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SCMP Reporter

The approach has proved successful in Europe and China

Sector awards for its Eastern Europe and China funds have proved the success of Manulife Asset Management's policy of selecting external managers for these funds.

The company's Emerging Eastern Europe Fund took the three-year award in the Equity Europe Emerging Markets sector, while its China Value Fund won the three-year Equity China (Greater) award.

Manulife's assistant vice-president and chief operating officer, Anne Weedon, says the company outsourced the funds after putting its in-house team through selection criteria to determine if it could handle the funds.

'Certainly, if there are gaps there, we look at other fund managers,' Ms Weedon says, adding that the selection is based on overall quality of the investment firm, stability of the organisation, succession plan, adherence to the code of ethics, and depth and quality of the overall experience of the people managing the assets.

'We look to see if there is a clearly defined investment process that has been successfully applied over time. Performance makes up a third of the factors. We look to make sure their performance compares favourably with the benchmark. We look at their risk characteristics,' she says.

Manulife manages eight funds internally and outsources its China Value fund to Value Partners and Eastern Europe fund to London-based Charlemagne Capital.

'One appealing thing with Charlemange Capital is they are able to get superior return with fairly low volatility,' she says.

The Emerging Eastern Europe Fund, with an asset size of US$83 million, has gone up by 223 per cent against the benchmark of 38 per cent in five years and 141 per cent against the benchmark of 33.6 per cent in three years.

In the past year the fund has been up 56 per cent against a benchmark of 40 per cent, according to its manager, Stefan Bottcher.

He says the fund has the lowest risk in the emerging Eastern Europe fund sector due to its focus on portfolio construction and stock picking. The process begins with a selection of 100 to 200 companies 'we feel are liquid enough' to focus on, as 'the biggest risk in emerging markets is liquidity'.

The fund manager then visits the companies once a year to identify the best ones, creating a focus list of about 50 companies to analyse in detail, including looking into their management quality, top line growth, earnings growth, cash-flow generation and balance sheets.

'If all these boxes can be ticked, we move to valuation analysis and set price targets. We do not then go straight to the portfolio. We pick all the stocks that have higher price target for our portfolio,' Mr Bottcher says.

From the short-list, half will be culled and no more than 25 firms in the Eastern European markets will be selected.

Being strongly aware of risk, he says the fund managers then select stocks that do not all 'positively correlate' with each other in the construction of the portfolio.

'For example, we are very excited about oil stocks. All the oil stocks in our universe will have high price target. We'll still not have in our top-five stocks five oil stocks. We may have other stocks which have very different characteristics to reduce the overall volatility and the overall risk in the portfolio,' he says.

One example of risk control is to limit the weighting of holdings in Russia interests to 50 per cent of the fund's assets, although the country appears to offer little downside in the near to mid term. Mr Bottcher says Russia is by far the biggest market in Eastern Europe, with market capitalisation making up at least 75 per cent of the region.

'Its economy grew by 7.3 per cent last year and is expected to grow this year at a similar rate. It has a budget surplus of about 2 per cent and current account surplus of about 10 per cent. Its currency has been very strong and has been appreciating against the US dollar. At the beginning of last year it was at 31 rubbles to the dollar and at the end of last year it was at 29 rubbles to the dollar,' Mr Bottcher says.

He expects Russian President Vladimir Putin will be returned to power next month in a landslide election victory, giving the government a stable platform to introduce further reforms over the next four years.

'Russia's stock market ...  is developing at a relatively fast pace. We see more companies coming into the market. There are many companies that remain under-covered and that remains the biggest opportunity in Russia. My outlook is particularly positive for Russia,' he says.

Other key Eastern European markets such as Poland and the Czech Republic also offer 'moderately positive' prospects, thanks to the prospect of accession to the European Union and currency union, putting them on equal footing with developed Western European markets. Poland and the Czech Republic each have a weighting of 17 per cent in the fund. Interests in Hungary, however, are minimised to 2 per cent as the fund manager is concerned the country will undergo devaluation and that it will be another two years before it joins the EU and currency union.

Manulife's China Value Fund, which has US$438 million in assets, registered a 476.46 per cent return over five years, 245.68 per cent over three years and 83.33 per cent over the past year. Ms Weedon says the fund manager is 'cautiously optimistic' on China's macroeconomic situation.

'China's GDP grew at 9.1 per cent last year and is expected to be 8 per cent to 9 per cent this year. The yuan is under pressure to go up against the US dollar. There is increasing transparency and corporate governance for Chinese companies,' she says.



Outsourcing strategy the right decision for Manulife