The Interview – Mark Martyrossian and Mark Fleming, Tiburon Partners: “In an age of information overload, the key to successful investment is to distinguish intelligence from information”
Mark Martyrossian and Mark Fleming (pictured), partners in Asian equities specialist Tiburon Partners and co-managers of the Tiburon Taipan and Tiburon Taurus funds, believe that the region was unfairly punished last year, underperforming the US and performing in line with much of Europe despite its stronger macro credentials, and that many stocks are trading at dirt-cheap valuations.
GFM: What is the history and background of your company, principals and funds?
MM/MF: Tiburon Partners is an FSA-authorised and regulated fund management business dedicated to delivering superior absolute return investment performance with effective risk management. We have a strong Asian bias in terms of product range, with three Ucits funds investing in the region’s equity markets, and currently offer three open-ended funds: Tiburon Taipan, which was launched in June 2006; Tiburon Taiko, launched in October 2009, and Tiburon Taurus, whose strategy was launched in December 2003.
The executive partners of the business are investment professionals with many years experience of financial markets in successful institutions. Tiburon Partners is structured to allow highly talented fund managers with exceptional track records to concentrate entirely on their core competence for the benefit of investors.
Tiburon Partners was founded by Mark Martyrossian and Richard Pell-Ilderton, who met at law school in 1980 and have worked closely together ever since. They have spent much of their careers in East Asia, including a period together on the board of Crosby Securities where Mark was managing director based in Hong Kong.
Mark Fleming joined the firm as a partner in 2003, having previously been head of international equities for the British Airways Pension Fund. The Asia ex-Japan portfolio of the British Airways AVC Performance Fund (for which Mark had sole responsibility from launch up to mid-2002) achieved a top 1 per cent audited track record over one, three and 10 years in a peer group of 2,000 funds. He is lead manager of the Tiburon Taurus Fund with Mark Martyrossian as co-manager. The same team manages the Tiburon Taipan Fund, a long-only counterpart of Tiburon Taurus, which was launched in June 2006 within a Ucits structure.
Rupert Kimber joined the firm as a partner in August 2009 and is lead manager of the Tiburon Taiko Fund, having previously launched and managed the Belvedere Japan Fund at Belvedere Investment Partners. He began his investment career in 1986 at Cazenove, where he relocated to the Tokyo office and became a partner in 1997. Following a decision to close the Japan business in 2003, Rupert took the bulk of his team to KBC Financial Products in Tokyo and became a managing director.
Tony Fernandes, who joined Tiburon in 2004 and became a partner in 2008, is responsible for managing middle office and IT functions.
In 2008 Tiburon was appointed as one of three sub-managers of the Asia ex-Japan allocation of HSBC’s flagship equity offering, World Selection. In 2010, the firm was appointed sole sub-adviser for Standard Chartered Bank’s Asia ex-Japan Signature portfolio, and last year the same team was appointed as investment adviser and discretionary manager for the Asia ex-Japan allocation of Skandia Investment Group’s Best Ideas fund.
GFM: What developments do you expect to see in your investment sector or industry field in the coming year?
MM/MF: Having recently returned from a trip to Asia, our belief that the region was unfairly punished last year and that many stocks are trading at dirt-cheap valuations remains intact. Even a cursory glance at global indices highlights the anomaly of Asia, underperforming the US and performing in line with much of Europe, despite its stronger macro credentials, which we believe is a very attractive opportunity.
We have clearly not heard the last from the euro soap opera so expect more volatility in global markets, though the change in tone from China and a slightly better US housing environment are positive developments. Nevertheless, Asia remains the cheapest and best option in the equity universe.
GFM: Please describe your investment process.
MM/MF: Our approach is fundamental bottom-up stock-picking in a global macro context. We have a preference for low valuation, but will buy more highly rated stocks if they meet stringent criteria for robustness of franchise, visibility of profits and free cash flow, with attention paid to corporate governance. We believe that despite periods when momentum is driving markets over the medium term by maintaining a disciplined approach to stock-picking along the lines described, investors reap the returns in both up and down markets.
GFM: What is your approach to managing risk?
MM/MF: Tiburon’s risk manager and compliance officer, Richard Pell-Ilderton, is not involved in the investment process. He monitors each of the firm’s portfolios in real time against predefined risk parameters and in the event that any position should breach a hard limit, he has the ultimate authority to take any necessary action to rectify the situation.
We take our relationship with regulators very seriously. Compliance is time-consuming but taking short cuts would be very costly both in terms of reputation and prospects for the business as a whole. Failure to pay due attention to compliance matters therefore represents an asymmetric risk. Richard has a background in securities law and regulation, having practised as a City lawyer in this area for 10 years earlier in his career.
GFM: How has your fund performed?
MM/MF: Tiburon Taipan returned 93 per cent between its launch in 2006 and October 30 last year. The fund was ranked first on a three-year annualised basis in Morningstar UK’s Asia-Pacific ex-Japan Equity peer group of 323 funds as of October 11, 2011.
GFM: Are you looking at any particularly attractive opportunities right now?
MM/MF: There has been plenty of hysterical cock and bull recently about a supposed deterioration in Chinese growth and its potential effects on the commodity markets. The iron ore price has become the touchstone for market sentiment, with copper taking an unusual back seat as the talking heads on CNBC, few of whom could tell the difference between haematite and kryptonite, opine over the likely demise of the steel industry’s main input.
It is certainly true that fixed asset investment in China cannot continue its current heady pace of growth, in part due to the law of large numbers, and that local government finances are in poor shape – though they are probably rather better than those of Harrisburg or the state of Illinois. Social housing, however, is booming, and this will probably at least compensate for any hiatus in private sector housing or railway infrastructure demand, with the latter unlikely to be constrained for long anyway.
As for local government debt goes, read federal, at least in a functional sense. They will not be allowed to default, and recent moves to allow bond issues for the provinces are a step in the right direction. It is also clear that the leadership in Beijing is on the case and is actively targeting an easing in liquidity conditions for private enterprise, including some of the steel mills.
On the supply side of the equation, quite a few major projects are underway in the Pilbara, Brazil and (eventually) in Africa. Yet at current prices of around USD130 per tonne for 62 per cent Fe, approximately 200 million tonnes per annum of domestic Chinese production is marginal, compared to cash costs for the Australians and the Brazilians of around USD50.
Prices may dip below this Chinese cash-negative cut-off for a while, especially as one can now speculate in the futures, but won’t stay there for long. Yet the stock market is valuing many mining stocks on the basis of prices being around 35 per cent below current spot into perpetuity. Too harsh, we feel.
While new sources of iron ore have been identified, several minerals do not enjoy this prospect. Rare earths are once again interesting to us, but we would add zircon and the titanium-rich mineral sands into the mix as well. For mining cognoscenti, the supply-demand imbalance of zircon and high quality rutile (a mineral composed primarily of titanium dioxide) is well known, but the recent fall in markets – as the risk off/China is finished trade took hold – provided an opportunity to get set.
Zircon is a required material for ceramic tiles and refractory materials, while titanium dioxide is the essential ingredient for white pigment. The paint industry has had a free ride on cheap rutile for years, but this is now changing as legacy contracts at artificially low prices run off and are replaced by market-based ones. Supply is constrained primarily by geology and a new pricing paradigm seems set for the foreseeable future. Listed producers of these materials should do very well over the next few years.
Asian markets are full of companies with holding company structures, and most of these have well-defined and often mean-reverting levels of discount to NAV. In periods of intense volatility, it is common to see holding companies and their listed investments move in opposite directions, and this frequently throws up interesting investment opportunities on both sides of the ledger.
Korea is particularly well endowed with these structures, though good opportunities also exist in Singapore and Taiwan. It is common to see 15 to 30 per cent moves in discount terms in fast-moving markets with no change in corporate governance or cash return to shareholders, which are two of the main reasons for these structures selling at perennial discounts. For the patient investor, these represent some of the best opportunities in markets at present.
GFM: What differentiates you from other managers in your sector?
MM/MF: In an age of information overload, we believe that the key to successful investment is to distinguish ‘intelligence’ from ‘information’. The depth and length of our experience in the Asian space provides us with detailed intelligence on a large universe of individual companies and a thorough understanding of how particular industries operate throughout an economic cycle. We believe we are well placed to judge what is discounted in the price and whether this is commensurate with history and realistic expectations of the future.
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