In this series of short profiles, we ask leading fund managers to defend their investment strategies, reveal their views on cryptocurrency, and tell us what they'd never buy.
This week our interviewee is is Fiona Yang, asian equities fund manager at Invesco, where she co-manages the 5-star rated Invesco Asia Trust.
Which Sector Shows the Biggest Promise in 2023?
We like the Asian consumer discretionary sector, and it is the biggest overweight sector in the Invesco Asian Trust PLC relative to its benchmark. Cyclically, Asian consumers, especially Chinese consumers, have saved a significant amount of money throughout the Covid-19 period. With the full reopening of China, we are likely to see a surge in consumer services.
We also anticipate a spillover into neighbouring countries as Chinese tourists resume travelling. Structurally, credit penetration across Asian countries is still relatively low as mass market credit is not widely available. We travelled to Indonesia last month and were reminded of the huge potential for traditional as well as digital banks to "democratise" the availability of credit, and in turn expand the Indonesian consumer market.
In addition, we are taking advantage of the recent market volatility to find new additions to the portfolio in a wide range of sectors. We bought into Macau casinos, which could benefit from continued reopening in China and Hong Kong; a pharmaceutical company with a promising innovative drug pipeline; and a cosmetics company with a strong brand portfolio amid rising demand for beauty products in the region.
What's the Biggest Economic Risk Today?
There are plenty of economic risks keeping fund managers awake at night, but I don't see Asia as particularly risky at this point in the cycle. First and foremost, Asia offers the prospect of both cyclical and structural growth. Economic activity is gradually returning to normal and we have yet to see a post Covid-19 recovery in some industries. Many countries in Asia are also at an earlier stage in their economic development, households are still seeing their incomes rise, and further credit penetration is a structural tailwind.
In addition, the Asian market is trading at an attractive valuation – below historical averages at 1.5-times book value and 14-times forward earnings. These valuations have historically been a good entry point for investors. Compared to developed markets, Asia is also cheaper, trading at a valuation discount of 30% versus the US market. My last point is that Asian central banks have adopted a more normalised monetary and fiscal policy throughout Covid-19, so they are not currently suffering from inflationary pressures and policy tightening risk. In contrast to the rest of the world, China is in an easing credit cycle.
Describe Your Investment Strategy
We adopt an active, fundamental, and bottom-up investment approach. We invest with a three- to five-year investment horizon and we buy companies for less than what they are worth. Being contrarian investors, we tend to find undervalued opportunities in areas the market doesn’t like. And for each stock we buy, we target a double digit annualised return, which is driven by a combination of business growth, valuation changes, and dividends.
We also integrate ESG considerations. ESG adoption in Asia is at a relatively early stage, which works to our advantage. As such, we can find companies with the potential to improve and help play a part in their journey. We have an advantage as active, fundamental managers because we already engage with company management daily as part of our research analysis. And we leverage Invesco’s global ESG team’s expertise and toolkit to address particular areas of opportunity and risk.
Which Investor Do You Admire?
Howard Marks.
Name Your Favourite 'Forever Stock'
There's no such thing. We always reassess the fair value of the stocks we own based on the most recent updates. There are many compounders in the fund that we have owned for a very long period of time, but that doesn't mean they'll be undervalued forever.
What Would You Never Invest In?
There is no specific type of company we would never invest in unless specifically excluded by our clients (for separate accounts) or by an Invesco policy. But one thing is certain: we will never knowingly invest in overvalued assets. We are very disciplined about that. Overpriced assets is our definition of risk.
Growth or Value?
In contrast to the last cycle, where growth companies went through an extreme period of outperformance, this cycle will be favourable to portfolios with the flexibility to find value across different styles, and as such offer good diversification. With the cost of capital likely to be higher than during the last decade, valuation matters again. Within the fund, we have a barbell approach combining quality, strong balance sheets, and stable margin companies, as well as "deep value" opportunities. That provides a good balance and positive asymmetry between upside and downside risk.
Overall, we like companies that can compound earnings and returns through a combination of reinvestment and dividends over time. Taking a two- to three-year view, global inflation is likely to fall from peak levels but also likely to stabilise at a higher level. Structural changes such as the energy transition and deglobalisation could potentially spur an investment cycle and the early innings of a more resilient but perhaps costlier/less efficient global manufacturing system. As such, with the cost of capital higher, long duration assets (i.e. growth) may not benefit from the same tailwinds vis-à-vis tangible assets (i.e. value), which still trade at a significant discount.
House or Pension?
Pension. In my view houses are for living in, not for speculation.
Crypto: Brilliant or Bad?
Not so great as a currency. Brilliant underlying technology though.
What Can be Done to Improve Diversity in Fund Management?
The industry is still lagging in terms of diversity and needs more commitment to racial and gender diversity. Admittedly, it is moving in the right direction. The increasing focus on ESG by the investment world is translating into more discussions between shareholders and companies' board of directors to improve employee diversity in the workplace. However, sometimes, the investment companies themselves are slow in promoting diversity.
Have you Ever Engaged with a Company and Been Particularly Proud (or Disappointed) in the Outcome?
Yes. We would incorporate such outcomes into our earnings and valuation multiple estimates for a company. Sometimes, a disappointing outcome has resulted in us exiting positions.
What’s the Best Advice You’ve Ever Been Given?
Stay intellectually curious and hungry for knowledge. Never consider yourself an expert.
What Would You be if You Weren’t a Fund Manager?
I would work at one of our portfolio companies – one where we see bags of potential!
