The Hedgeweek Interview - Ezra Sun, Veritas Asset Management: "Asia still offers significant investment opportunities in areas of structural growth"

Ezra Sun, manager of Veritas's Real Return Asia Fund, says that while Asia is set to suffer by proxy from the global economic slowdown, experiencing a reduction in domestic consumption and export growth, his fund's target return of around 15 per cent per annum is still achievable over the long term.

HW: What is the background to your company and funds?

ES: Veritas Asset Management (UK) and Veritas Asset Management AG are wholly-owned subsidiaries of the Real Return Group, which is wholly owned by management and employees and operates as a partnership.

Stewart Newton is chairman of the Real Return Group, Charles Richardson is chief executive of Veritas UK and Anthony Rosenfelder is managing director of Veritas AG. They are all co-founders of the firm.

Veritas is an independent, specialist investment boutique established in 1993 with a 15-year top-class track record in investing and private client servicing. Assets under management currently stand at GBP966.3m.

HW: Who are your service providers?

ES: Our auditors are PricewaterhouseCoopers for the funds and Ernst & Young for the company, and our law firm is Dickson Minto. The administrator of the Real Return Funds is PNC Global Investment Servicing and our prime brokers are UBS and Deutsche Bank.

HW: How and where do you distribute the funds? What is the profile of your current and targeted client base?

ES: We are currently in the process of bolstering our distribution under the leadership of Richard Meyrick, who has more than 13 years of distribution experience. The current client base of the Real Return Asian Fund consists of 42.6 per cent private clients, 23.6 per cent external asset managers and 33.8 per cent fund of funds.

HW: What is the investment process of your funds?

ES: The Real Return Asian Fund's investment strategy is long/short equity, using specific macro themes to drive a bottom-up stock-picking process. In analysing companies we focus on the business model, the quality of management (or lack of it) and the sustainability of the business. Particular attention is paid to free cash flows. Investments can be small, medium or large cap and covers the Asian region from India to Japan, including Australasia.

The portfolio is split between the core portfolio, which consists of companies with sustainable and predictable growth to provide steady returns over the longer term of three to five years, and the trading portfolio, which is short-term in nature (up to six months) and seeks to capitalise on market inefficiencies and earnings momentum.

The investment process involves macro economic analysis to enable the identification of themes, relying on both in-house and outside research, and using the themes identified to search for opportunities in markets. Rigorous research is employed to discover the right stocks, including analysis of the business model, business environment, quality of management and financial health of the target investment. There is a special focus on cash-flow analysis.

The emphasis on primary research entails analysing the accounts and understanding the numbers, company visits to factories and other sites, and regular contact with company management to understand changes in business model, earnings expectations and management composition. Valuation comparisons with peer group and the stock's historical rating help to pinpoint the right entry and exit prices.

HW: How do you generate ideas for your funds?

ES: Themes shape the context within which we invest. We adopt an open and 'best ideas' investment approach through a culture of sharing and encouraging ideas. We place strong emphasis on proprietary, fundamental research with a strong value discipline, and focus on conviction investing and patience using quantitative analysis with a qualitative research overlay.

HW: What is your approach to managing risk?

ES: We check the portfolio on a daily basis and assess risks of three types. Qualitative risk assessment involves determining the risk of investing in the company in its own right. We attempt to understand the company in terms of numbers (based on their accounts) and cross-check with industry sources.

With valuation risk, we determine whether the company is over- or undervalued. Detailed scenario analysis is undertaken to understand the impact on valuation in different circumstances.

Regarding portfolio risk, we look at concentration risk in terms of sector and country risk. On average, net exposure to any country or sector will not exceed 25 per cent of net asset value. We are also mindful of unintended correlations.

We also have a dedicated risk and performance analyst who reports to the manager on a weekly basis.

HW: Do you expect your performance or style to change going forward?

ES: We have delivered approximately 14 per cent per annum over the past four years, compared with around 6 per cent for the market. The fund thus more than doubled the return of the market but with significantly lower volatility, of approximately 10 per cent.

We do not expect to change our performance or style. Our prudent investment approach is ideal for managing money in volatile environments such as Asia, and we believe our target return of around 15 per cent per annum is still achievable from a long-term perspective.

HW: What opportunities are you looking at right now?

ES: We are concentrating on infrastructure, consumer staples, discretionary consumption, healthcare and education.

HW: What events do you expect to see in your sector in the year ahead?

ES: We expect the global economy to slow down, particularly the West. The Asian economy will also suffer by proxy, resulting in a reduction in domestic consumption and export growth.

HW: How will these developments affect your own portfolio?

ES: We need to be increasingly cautious where and what we invest in and the valuation we pay for stocks. However, we believe there are still significant investment opportunities in areas of structural growth such as the opportunities mentioned above, together with capitalising on economic growth and income growth in Asia.

HW: What differentiates you from other managers in your sector?

ES: I am a Chinese national and am supported by two other Asian specialists from Korea and China. We combine local knowledge with international understanding in a proven and experienced team with a global perspective. By incorporating a strong grasp of macro-economic perspective, politics and economic policy in Asia, the team is able better to predict the changes in Asia with regard to asset allocation and entry and exit for any given market.



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