Hedge Fund Monthly
Interview with Zaheer Abbas Sitabkhan, Fund Manager of LG Asian Plus Fund
|Matt Schmidt, Eurekahedge
Zaheer runs the LG Asian Plus Fund and has been with LGM
since 1995. He has been involved in managing the fund since
inception and has taken over full responsibility since June
2000. He is a graduate of Case Western Reserve University
and has a MBA from Indiana University.
The LG Asian Plus Fund investment strategy is described as
long/short pan-Asia including Japan and Australia with a long
bias. Stock selection criteria are described as bottom-up
with longs based on management, growth and value. Shorts are
described as chosen on flawed business models and de-rating
Interview with Zaheer Abbas Sitabkhan
- The LG Asian Plus Fund was down 1.1% in June while
most Asian markets fell between 5 and 10%. In April 2000
under similar market conditions, the LG Asian Plus Fund
was down 9.5%. What changes did you and your team make to
prevent a greater fall in the NAV over the month of June?
I think that the biggest difference was that in June
2002 the LG Asian Plus Fund was more diversified. April
2000 was a valuable lesson for me as a manager; the fund
was more concentrated with a higher weighting towards
the technology sector. That was not the case over the
past month. Also, position sizes were much smaller last
month compared to April 2000. This allowed us not to get
hurt by one or two falling names. Finally, we have a much
more systematic approach to trading, stop-losses and overall
risk control today. There are three people who monitor
risk for the fund: myself, the trader and the compliance
officer. This allows me to see investment mistakes early
on and to deal with them more effectively than in early
- With the almost weekly reports of earnings misstatements
and concerns over corporate governance in the United States,
have you begun to change the way you evaluate Asian companies?
No. Analysing the company's cash flow has always been
an important part of our investment process. If one focused
on cash flow statements for companies like WorldCom and
Xerox, you would have noticed the potential for these
current earnings restatements. Regarding the general theme
of corporate governance in the U.S., I don't see it having
a major impact on the rating of Asian companies. Asia
had its corporate governance scare in 1997. Today, our
team is noticing a considerable change to the positive
regarding company transparency. Take for example the Indian
software company Infosys. In the early and mid-1990s there
was very bad corporate governance in Asia, however companies
like Infosys that reported clean and timely earning statements
were rewarded with higher stock market ratings. Others
in Asia have learned from the example of Infosys and are
now seeing many more companies who take corporate governance
What investments/sectors have worked well and which
have not in 2002?
Positive contributors for the fund this year have been
cyclical recovery trades in South Korea, Taiwan, and Indonesia.
Short positions in Hong Kong, Singapore and some in Australia
have also worked very well. Specifically, dollar exporters
have been a great short sector for us along with technology
earlier in the year. On the negative side, positions in
India were a drag on performance during the first few
months of this year. We were right on the company fundamentals
in India but were caught out with the military escalation
during the spring. However, the restructuring plays in
India along with elsewhere in the region are beginning
to help the fund's performance. On the negative side,
our Japan long positions haven't worked out as well as
I had hoped, and we didn't capture the cyclical recovery
story in February.
- Is the falling U.S. dollar a major concern for your
The fund is currently positioned well for a gradual
fall. What would hurt us is a rapidly declining dollar
because it throws into confusion a lot of the growth numbers
that we are assuming. While local demand is good in Asia,
we still need to have a strong export sector to avoid
- At the end of June, the fund's net and gross weightings
in India were close to 12%. What is your team's view on
What we are seeing today in India is a domestic led cyclical
recovery and companies continuing to restructure, thus
creating better top line growth, better utilisation of
capital and rising ROEs -- an unusual and positive dynamic.
Our stock picking is focused on domestic stocks, specifically
in the steel, refineries and oil sectors. Lastly, privatisation
in India has taken on an institutional role, independent
from politics. This should also be a real engine of growth
for the country.
What are your team's views on the geopolitical environment
in the sub-continent?
India and Pakistan have both realized that there is no
real logic for war and tensions have subsequently reduced.
The broad international support to keep the region out
of war is also helpful. Granted there is still a risk
that the government in Pakistan falls or skirmishes continue
on the "line of control"; but given the overall
involvement of the world community in preventing a major
conflict, the likelihood of an all out war has dissipated.
- With the continuation of the United States' war on
terrorism and its possible expansion into Iraq early next
year, the risk premium appears to have increased in equity
markets throughout the world. What type of risk management
systems do you have in place to combat this potential increase
First, we have increased the diversification of the portfolio
by expanding the number of positions and by running a
more balanced long/short ratio. Second, we are looking
to put money into those sectors that are safe havens or
would even benefit from an U.S. invasion and the subsequent
rise in oil prices. These sectors include mining, commodities,
oil and safe currencies like the Australian dollar. Lastly,
we have increased the overall liquidity of the portfolio.
Currently, 95% of the fund can be liquidated in five days.
Liquidity is something I monitor very aggressively.
- How do you address the concerns of investors who are
wary to buy hedge funds owned by long-only managers?
There are two issues in addressing this concern. First,
we are moving forward to segregate the ownership of the
fund, so that my pay incentives are tied to the fund's
performance. I expect that this new structure will be
completed shortly. Second, one of the benefits of working
within an established firm is that we have all the infrastructure
in place. We have trading, research, back office, compliance,
and administration in place. This allows me to focus solely
on fund management.
How receptive were investors to your recent marketing
trip to Europe and the US?
The reception was very good. More meetings than we could
attend. Now it's a matter of following up and making sure
that the investors, who were previously not familiar with
us, feel comfortable with our investment style and performance.
What do you think the capacity of your fund is?
The fund is currently at US$36m. I believe between $200
to $225m at the moment. The fund's strategy is to exploit
inefficiencies in the Asian markets and that limits the
size of what we can manage.
Lloyd George Management (Hong Kong) Ltd
+852 2845 4433
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