IF THE HONG KONG market seems awash with talk of doom and gloom, deficit and deflation these days, Brook McConnell is a refreshing island of bubbling optimism. 'Hong Kong is the best way to play the fastest growing economy on earth with the least amount of risk,' Mr McConnell, who owns and runs his own small investment shop South Ocean Management, said. 'We are very excited about the potential. I'm so bullish I'm jumping out of my seat.' Mr McConnell has reason to be optimistic as his 16-stock portfolio of small and medium-sized companies has been going gang-busters recently while Hong Kong blue chips have been in the doldrums. His Hong Kong Partners fund was the top performer among 57 Hong Kong funds in the fourth quarter of last year with a gain of 34.73 per cent, according to Lipper Asia. For the full year it was third with a loss of 7.68 per cent and was fifth over three years with a gain of 37.26 per cent. Mr McConnell's formula is simple: look for companies with low price-to-earnings ratios and high expected growth rates. 'If a company is expected to grow 20 per cent I don't want to pay much more than 10 [times earnings],' he said. The other key point for Mr McConnell is assessing management quality, which he says is the toughest part of his business. 'A company can be in a bad industry with a good management and do relatively well, but a bad company in a great industry will actually kill you down the road at some point,' he said. 'I have found that I have always done better in companies with good management. Those that have not had good management I have done poorly in.' Cheap growth companies with good management sounds like a tall order, although these days with the stock market so depressed there were lots of them, Mr McConnell said. On example is Varitronix, which makes liquid crystal displays. It has cash of HK$2 per share but is only trading at HK$5, 'and it is a huge leveraged play in the upturn in the worldwide economy. And it's still on 10 times [earnings],' Mr McConnell said. Mainstream houses tend to use a benchmark as a starting point, matching their funds with the stocks in it. They make some active bets around the benchmark by over weighting or under weighting different stocks and sectors. That means they will inevitably have some of the benchmark's big names in their portfolio even if the fund manager is not thrilled by the current prospects. That helps the fund to stay in touch if there is a sudden rally in blue chips but means a manager cannot hope to preserve his client's cash when the market makes a significant fall. The beauty of the approach by Mr McConnell and some other boutique shops is they can disregard the benchmark and put together a portfolio of companies they actually believe wholeheartedly in. With skill and luck they can produce a positive return even when the benchmark is taking a bath. Mr McConnell has not shunned all the big names. He has Hutchison Whampoa and its parent Cheung Kong Holdings in his portfolio. 'I don't own Cheung Kong because of Hong Kong real estate, though they are the largest land owner. I own it because there is a genius at work on top of that building,' Mr McConnell said referring to Li Ka-shing's office in Cheung Kong Centre. Hutchison has been in the doghouse of late because of its expensive bet on third-generation (3G) mobile phones, which seems unlikely to live up to the hype. The scepticism today reminds Mr McConnell of the attitude towards Hutchison when it made its first mobile-phone foray into Europe. 'I don't know what 3G is going to mean but I'm telling you that nobody back in 1992 understood that everybody would have a cellphone in their pocket today. 'They may hit a single or they may hit it right out of the park with 3G. It is still right out in the open. Nobody believes they are going to hit a home run that is for sure,' he said. While the last few months have been good to Mr McConnell, he has had a tough time since coming to the SAR in 1992 in his endeavours to follow in the fund management footsteps of his forebears. His grandfather, Robert E. McConnell, was born in Durango, Colorado and went east to find his fortune. He ended up becoming such a well-known money manager that he was given the job of looking after president Herbert Hoover's nest egg. Mr McConnell's father, Dick, also developed a name for himself, becoming known as the 'dean of fund managers' on Wall Street and was noted for his efforts in training investment professionals. Dick set up Greenwich, Connecticut-based value fund house Sound Shore Management and later set out on a mission with his son to find new investment horizons. 'We had the opportunity of our lifetimes at that point to look around, so we did,' Mr McConnell said. 'When we came to Asia we spent two weeks in Hong Kong and had 50 different meetings with all sorts of people we were introduced to. We saw what was going on in the early '90s with companies going across the border lowering costs and expanding markets and yet selling at four or five times earnings, basically undiscovered values. We wanted to invest our own money first, then set up a firm that would be inviting our friends and associates to participate.' The McConnells' father-and-son company visits made an impression in Hong Kong where so many businesses are family run. 'What we have done through the years is gone through and met most of the executives and managers of most small companies out here and have developed long-term relationships,' Mr McConnell said. South Ocean began to find some clients, mainly United States investors, and by 1994 had US$40 million under management. That has since dwindled, not so much because of bad performance but the tough act it was competing against. The high-flying Nasdaq became Mr McConnell's bogey as clients yanked money back home. Also heading home was Mr McConnell Senior, who has now retired although he still writes articles on investing. The flow out of Hong Kong could soon be reversing as US investors disillusioned by the economic downturn and corporate-accounting scandals look for better value and growth abroad. 'Everybody has got their head in the sand right now. They are scared to death, don't know what to do. Get your head out of the sand and start looking around. Money is going to start coming here like $1 million per hour,' Mr McConnell said. The long term also looks good with mainlanders having little choice with how to invest their US$900 billion in savings. 'There's 1 per cent deposit rates on the [Chinese] stock market. That is why the stock market got up to 60 times earnings. 'The integration of Hong Kong and China will produce the fourth-largest market on earth and it will be coming. The milestone last year was the B shares being legalised to be owned by domestic investors.' A further step was the suggestion by the People's Bank of China chief that Hong Kong should be allowed to take yuan deposits. Once that happened it would be easy for mainland money to get into the SAR's stock market and 'this place is going to explode on the upside', Mr McConnell said. Brook McConnell 1974: English degree graduate from University of Denver. 1975: Began work as a welder on an Alaska oil pipeline. 1976: Financial consultant with PaineWebber in Washington DC. 1984: Broker dealer and fund manager with Melhado Flynn in New York. 1990: Investment banker for Hurst Printing in Dallas. 1992: Founder and president of South Ocean Management.