Art of the portfolio
SUCCESSFUL FUND MANAGEMENT boils down to having quality information, which explains why Victor Lee, investment manager for the Pacific Regional Group at JF Asset Management, meets as many as 200 companies a year.
'You have to learn the different cycles of their business and what the catalysts are,' Mr Lee said. 'To invest for clients, you need to know the management, what they are doing and what will do well in the next three to six months.'
Therefore, when quizzing senior executives, he is on the lookout for signs that the company will beat or miss consensus earnings estimates. His basic assumption is that most businesses follow a three to five-year cycle. However, numerous qualitative factors can change or influence that, many of them relating to corporate strategy and management priorities.
'My job is to analyse those factors,' Mr Lee points out. 'Normally you can forecast revenue growth based on capital increases. I focus a lot on margins to make sure the companies we invest in don't have a falling trend.'
What usually scares him away is a big jump in margins in the previous two years coupled with a very aggressive capital expenditure plan. Too often, this leads to oversupply going forward, a drop in bottom-line profits and an increase in depreciation costs in the following two or three years.
He is also wary about companies that have grown complacent about their size. 'If a bank enjoys a position as number one in its market and maintaining the business, I don't get much upside as an investor,' he says. 'The share price is probably fairly valued already.'
For Mr Lee, the key to constructing or rebalancing a portfolio is to find companies not just able to deliver growth, but which also have 'a good long-term story'.
When doing this for the JF Pacific Securities fund, Mr Lee refers to the Morgan Stanley Composite Index and in-house guidelines on suggested weightings for different countries and industry sectors. He then studies the specifics of earnings momentum, earnings per share growth, corporate governance and return on equity, paying particular attention to what drives share price performance in individual markets.
In Australia, for example, there is traditionally greater focus on company profitability, while in Taiwan longer-term investors are more concerned about the technology cycle. In the mainland, meanwhile, the key drivers of earnings growth include a company's understanding of government policy and, increasingly, its position in the domestic market. Against the benchmarks, he is currently 'underweight' in Japan and 'overweight' in China, India and Indonesia.
Mr Lee's preference is for companies with the equivalent of 'a good brand'. This, he believes, gives them an inherent advantage in the Asia-Pacific region, with its burgeoning middle class and high rate of personal savings. He therefore has significant holdings in the likes of Toyota, Samsung Electronics and China Construction Bank, as well as in the semiconductor, telecom and mining sectors.
To track developments, he relies on a team of about 80 investment professionals based in Hong Kong and throughout the region. They also pick stocks on a country basis and recommend them for the regional fund.
'There is dialogue on a daily basis, so we can make speedy investment decisions,' Mr Lee says. Buy and sell orders, which are executed by a separate team, can involve trades of up to US$50 million in a day to achieve a different net position for the fund.
'Adjustments really depend on the news flow,' Mr Lee says. 'The market can be very volatile, but our job is to perform for the long term.'
Mr Lee also manages the firm's Asian hedge fund - the first authorised by the Securities and Futures Commission for sale to retail investors - and has big hopes for this type of alternative investment vehicle. 'Hedge funds are growing as a class and it is important for us to capture that growing business,' he says.
Having been with the firm since graduating from Oxford University with a first-class degree in engineering science, Mr Lee has learned all about coping with stress over the past 10 years.
'It's high pressure because you manage other people's money,' he says. 'But I tell myself to do what you can and that there's no point worrying about what you can't control.' He adds that there is also a psychological element to successful investing.
'You have to control your own fear and greed and not get too excited when the market is strong. It takes a cool mind to invest based on the facts.'
Although controlling multimillion-dollar stakes in some of the world's top companies, Mr Lee is in no doubt about his best investment so far: a personal donation to help build a school in Yunnan province. 'Twenty years from now the school will still be generating benefits for 300 students a year,' he says. 'Part of the motivation for me is being able to give something to those who really need it. Otherwise, it's just a numbers game.'
