While the fund is predominantly blue chip-oriented and benchmarked against the Hang Seng Index, it does 15 per cent in China plays. That is in just four names: China Mobile, the diversified Citic Pacific, computer maker Legend Holdings and China Southern Airlines.
'It could increase but it will be a moderate part of the portfolio and this would never be transmogrified into a sort of red-chip dominated portfolio,' said Mr Harriss. 'It has not been a shoot the lights out kind of fund. I am not about to change that style. There have been investors in this fund for a long time, they know what they are getting.'
1989:Graduated with bachelors degree in history from York University.
1991:Graduated with a master's degree in management studies from Oxford.
1991:Manager with small hi-tech firm PP Systems.
1993:Joined Guinness Flight As set Management in London.
1994:Promoted to Asian equity analyst based.
1998:Moved to Hong Kong as fund manager.