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SAIL Advisors’ Lim sees opportunities in Japanese consumption stocks

Asian hedge funds have rediscovered their mojo this year. For the first quarter of 2013, Asian hedge funds were up 5.68 per cent, according to Eurekehedge. This, in turn, has translated into strong performance in the Asia Equity Alpha Fund managed by Hong Kong-based SAIL Advisors, one of Asia’s leading fund of hedge fund firms. 

Of the 11 underlying managers in the portfolio, three are Japan-focused, while five are China-focused. The other three managers currently run pan-Asian mandates.

And it is precisely the Japanese market and continued opportunities in China equities that have been the driving force behind the fund’s performance so far this year.

As portfolio manager Lanny Lim (pictured) comments: “Having disappointed for a few years, Asian hedge funds are starting to deliver on performance. Japanese hedge funds were up 17 per cent until the end of May, and even China-focused hedge funds are outperforming the MSCI China Index, which is down -4.6 per cent YTD, whereas hedge funds are up 8.7 per cent.

“There are very few asset classes globally right now than can offer the kind of returns being generated by Asian hedge funds when correlations are low and managers are rewarded for good stock picking.”

Thanks to “Abenomics” – a concerted effort to introduce fiscal stimulus to inflate Japan’s market and weaken the currency in doing so – Japanese equities have boomed over the last 12 months, the Nikkei 225 enjoying a +52 per cent increase and spiking at 15,627 towards the end of May before tailing off: the yen has since appreciated to a degree, causing the Nikkei to fall to 13,007 (at the time of writing).

“We have a 20 per cent weighting in Japan and making returns on virtually no net exposure: the majority of our managers are stock picking and trading with minimal net exposure. This has helped our underlying Japan-focused managers return around 22 per cent YTD,” says Lim, who adds that even if the Japan markets were to reverse, “we wouldn’t expect to be unduly hurt.

“Since we have minimal net exposure to Japan, we’re not terribly concerned if the Japan rally finishes. For instance, during the 12 per cent intra-month Nikkei sell-off in May, contribution from our Japan managers was largely flat.”

Lim believes that while export stocks in Japan have had a great run (because of a weakened yen), the next exciting trade opportunity will be in consumption stocks. “The Japanese government is due to vote on a VAT increase in July, and we expect that to go through. We have therefore increased exposure to one of our Japan managers who is a mostly domestically-focused and a consumption sector specialist.”

A lot of the easy money in Japan is already done in Lim’s opinion, by which he means being long the index and short the yen. In his view, the real economy is likely to be a beneficiary in 2H13, with consensus earnings estimates of 50 per cent growth; although this will largely be a result of the currency impact as opposed to growth in volume and prices, which may come later. As a result, Lim remains optimistic on Japan, noting: “If the government pushes through the VAT increase from 5 to 8 per cent and continues to give people more confidence in the economy, there’s reason to remain optimistic. Some companies will benefit tremendously and that’s where our managers’ stock picking skills become advantageous.”

As for China, even though its markets have had a difficult run since January (the Shanghai Composite Index is down nearly -4 per cent YTD), Lim says that the fund’s underlying managers are up more than 10 per cent, on average, through May.

“A number of sectors have been strong, which our managers have been able to capture. One is property, which did well in January. Utilities has been a good performer, as has pharmaceuticals. We are overweight those three sectors and underweight industrial stocks.

“A lot of our managers are now starting to look at cyclical stocks, in addition to property. Power stocks are also looking very attractive. If the China markets do well in the second half of the year, I don’t see why we shouldn’t target double-digit returns in the portfolio for 2013.”

Welcome news to SAIL Advisors’ investors, and no doubt those looking to increase their exposure to Asia Pacific stock pickers.

What is encouraging, with respect to China’s managers, is that they seem to have matured and concentrated on bringing down their risk profile; indeed, after the ’08 financial crash, a lot of Asian long/short equity hedge funds went under because they were simply too long biased. That now seems to be changing, with Lim noting that China managers are becoming “more savvy” in building short positions.

“Prior to 2008 most of these guys just did index shorts. Now, they are doing single name shorts so they’ve become much more active at shorting in their portfolios, which has been an independent development.” It also means that even when the markets are floundering, these managers are learning to lock in performance.

Asked if SAIL Advisors were thinking of adding any additional managers to the Asia Equity Alpha Fund, Lim says:
“Right now we want to keep it fairly concentrated. We don’t want more than 12 managers in our long/short equity portfolio so as to avoid becoming so diversified that we end up looking like an index. It’s making sure we have the right mix of managers in the portfolio to make money in market rallies, but who can stock pick well enough to ensure that if markets flatten off or fall, they can still help us make a decent return.”

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