The Interview – Liz Evans, Cavendish Asset Management: “The growth stories for China and South-East Asian countries such as Singapore, Thailand and Indonesia remain compelling”
Liz Evans, manager of the recently-launched Asia Pacific fund at investment boutique Cavendish Asset Management, says 2010 will be a generally positive year for Asian markets as they continue to recover from last year’s historic trough, with less volatile markets and more moderate returns, but uncertainty remains over prospects for inflation and interest rate rises, especially in China.
GFM: What is the background to your company and funds?
LE: Cavendish Asset Management is the boutique investment arm of the Lewis Trust Group, one of the largest privately-owned businesses in the UK, which includes the River Island fashion retail chain.
Cavendish has a strong track record of launching and growing small, nimble equity funds, adhering to an investment strategy focused on long-term growth, bottom-up stock-picking, and active management. Funds are open to retail and institutional investors alike.
Following the success of our three established mainstream funds (the Cavendish Worldwide, Cavendish Opportunities, and Cavendish AIM funds), we took the decision in 2009 to launch five new funds. Four fund covering North America, Europe, Japan and technology went live last May, followed shortly by the launch of the Asia Pacific fund, of which I am the sole manager. Our intention was to provide more choice for investors at a time when valuations looked attractive.
The Asia Pacific fund invests primarily in domestic Asian stocks, as I believe this is the best way to gain exposure to strong economic growth in the region. The fund invests mainly in large-cap and increasingly mid-cap opportunities, where I believe there is the best scope for further growth following a good rally in emerging equities. The fund currently has GBP52m under management, and requires a minimum initial investment of GBP2,500.
GFM: Who are your key service providers?
LE: We employ Ernst & Young as our auditors and Eversheds as our legal firm. Our fund administrator and custodian is Northern Trust.
GFM: What is the split of your assets under management between institutional and private clients?
LE: Seeing as we only recently launched the Asia Pacific fund to the retail market, more than 90 per cent of assets currently under management come from institutional investors, but we are confident of taking market share on the retail side. There is some momentum buying into the Asian market following the heavily discounted prices on the table earlier last year.
Asia is in the best position to provide continued market growth whilst the West is posting a rather anaemic recovery. Moreover, the long-term fundamentals make Asia a great diversifier for investment portfolios and the region with the best opportunity for growth. All in all, we believe the short-term and long-term shift in power from west to east will result in an attractive, actively managed retail proposition.
GFM: What is your investment process?
LE: At Cavendish we are firm believers in real, nimble active management, rather than acting as a closet index tracker, or going through a bureaucratic process to move in and out of targets. As a result, individual managers retain a large degree of autonomy.
Counterbalancing this, the size of the firm also allows us to work in a highly collegiate fashion. We have weekly meetings involving all the fund managers for sharing and discussing information, market outlooks, and sector and individual holdings. This allows each of us to draw on a wide range of expertise and knowledge from across global markets when making judgements relating to our own territories.
I mainly focus on seeking out opportunities for long-term capital appreciation that are not over-valued. Ideally there will be a perfect marriage between a given individual Asian country and sub-sector, but I am ultimately driven on a stock-by-stock basis.
GFM: How do you generate ideas for your fund?
LE: My bottom-up approach to stock-picking means I base my decisions on in-depth knowledge about companies – their history, management, outlook, products and investment plans. Developing this level of insight typically requires multiple site visits, or meeting officials in London and getting to know their company inside out.
At any point in time, I will have a long list of potential opportunities into which I would be happy to invest when the price is right. I undertake all my own research and use a number of Asia-based brokers and analysts – I am more than happy to look past the brand name and opt for those renowned for their expertise in my region.
GFM: What is your approach to managing risk?
LE: The emerging markets of Asia are rightly seen as some of the world’s most volatile markets. While they may not have the overall depth and stability of Western markets, they correspondingly offer considerably more potential for growth. It is this inherent regional level of risk that I look to limit, mainly by focusing only on mid- and large-cap players so as not to compound the risks attached to small-cap investing.
Nonetheless I am always looking for growth and so tend to shun more defensive plays where I can. as I have little interest in very low-risk, low-growth, high-yielding stocks unless market conditions look unfavourable.
In inherently risky markets such as the fledging Asian tigers, Cavendish’s hands-on, bottom-up approach to stock-picking comes into its own as an inherent form of risk management. These markets are far more volatile than their Western counterparts and the ability to spot individual opportunities and weaknesses becomes paramount to controlling risk, as does the ability to exit and enter stocks in a nimble fashion. I always enter and exit stocks on a stock-by-stock basis. I’m not one for short-term profit-taking as a rule of thumb, preferring to buy on weakness rather than sell on strength.
GFM: Do you expect your performance or style to change going forward?
LE: By mid-March last year, the very real possibility of economic Armageddon had been priced into equity valuations the world over. As this threat receded, the discount margin has narrowed and we have witnessed a tremendously powerful rally across world markets. Last years was for the most part about trying to limit downside risk and ride the upsurge as much as possible – perhaps truer of Asia Pacific than any other region.
In 2010, we will see a more difficult market with far more sideways trading. Stocks had such an incredible run last year that the pressure is now on for appreciated values to be justified by company earnings, and by a certain level of confident economic recovery. Stocks will be far more vulnerable to profit-taking, and so we will see choppier markets. I would not be surprised if some companies’ prices were to fluctuate by up to 20 per cent in a matter of days. Again, this environment will afford advantages to smaller, more nimble, actively-managed funds.
Nonetheless, certain Asian economies – particularly China, a market I expect to increase my exposure to further going forward – have weathered the financial crisis well, using surplus budgets to fund massive government stimulus packages. While we are entering a more difficult period, including inflationary expectations, there is still not much downside as long as world markets continue their protracted levelling out and upward trend.
GFM: What opportunities are you looking at right now?
LE: The growth stories going forward for China, as well as a number of South-East Asian countries such as Singapore, Thailand and Indonesia, remain compelling, and a lot of money is waiting on the sidelines to move into these markets on a correction. China in particular is very exciting at the moment. Even with the significant correction that some commentators fear, China will still be looking at a level of GDP growth in 2010 that Western economies can only envy.
Thanks to its budget surplus, China as well as other countries such as Singapore have been able to pursue aggressive stimulus packages without destabilising national finances, and the benefit-risk ratio of these fiscal policies will be more favourable than for their equivalents in the West.
Chinese infrastructure is looking particularly interesting, being the primary beneficiary of stimulus investment into public projects. While this has largely been priced into the largest infrastructure stocks, smaller players such as railway component suppliers are more attractively valued, even though they stand to reap similar benefits.
Chinese consumer goods also remain as interesting as ever despite lagging consumer demand in the West. The continued rise of a new Asian middle class combined with a likely global shift away from the paradigm of the export-led east and consumer-led west could boost domestic demand considerably. Consequently, Chinese retail and property stocks look set to provide good value going forward.
GFM: What events do you expect to see in your region in the year ahead?
LE: This year will be a generally positive one for Asian markets as they continue to recover from 2009’s historic nadir. Markets will be less volatile, with more sideways trading and more moderate returns. The regional focus will remain on China and India, and in both territories we can expect to see GDP upgrades throughout the year as demand picks up again from Western markets.
This raises the likely double prospect of inflation and interest rate rises. I expect to see around 3 per cent inflation in China for 2010. While China is quite able to live with this, some analysts are expecting much higher levels of around 5 per cent, which would prompt a serious rise in interest rates.
The problem with interest rate rises is that rates throughout the region are currently on very different cycles. It is likely a variety of Asian economies, including China and India, will raise their rates in the first quarter, and we are likely to see rolling rate rises across the region throughout the year. How much of a headwind these rises will prove for regional growth depends largely on how aggressively authorities feel they need to combat the prospect of inflation.
GFM: Are investors’ expectations shifting between capital preservation and growth? If so, how do you deal with this?
LE: While markets are not yet frothy, we are seeing a considerable decrease in risk aversion. While investors will buy into low-growth, high-yield stocks to diversify geographically, the Asian region is typically seen as a riskier play, and tends to attract investors looking for growth. As the global economy continues to stabilise, more investors will return to riskier portfolios, and markets such as China and India will increasingly become first port of call for a higher growth strategy. In my own portfolio I am always seeking to invest where I see potential for long-term growth, whether in a falling market or not.
GFM: What differentiates you from other managers in your sector?
LE: What distinguishes all Cavendish funds from the competition is their small size. Our funds are far more nimble than the average. Our holdings in any given company are generally small enough to allow us to enter and exit stocks at speed and with ease, without undue admin or fanfare.
Despite improvement, markets the globe over, not just in the Asia Pacific region, remain volatile and visibility low. Economic data, though generally positive, continues to provide a somewhat contradictory picture, and it remains uncertain how a protracted and fragile recovery in the West will harm Asian prospects. In such a scenario the ability to react promptly to sudden events, surprising data and consequent shifts in sentiment is paramount.
Our size also gives us our funds the ability to invest in mid-cap stocks, which in the current recovery play are exhibiting more value than large-cap stocks.
GFM: How do you view the environment for fundraising in 2009? How does this affect your funds?
LE: The environment for fundraising over the next year will certainly represent a serious improvement over the terrible months at the start of 2009. The Asia Pacific region has performed impressively during the financial crisis and subsequent global recession. The numbers themselves speak volumes to investors: the region’s two heavyweights (China and India) retained high levels of growth throughout, and China this year looks set for at least an 8 per cent rise in GDP.
Those Asian economies that were dragged into recession along with the West, such as Singapore (originally predicted to suffer a massive 10 per cent GDP contraction), have enjoyed substantial upward revisions to their GDP figures for 2009. Most Asian economies have been able to enact massive stimulus packages on the back of national surpluses.
This provides a stark contrast to the traditional Western heavyweights, all of which entered recession in 2009 and are currently seeing tepid recoveries. In 2010, the contrast between healthy recovery in the East and fragile recovery in the West will become increasingly marked, considerably influencing investor sentiment.
GFM: Do you expect to see further consolidation in the fund management industry?
LE: Not particularly. Much of the consolidation we saw in 2009 was essentially the result of funds shutting down, or being unable to stand on their own feet due to the severity of the crisis in equities. If we are over the worst, and especially if markets recover as expected this year, the primary driving force behind the recent spate of consolidation will recede rapidly.
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