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Employing a high conviction strategy to deliver returns: Fullerton Asia Absolute Alpha
Fullerton Fund Management’s Asia Absolute Alpha Fund aims to deliver robust returns over a market cycle by pursuing a high conviction strategy that actively manages risk.
The fund, which has achieved an annualised 10.2%1 since its inception in June 2015, tries to identify new investment themes ahead of the crowd, before conducting focused research to select the individual stocks that stand to benefit from these ideas the most.
It also places a strong emphasis on preserving capital. Chief Investment Officer at Fullerton, Ken Goh, explains: “We manage downside risk by challenging ourselves about how we could be wrong with our specific ideas. We tap into the different team members to find the blind spots and take into account everybody’s differences, in order to make the best decision regarding a particular investment.”
The fund invests in a relatively small number of high conviction stocks of companies that are either listed in Asia, or positioned to benefit from the Asia growth story.
“For us, equity investing is about alpha opportunities. We believe that if you are open-minded and take a longer-term view, there remain very good alpha stories in Asia,” Goh says.
However, he adds that when investing in Asia, it is important to constantly challenge your own assumptions and refresh your perspective, as well as having the discipline to act quickly when the situation changes, and exit an investment when the story has played out or been priced in.
“This is a very important part of investing in Asia because unlike developed countries, where you have companies that will continue to execute well for decades, in Asia, the alpha will typically last for very short periods of time, maybe just three years, or even shorter. We have to be cognisant of the fact that when Asia growth stories happen, they can be big, but they may not last for very long,” he says.
Goh cites an example of a China electric vehicle company in which the fund invested. “We avoided investing in the whole sector in the early years because we felt it was premature. The risks were very high, and the market was not ready. Only after following this company for many years, did we decide it was financially strong and we took a bet. It turned out to be a very good call and it became a multi-bagger in a few months.”
But he adds that while the fund held the shares, they continually challenged themselves about what the market was pricing in, in terms of forward-earnings growth prospects, initially focusing on the coming few years, and then looking at the next ten years.
“When we reached the point that we couldn’t justify it, we sold the position. All of this happened within half a year. Currently, the company’s share price is still significantly below the price at which we sold it,” Goh says.
Fullerton, which won two awards for Asian Bonds, as well as being named Best Equity Manager (Singapore) and Fund Launch of the Year (Singapore) and receiving a joint award for Fund Launch of the Year (Malaysia) in Asia Asset Management’s Best of the Best 2022 Awards, takes a bottom-up approach to stock selection for the Asia Absolute Alpha Fund2.
The process begins with a brainstorming session between analysts and portfolio managers, during which they identify six key themes on which to focus resources, spending time fine tuning these ideas before starting portfolio construction.
“Before making any investment, we do very serious due diligence and make sure we are very comfortable in our assessment that the stock would not likely lose more than 10%3. That is our starting point,” Goh says.
The fund’s current investment themes are technology, inflation beneficiaries, green transition, geopolitics, experiential lifestyle, healthcare and cash generators3.
Head of Asia Equities, Brian Wee explains that post-Covid-19 there is a renewed focus on technology migration and digital transformation, particularly in terms of using artificial intelligence, machine learning and high-performance computing to augment the current technology offering. “We also see opportunities in the metaverse, with augmented reality and virtual reality devices over the longer term,” he says.
For inflation beneficiaries, the fund looks for companies with pricing power, either because of a supply and demand dynamic, or because they have a unique offering for which demand will remain resilient.
In terms of green transition, the fund avoids investing only in companies associated with renewable energy, since the investment team believes there is a flawed approach to achieving carbon neutrality. “We realise there are big supply constraints resulting in very high prices for solar modules. Instead, we look at green transition in terms of energy security and companies in sectors such as oil and gas, that are putting in place the right measures to improve their carbon emissions,” Goh explains.
Geopolitics is included as an investment theme because the team thinks it will have a key impact on the world in terms of energy strategy, defence and localisation. Meanwhile, experiential lifestyle looks for investment opportunities arising out of how people will live differently following Covid-19, while the pandemic has also created opportunities for healthcare companies.
Finally, with interest rates expected to remain high for some time, the fund is looking for companies that are able to generate cash sustainably.
“We are in a transition period and we are confident that these themes will serve us through the paradigm shift from a low interest rate and low inflation environment to a new era of high inflation and higher interest rates,” Goh says.
He noted that the fund also integrates ESG considerations into its investment process. “We believe in ESG alpha. We need to understand companies’ ESG proposition, as well as their ESG evolution. As a result, we engage very seriously to ascertain where ESG alpha will come from.
Last year, Fullerton engaged with more than 100 different companies, holding meetings to talk about their ESG strategies and goals. “We know companies well, and we make our judgement on whether they can deliver and are really serious about ESG, and include this in our analysis,” he adds.
Fullerton currently maintains a cautious outlook on Asian equities, particularly on Mainland China. “China’s economy is softening, and this weakness will be felt in the coming quarters. As company valuations come down compared with historic levels, we will look for opportunities,” Goh says.
As at June 9, 2022 approximately 20% of the fund’s assets are held in cash. “Because of the way we construct our portfolio on a bottom-up basis, if we don’t see a stock that can add value to the portfolio, we put that [money] into our cash assets. That is how we think about maximising the upside and protecting the downside,” Wee explains. He adds that cash levels can be adjusted quickly if the team sees the right opportunities.
Goh adds: “It is through being careful, vigilant and disciplined that we manage downside risk. As we enter into an environment that we think will be quite challenging with policy tightening, we have been holding a substantial amount of cash. We have recently reduced some of our cash holdings following the sharp sell-off in China, especially in the internet sector. Our portfolio is also invested in defensive stocks, such as telecoms and high-quality banks where there is not much downside. That is how we will strive to preserve capital this year.”
A strong team
Goh is confident that a key component of the Asia Absolute Alpha Fund’s success is the team of analysts and portfolio managers behind it. He explains that they work closely together and have created a culture in which they challenge each other about whether their ideas or assumptions are correct.
“It is important that we listen to each other, and don’t lose sight of the philosophy and process, and focus on having the discipline to make the right decisions,” he says.
The team is highly experienced, with an average of 17 years in the industry, and its members have worked across many different areas and economic cycles. It is also very diverse, with people from countries across the region, including India, Korea, Vietnam and China. “We have people on the team who know and understand local Asian culture, and that gives us a lot of insights into the way people in these countries are behaving,” Goh explains.
He adds that Fullerton also places a high emphasis on the development of individual team members to help them achieve their career aspirations through recognising the work they do and providing mentorship programmes.
Wee attributes the fund’s success to a combination of having the right philosophy in place and the right team to execute it. “We have a strong emphasis on downside protection and maximising return. It is our philosophy and process that really sets us apart from our peers in terms of our performance. It is a philosophy that has worked and will still work, no matter what the market conditions are.”
1 Returns of Fullerton Lux Fund – Asia Absolute Alpha Class A (SGD) Acc are as at end May 2022 and are calculated on a single pricing basis in USD (unhedged) with net dividends and distributions (if any) reinvested. Offer-to-bid returns is 9.4% p.a. and includes an assumed preliminary charge of 5% which may or may not be charged to investors. Past performance is not indicative of future returns.
2 Please refer to our website for full listing of the awards. Past performance of the Manager is not indicative of future performance
3 Subject to change without further notice
Disclaimer: This publication is for information only and your specific investment objectives, financial situation and needs are not considered here. The value of units in the Fund and any accruing income from the units may fall or rise. Any prediction or forecast is not indicative of future or likely performance. Applications must be made on the application form accompanying the prospectus, which can be obtained from Fullerton or its approved distributors. You should read the prospectus and seek advice from a financial adviser before investing. If you choose not to seek advice, you should consider whether the Fund is suitable for you. The Fund may use or invest in financial derivative instruments. Please refer to the prospectus of the Fund for more information. This advertisement or publication has not been reviewed by the Monetary Authority of Singapore.”
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