For professional investors only
Hermes Emerging Asia
March 2013
Jonathan Pines, Portfolio Manager
Characteristics
Strategy AUM £100.9m / $160.0m
Inception date 1 January 2010
Fund Manager Jonathan Pines, CFA
Benchmark MSCI Asia ex Japan IMI1
Absolute Performance 15.7% (annualised) since inception
Relative Performance 9.0% (annualised) since inception
Number of stock holdings 45-60
Typical tracking error range 6-8%
Maximum individual position 10%
Investment style Value with a contrarian tilt
1 Benchmark MSCI AC Asia ex Japan IMI Net from 01/12/2012. Previous benchmark: MSCI Emerging Markets Asia IMI. Source: Hermes; all data as at 31 January 2013. Note: The composite performance record of the Fund Manager is shown for illustrative purposes only and data refers to returns of the Hermes Emerging Markets Asia IMI Active Equity measured in US Dollars, net of 75 bps management fees and costs. Performance shown is illustrative, and a supplemental track record to the Hermes Emerging Asia Fund launched in 1 November 2012. Past performance is not a reliable indicator of future results. CFA® is a trademark owned by the CFA Institute
Hermes Emerging Asia
www.hermesfundmanagers.com | Hermes Emerging Markets Asia 1
Hermes Emerging Markets investment team
2
Gary Greenberg Lead Fund Manager
Global Emerging Markets 28 years’ investment experience
2 years Hermes
Jonathan Pines Fund Manager Asia ex Japan
14 years’ investment experience 4 years Hermes
Samir Patel Deputy Fund Manager GEMS, Latin America
24 years’ investment experience 3 years Hermes
Elena Tedesco Fund Manager
EMEA 13 years’ investment experience
11 years Hermes
Kunjal Gala Investment Analyst
8 years’ investment experience 1 year Hermes
Client Relations
Quant Research
Economics Team
Dedicated Trading Risk Analysis
Performance Measurement
Equity Ownership Services
Investment Office
Supplemented by wider Hermes team — Research, Analytics and Trading
www.hermesfundmanagers.com | Hermes Emerging Markets Asia
Investment philosophy
Quality
Potential Ideas Quality at any price Price at any quality
Pric
e
Dots represent stocks in our universe
We believe alpha can best be generated by bottom-up analysis: by buying high quality companies at a reasonable price or reasonable quality companies at an exceptional price. Jonathan Pines – Fund Manager
www.hermesfundmanagers.com | Hermes Emerging Markets Asia 3
Avoiding quality at any price
Source: Hermes, Bloomberg at 20 January 2013. Note: earnings per share have been multiplied by 10 simply to facilitate better comparison with tangible book value per share and the share price. The stock has never been purchased for the strategy and is not among the stock holdings.
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Book value per share Share price earnings per share x 10
Recent sharp fall on single piece of negative newsflow (increase in royalty rate to parent)
Unilever Indonesia Indonesian rupees per share
Between 2002 and 2012, earnings per share has increased nearly 5 fold and tangible book per share has more than doubled but the share price has increased more than 18 fold
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5
Cyclical vs. non-cyclical
Source: Morgan Stanley, 2012.
Global staples vs. broad market Relative P/E valuation
The current high relative regard in which consumer staples are held by investors are similar to during the 2008 financial crisis; and virtually the mirror image of the disdain that these stocks were held in during the 1999/2000 internet bubble
www.hermesfundmanagers.com | Hermes Emerging Markets Asia
Value opportunity: Cosco Pacific (China)
Source: Hermes , Bloomberg at 20 January 2013. Note: earnings per share have been multiplied by 10 simply to facilitate better comparison with tangible book value per share and the share price. The stock was initially purchased for the strategy in December 2010. and is currently among the largest 10 stock holdings.
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Book value per share Share price earnings per share x 10
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Select mispriced stocks relative to assessment of long-term prospects: more than 90% of names initially identified are ultimately rejected
Size positions by emphasizing downside risk rather than upside potential Invest with conviction: typically hold 45-60 companies with approximately 40% of the portfolio being invested in top 10
Portfolio construction
Top 10 absolute holdings Actual weight
(%)
Cosco Pacific 5.27
Youngone Holdings 4.17
Samsung Electronics (Pfd) 3.81
Gwangju Shinsegae 3.77
Travelsky Technology 3.36
Samsung Fire & Marine 3.24
Hana Financial Group 3.12
China Mengniu Dairy 3.07
China Dongxiang 2.97
Genting Malaysia 2.95
35.72
Portfolio style characteristic
# of standard deviations away from median benchmark stock
Book/price ratio +3.7
Earnings yield +2.0
Dividend yield +0.0
Free cash flow yield +3.9
Debt to equity ratio -2.2
Earnings growth -1.4
Source: Hermes; all data as at 31 January 2013. Note: The composite performance record of the Fund Manager is shown for illustrative purposes only and data refers to returns of the Hermes Emerging Markets Asia IMI Active Equity measured in US Dollars, net of 75 bps management fees and costs. Performance shown is illustrative, and a supplemental track record to the Hermes Emerging Asia Fund launched on 1 November 2012. Past performance is not a reliable indicator of future results. Benchmark MSCI AC Asia ex Japan IMI Net from 01/12/2012. Previous benchmark: MSCI Emerging Markets Asia IMI.
www.hermesfundmanagers.com | Hermes Emerging Markets Asia 7
Capital structure inefficiencies – Korean common vs. preferred stock Examples
Price (KRW) Dividend yield (%) One year price
change (%)
Samsung Electronics common 1,454,000 0.4 32 Preferred (42% discount) 848,000 0.7 25
LG Electronics common 76,300 0.3 3 Preferred (73% discount) 20,500 1.2 -14
Hyundai Motor Co common 210,500 0.8 -9 Preferred (#2) (65% discount) 73,400 2.5 5
Source: Hermes, Bloomberg, 20 January 2013.
www.hermesfundmanagers.com | Hermes Emerging Markets Asia 8
Why we are extra vigilant when analysing Chinese stocks Case studies
Earnings being too consistent with too little volatility
Less well known auditors
Management selling shares or not having a high shareholding
Low effective and cash tax rates
Low cash generation, including high capital expenditure or capitalised expenses
Low dividends relative to earnings
Reverse (back door) listings
Recent management changes
Frequent, apparently unnecessary share or debt issues
Management changes
Highly acquisitive companies
Very high gross or operating margins in absolute terms or relative to competitors
Intelligence from competitors, customers and analysts
Abnormal short selling activity
Company Industry Listing Stock Impact Chaoda Modern Agriculture Agriculture Hong Kong Suspended
China Energy Savings Tech. Technology US Delisted
China Expert Technology Technology US Delisted
China Forestry Forestry Hong Kong Suspended
China Integrated Energy Energy US Stock fallen +75% from recent peak
China Media Express Advertising US Stock fallen +75% from recent peak
China Sky Medical Pharmaceutical US Stock fallen +75% from recent peak
China Yingxia Food US Delisted
Deer Consumer Products Retail US Stock fallen +75% from recent peak
Fuqi International Manufacturer US Stock fallen +75% from recent peak
Fuwei Films Industrial US Stock fallen +75% from recent peak
Huabuo Tobacco Flavouring Hong Kong Stock fallen +75% from recent peak
Longtop Fin. Technologies Technology US Delisted
Orient Paper Publishing US Stock fallen +75% from recent peak
Ports Design Retail Hong Kong Suspended
Puda Coal Energy US Stock fallen +75% from recent peak
Rino International Waste US Stock fallen +75% from recent peak
Sinoforest Forestry US/Canada Suspended
Source: Hermes. For illustrative purposes only.
Potential accounting irregularity indicators Listed Chinese companies recently impacted by fraud allegations or accounting abnormalities:
www.hermesfundmanagers.com | Hermes Emerging Markets Asia 9
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Emerging Markets Asia IMI Active Equity (75bps fees) MSCI Emerging Markets IMI
Performance since inception
Hermes Emerging Asia Equity Strategy GIPS® Composite monthly performance since inception (%)
Up:Down month analysis Outperformed in 88% of
months Outperformed in 57% of
months when the benchmark rose
Outperformed in 70% of months when the benchmark fell
Source: Hermes; all data as at 31 January 2013. Note: The composite performance record of the Fund Manager is shown for illustrative purposes only and data refers to returns of the Hermes Emerging Markets Asia IMI Active Equity measured in US Dollars, net of 75 bps management fees and costs. Performance shown is illustrative, and a supplemental track record to the Hermes Emerging Asia Fund launched on 1 November 2012. Past performance is not a reliable indicator of future results. Benchmark MSCI AC Asia ex Japan IMI Net from 01/12/2012. Previous benchmark: MSCI Emerging Markets Asia IMI. www.hermesfundmanagers.com | Hermes Emerging Markets Asia 10
57%
20%
Quality cyclicals
Cash rich and low PE ADRs listed in the US
Capital structure inefficiencies
Chinese recovery
Current themes and positioning
Sector active weight (%)
Country active weight (%)
-15 -10 -5 0 5 10 15 20
Financials
Telecom. Services
Materials
Utilities
Health Care
Energy
Consumer Staples
Industrials
Information Technology
Consumer Discretionary
-15 -10 -5 0 5 10 15 20
Hong Kong
Singapore
India
Indonesia
Malaysia
Philippines
Thailand
Taiwan
Republic Of Korea
China
Source: Hermes; all data as at 31 January 2013. Note: The composite performance record of the Fund Manager is shown for illustrative purposes only and data refers to returns of the Hermes Emerging Markets Asia IMI Active Equity measured in US Dollars, net of 75 bps management fees and costs. Performance shown is illustrative, and a supplemental track record to the Hermes Emerging Asia Fund launched on 1 November 2012. Past performance is not a reliable indicator of future results. Benchmark MSCI AC Asia ex Japan IMI Net from 01/12/2012. Previous benchmark: MSCI Emerging Markets Asia IMI. Cash position is 2.84%. www.hermesfundmanagers.com | Hermes Emerging Markets Asia 11
Appendix
Sell discipline, portfolio monitoring & risk management
250 stocks
Idea generation
100 stocks
Fundamental analysis
45-60 stocks
Portfolio construction
Universe of 2,500 stocks deriving revenue from Asia ex Japan
Liquidity and size screen Seek companies trading
cheaper than expected relative to quality
Select mispriced stocks
Size positions by considering risk
Invest with conviction
Study financial statements
Write report and project financial statements
Hold discussions with management
1 2 3
Investment process
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Emerging Asia – growing quicker than developed
Source: Hermes, Bloomberg.
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1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
Developed Countries (G10) Emerging Asia
Real GDP growth (%)
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15
Emerging Asia and developed market stock market performance
Source: Hermes, Bloomberg.
Index value (rebased)
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Developed Asia ex Japan
www.hermesfundmanagers.com | Hermes Emerging Markets Asia
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Emerging Asia: reasonably cheap
Source: Hermes, Bloomberg.
Price book multiple of major benchmark countries Price book multiple (X)
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China Enterprise Korea Taiwan India
www.hermesfundmanagers.com | Hermes Emerging Markets Asia
Portfolio Manager’s biography
CFA® is a trademark owned by the CFA Institute.
Jonathan Pines, Fund Manager, Hermes Emerging Asia 14 years’ investment experience Jonathan Pines joined Hermes Fund Managers in March 2009 as Portfolio Manager responsible for Asia (ex Japan) within the Emerging Markets team and launched the Hermes Emerging Asia Strategy at the start of 2010. Previously he was a Fund Manager at RAB Capital and Analyst at Orbis Investment Advisory in London. Jonathan grew up in South Africa, where he was a partner at PKF Johannesburg, Chief Investment Officer of Akul Capital (South Africa) and held non-executive directorships of several listed and private South African companies. He holds an MBA from Harvard Business School, is a CFA charterholder and is a chartered accountant.
www.hermesfundmanagers.com | Hermes Emerging Markets Asia 17
Portfolio Manager’s biography
Kunjal Gala, Investment Analyst, Hermes Emerging Asia 8 years’ investment experience Kunjal Gala joined Hermes Fund Managers in February 2012 as an Investment Analyst in the Emerging Markets team. He joined from Her Majesty's Government, where he worked from October 2008 as an Assistant Director in The Shareholder Executive, the in-house Portfolio Management and Corporate Finance arm of the UK Government. Prior to this he was a Senior Financial Analyst at Morgan Stanley Investment Banking from December 2004, responsible for both business development and execution of M&A / Strategy mandates within the consumer products coverage banking team. Previously he worked for Thomas Cook (India) in the Management Information Systems division (September 2003), and PricewaterhouseCoopers in the Assurance and Business Advisory Service (August 2001). Kunjal has a Bachelor of Commerce from Mumbai University and is a qualified Chartered Accountant from the Institute of Chartered Accountants in India.
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This document is for Professional Investors only. In Australia this document is directed at ‘Wholesale Clients’ only. Any investment products referred to in this document are only available to such clients. Investing with Hermes may be restricted in other countries and as such, any person who receives this document is required to make themselves aware of their respective jurisdictions and observe any restrictions. This document does not constitute a solicitation or offer to any person to buy or sell any related securities or financial instruments; nor does it constitute an offer to purchase securities to any person in the United States or to any U.S. Person as such term is defined under the US Securities Exchange Act of 1933. It pays no regard to
the investment objectives or financial needs of any recipient. No action should be taken or omitted to be taken based on this document. Tax treatment depends on personal circumstances and may change. This document is not advice on legal, taxation or investment matters so investors must rely on their own examination of such matters or seek advice. Before making any investment (new or continuous), please consult a professional and/or investment adviser as to its suitability. Any opinions expressed may change. The value of investments and income from them may go down as well as up, and you may not get back the original amount invested. Any investments overseas may be affected by currency exchange rates.
Past performance is not a reliable indicator of future results and targets are not guaranteed. Investments in emerging markets tend to be more volatile than those in mature markets and the value of an investment can move sharply down or up. All figures, unless otherwise indicated, are sourced from Hermes. For more information please read any relevant Offering Documents or contact Hermes. Issued and approved by Hermes Investment Management Limited (“HIML”) which is authorised and regulated by the Financial Services Authority. Registered address: Lloyds Chambers, 1 Portsoken Street, London E1 8HZ. This document is distributed in Australia by Hermes Fund Managers
(Australia) Pty Ltd (“HFMA”) which is registered with the Australian Securities and Investments Commission (“ASIC”) under financial services licence number 351784. HIML is a registered investment adviser with the United States Securities and Exchange Commission (“SEC”). Telephone calls may be recorded for training and monitoring purposes. Potential investors in the United Kingdom are advised that compensation will not be available under the United Kingdom Financial Services Compensation Scheme.
Important information Hermes Emerging Markets Asia Strategy
CM132186 NonUS 03/13
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For professional investors only
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