David Webb founded Wellam Investment Ltd. in March 2000, the firm is based in Hong Kong. Prior to establishing Wellam, Webb was MD and head of Asian equities at Chase Asset Management in Hong Kong since 1992. David currently runs the Hidaro Fund, a Japan equity long/short fund employing both a relative value and directional strategies. David is supported by Hitomi Sugino who previously worked with David at Chase and has been in the Japanese securities market since 1982. The Hidaro Fund was launched in February 2001, prior to which David and Hitomi were running a segregated account with the same strategy. The Hidaro Fund was -1.64% for July 2002 and is +2.70% YTD at the end of July.
Interview with David Webb
- How much money is in the Fund and how is fund-raising proceeding? What is the maximum size of the Fund?
We are currently running a total of US $101 million, $67million in the Hidaro Japan Fund and $34 million in a segregated account run par passu to the hedge fund. Right now, $200 million is the maximum that they will run in the strategy. Though we primarily invest in large capitalisation names and could handle more than $200 million, more than that amount would inhibit our ability to be flexible.
- What is the status for the organisation?
The Firm [Wellam Investment Ltd.] currently has two investment professionals, myself and Hitomi Sugino, and an office manager and one settlements officer. The plan is for us to add one more analyst to be based in Hong Kong and another operations manager. We are also moving to a larger office in Central from Causeway Bay [both in Hong Kong].
What has made and lost you money in Japan this year?
So far this year, the investments have worked well. During the first half of the year we benefited a lot from stocks that we thought represented good value but were sold off in November and December last year. What we liked about those names was that management was trying to restructure and the stocks were undervalued and oversold, pricing in a financial system collapse that we believed wasn't going to happen.
For the investments that didn't work for us we need to focus on June and July. In June we had the right view that the yen would strengthen and exporters would fall, but exporters didn't come down much until July. In July we were down 1.64%, most of that came towards the end of the month. There wasn't any one thing that caused the drawdown; there were a couple of bad days where our longs and shorts didn't perform well in the pair-trading strategy
- What themes and sectors are you currently finding interesting in Japan? Outlook for the next 6 months?
We do a lot of company visits, around 300 per year and there is not any single sector that we are particularly positive or negative about. What we are finding is a lot of interesting stocks for both the long and short portfolios in a whole variety of industries; this corresponds with our investment process where we go and see companies and form our views from that instead of from general sector themes.
However, on a strategic point of view: we think the exporting and technology sectors are interesting. With exporters you have to take two things into account: a) what happens to the currency and b) what happens to the U.S. economy. If you were to become bullish on the US economy and believe the yen will weaken then you have to expect the export sector will do well since it came down a lot from its May/June highs. The general story is that technology orders and the general business cycle bottomed in November of last year; then after Chinese New Year there was a significant pick-up in business and recently there has been more of a slowdown and the visibility has become muddled. Year on Year numbers for June have improved but margin erosion has picked up. The September results season is going to be very interesting, one will have to take into account their holdings' currency forecasts and look at actual first half performance numbers relative to expectations. I think there will be volatility in the next couple of weeks; there will be both positive and negative surprises. The next couple of months will be quite testing.
- 10% of the Fund can be allocated outside of Japan; are you currently invested in other countries?
We have some investments in Australia, but they are quite small both on the long and short side (David Webb used to run an Australian fund). The Asia ex Japan positions have always made up a very small portion of the Fund. Investments outside of Japan always complement our stock picks in Japan.
You run a balanced portfolio between Jones model equity l/s and relative value; which style are you focusing on today?
The pair-trading strategy has historically been around 70% of the portfolio's gross exposure. Today, it is at a lower level, around 50% of the gross exposure; that is a factor of our low gross (60%) instead of a shift to a straight long/short strategy.
- It seems that there are differences of opinion on whether corporate restructuring is really progressing in Japan. What are your thoughts?
I believe that the current situation, which has been the same for the past 12 years, cannot continue. I am very optimistic that changes are coming, but not optimistic that it is good for the country since these changes will likely result in an increase in unemployment, decline in tax revenues and strains on the social security system.
If you look at the overall pace of change, it is still slow by western standards. However, if you look at some specific companies, the change is quite drastic. The more the market gets a hold on these stories, the more they will reward the companies that are legitimately restructuring. The problem to date is that investors have been bitten once or twice by Japanese companies which said they were restructuring but weren't serious about it. Those that have seriously changed their business models were rewarded.
So going forward, some companies will continue to make significant changes in their business models, like drastically cutting costs by pulling their manufacturing out of Japan and into China. Other companies won't be able to achieve that and they will likely disappear. This is a good environment for a pair-trading and stock picking strategy, since there will be clear winners and losers over the next few years.
Wellam Investment Ltd
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