The FreeSpirit Group of companies manages and advises on approximately US$125 million of assets. FreeSpirit was founded in 2003 and has offices in Sydney, Singapore and Tokyo. Three products are offered by FreeSpirit Capital Management, a Cayman-domiciled investment management company. The Japan Long/Short Fund was launched in 2003, the Japan Opportunity Fund in 2005 and the Asia Fund, advised by Eric Sandlund, in August of this year. All investment personnel are significant investors in the funds.
- One of your stated investment objectives is to retain a greater than 3% underlying yield. Could you throw some more light on how you uncover underlying yield, and how it ties up with your Asia Fund’s choice of asset classes to invest in?
We are always on the lookout for companies with attractive and growing yields. Screening helps identify the companies with these characteristics. Company visits help us build our confidence regarding discipline and commitment to dividends, and appropriate capital management. There will be times when we will employ fixed income investments to enhance the fund’s yield. Currently fixed income yields trade at depressed levels and are priced unattractively versus history and equity alternatives. This is a function of excessive risk appetites globally.
Does the Asia Fund tend to be long-biased? If yes, has this adversely affected the fund’s performance in the recent spate of choppy equity markets? What is the fund’s average net exposure? What are the typical holding period and turnover of the fund’s portfolio?
The Asia Fund has a long bias due to our belief in the secular growth outlook for the region. We only launched in August and fortunately posted a positive result. It’s probably too early in our history to discuss average net exposure levels and typical holding periods. Our intent is to identify quality companies that are well positioned to participate in the region’s long-term growth.
- Could you also highlight the key features of the Asia Fund, in terms of liquidity and redemption, incentive fees charged, etc?
The Asia Fund is a master/feeder structure, offering a Cayman LP with tax reporting fully compatible with the needs of US investors. The non-US feeder fund is a Cayman corporate structure. The master is listed on the Irish Stock Exchange. The fund offers monthly liquidity, with 30 days’ notice in the case of redemption. The fee structure is 1.5% of AUM base management fee, per annum, and 20% of profits above a high water mark.
- What is the current geographic breakdown of the Asia Fund’s allocations? Could you shed some light on changes to and exposure limits on the same?
Given our recent launch and the fact that the capital was not fully deployed at 31 August, it is too early to make a useful comment about geographic allocation. I would say that we avoid geographic exposure limits. We are aware of liquidity constraints that might limit our ability to invest extensively in some of the smaller markets due to our concentrated-portfolio approach.
- On a more specific note, the past few months have seen market players become more prudent and fundamentals-driven in their allocations to the emerging markets. How is this affecting your allocation decisions in Asia?
We have a fundamental basis for each of our investments. Although emerging markets have been performing well the last three years, they have been a volatile asset class historically and of course, risk and returns are a package deal! We think risk is currently mis-priced due to the recent high global liquidity levels. Emerging markets are best bought when one is getting paid full price for the associated risk.
- The Eurekahedge Asian Hedge Fund Database currently has close to 600 pure Asia-focused funds. What are FreeSpirit’s strengths and competitive advantages over these other funds?
Ultimately, it is for an investor to decide whether we have a competitive advantage. However, we see our strengths in our depth and breadth of experience. I have over 20 years of experience looking at almost all of the Asian markets, including Australia and New Zealand. There may also be an advantage in being able to reference a deep understanding of what is going on in Japan, in discussions with my colleagues in Sydney and Tokyo. Running a concentrated portfolio of 25 to 35 names also entails a very high level of conviction in each of our investments.
- FreeSpirit also has a Japan-focused equity long/short fund in its portfolio. Could you compare and elaborate on the performance of your Asian and the Japanese funds during the past three months’ tough market environment?
It would be unfair to compare the funds – the Japan Long/Short Fund is managed as a “balanced book.” As explained, the Asia Fund will maintain a long bias.
- In your years of investment experience in the Asian markets, what key trends have you noticed in terms of investment style preferences, investment focus, risk appetites etc, in recent years?
The most significant continuing feature of these markets is how investors insist of extrapolating recent trends. That can relate to small cap versus large cap, domestic plays versus export plays, value versus growth, etc. Fortunately, extrapolating the present trend can often present opportunities; think of the short opportunities set up by the rush into large-capitalisation growth stocks which culminated in the TMT bubble bursting in early 2000. Or you can reflect on the terror of SARS which stalked the region in 2003, pushing down the price of risk to almost irresistible levels.
- Currency returns within Asia are diverging, what is the reason and could you elaborate on the fund’s strategies in hedging currency fluctuations?
We always keep an eye on currency. I went on my honeymoon in Bali over 20 years ago and the rupiah had just gone above 1,000 to the dollar. Boy, did it have a long way to go! Currently we see Asia’s currencies benefiting from the dollar’s struggle with twin deficits and a slowing economy. The long-term outlook for Asia’s currencies should remain positive due to Asia’s superior growth profile and bulging surpluses. What worries me on this view is that it is very much consensus at this time. If the region’s currencies begin to look stretched on the upside, we will look to hedge our exposure.
- What is your outlook on the Asian markets over the near and long term? Given investor concerns over inflation and a possible economic slowdown, what sort of opportunities is your fund looking into?
While Asian markets have run well the last three years, the near-term outlook looks subdued. Although the region’s markets do not look expensive on a simple PER basis, ROEs appear stretched and few markets look cheap versus book value. Mercantilist trade policies leave the region exposed to a prospective slowing in the US market. The long-term opportunity remains attractive due to the region’s growth. We think improving capital management and corporate governance will allow minority investors increasing scope to participate fully in Asia’s growth story. We continue to look for well-managed companies, with robust franchises, strong balance sheets and attractive valuations.