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 Sharukh Malik, manager of the Greater China Fund at Guinness Global Investors.
Which Sector Shows the Biggest Promise in 2023?
The opportunities arising from generative artificial intelligence are interesting from multiple angles. While most of the focus has been on the companies developing the end product, I think there is a strong opportunity for certain hardware manufacturers to benefit too. Compared to conventional servers, some of these manufacturers can sell several times more of their products given the greater processing power of AI servers.
What's the Biggest Economic Risk Today?
Any missteps from the Federal Reserve with respect to taming inflation. Even though the Fed may further increase rates this year, it did not do so in June which some find puzzling. I think their communication to the market has to be clear and the more uncertainty in their messaging, the greater the risk of a negative reaction if they hike by more than consensus.
Describe Your Investment Strategy
I target high quality, profitable companies which give exposure to the structural growth themes in China. Some of these themes include China’s move up the value chain, sustainability and the growing middle class. The quality and profit filter directs me to be better run companies that give the thematic exposure. The process is designed to give this exposure while mitigating the risks involved with investing in China. The strategy is run on an equally weighted basis, reducing the stock specific risks seen in the overall market. The strategy also has a valuation discipline designed to avoid overpaying for future growth.
Which Investor Do You Admire?
A few years ago I stumbled upon a talk from Richard Lawrence, who founded Overlook Investments in Hong Kong. He has been investing in Asia for decades and it was interesting to hear the stories of someone who has been through various investment cycles in Asia.
Name Your Favourite 'Forever Stock'
I don’t believe in “forever stocks” as there are other components to shareholder return which are outside of the company’s control. Even for the best business, there can be times where valuations are too rich and the likelihood of a good rate of return is too low.
What Would You Never Invest In?
I do not invest in companies with a return on capital persistently below the cost of capital. These companies destroy shareholder value and is often a sign that the industry the company is in is too competitive. Some investors target these sorts of companies in the hope of a turnaround, but I think the probability of success is too low.
Growth or Value?
I think this is a tricky question to answer because it seems there are lots of definitions of both growth and value. I target “growth at a reasonable price” companies, which I define as targeting companies which can grow earnings, where I also look to minimise the risks from mean reversion in valuation multiples.
House or Pension?
I think the number of asset classes available in a pension makes it more attractive than a house. With interest rates increasing, I think this makes a pension even more compelling today.
Crypto: Brilliant or Bad?
I think the concept is interesting but because of the lack of regulation, seems to be more bad than brilliant based on the recent headlines in the news. I think some regulation is needed to increase trust in this space. For example, for the crypto exchanges, it seems they need to be forced to hold client funds in a dedicated account, to prevent the risk of comingling the funds with other accounts.
What Can be Done to Improve Diversity in Fund Management?
I think offering internships to students from areas that are underrepresented in the industry is a sensible place to start. Last year we offered internships to students from local sixth forms, to help with data gathering tasks. They got exposure to other parts of the business too so by the end of the placement they had an idea of how a fund management company operates. The internships should make these students’ CVs more competitive for when they later apply for jobs during university. As I discovered myself a decade ago, state school students have far less of a family network to use to obtain internships and jobs, so this is a good idea to level the playing field.
Have you Ever Engaged with a Company and Been Particularly Proud (or Disappointed) in the Outcome?
Yes, I have just come back from a trip to China where I engaged with several of the companies I own shares in. These companies were eager to learn the perspective of foreign shareholders. I made numerous suggestions on where these companies could improve governance and disclosure, particularly with respect to ESG. Encouragingly, these suggestions were taken on board and I expect some will be put forward to the boards of these companies.
What’s the Best Advice You’ve Ever Been Given?
Treating failures as learning opportunities rather than mistakes is very useful for investing. For each stock in our portfolio, we have a qualitative review where some questions have been specifically inserted in response to previous investment mistakes, to minimise the risk of repeating the same mistakes.
What Would You be if You Weren’t a Fund Manager?
Have never seriously thought about it, but maybe in another world I would have studied computer science at university and learnt how to write code.
