Interview with Madeleine Lee, CIO at Athenaeum Limited
Athenaeum Limited is focused on maximising the risk and return trade off in Asian Equity investment anchored around our low volatility investment strategy. We give investors access to dynamic Asian Markets with managed risks, and are the only low volatility fund in Asia ex Japan equities. Our approach to portfolio management seeks to provide investors with consistent returns, greater capital protection and diversification within Asia.
High conviction stock picking on a thematic basis accounts for 80% of the investment process with the balance of returns derived from the top-down macro overlay. This risk adjusted approach has resulted in consistent fund performance with market relative strength in earnings growth, dividend yield and valuations. The fund has consistently achieved a high Sharp Ratio and has outperformed the MSCI Far East Ex Japan Index by over 32% since inception.
Athenaeum has been advising foundations, funds and high net worth individuals since its establishment in 1999. It was founded in Singapore by Madeleine Lee, who has 27 years of experience in investment management in endowments, pension, mutual and sovereign funds. The firm focuses on Asia ex Japan markets with its core team of investment specialists with a combined 100 years of experience in Asia.
The Athenaeum Asian Equities Fund was up 20% in 2012, outperforming its peers as well as the underlying markets. What were some of the winning themes that enabled this performance?
The outperformance can be attributed to our focus on a mix of defensive and growth stocks given the volatile market condition in 2012. In particular, we avoided stocks with high earnings growth expectations that were trading at expensive valuations as they could easily disappoint.
The fund’s investment themes were evenly split between a mix of defensive and growth stocks. The defensive theme provided a cushion for the fund’s returns during market declines and increased volatility - this segment outperformed massively in the 3Q of 2012. On the other hand, the growth theme was the principal engine for returns that focused on two themes; stocks that were benefiting from growing affluence in Asia and best-of-breed stocks that were able to drive sustained earnings growth within their respective sectors. In 4Q 2012, we shifted some weighting from the dividend stocks to some of the affluent stocks in China and North Asia which were trading on the low side of historical valuations. This in turn, worked well as China began to ease on the macro front and consumption returned.
On the micro-level, we were able to move quickly in and out of our positions as the fund had no pre-determined weighting restrictions. As such, we were able to anticipate short-term shifts in market trends and position our stocks to benefit from these trends.
How has your fund performed during the first four months of 2013? Given that you take exposure to gold via ETFs as a macro hedge, how was your portfolio affected by the sharp price movements in gold?
The Fund was up 6.2% for the first four months of 2013. The impact of the price movements of gold on our portfolio was limited as it was largely designed as a macro hedge and our position was relatively small. The rally in equity markets in April helped to offset the losses in our gold position.
Could you tell us about the qualitative and quantitative research and analysis that you perform on stocks before actually investing in them?
We employ a bottom-up approach to investing that focuses on the stock’s fundamentals layered with secular and macro trends that are affecting the country and region.
In selecting our investment ideas, we maintain a balance of Growth and Value parameters across the portfolio. The essence of the process is to find well-managed companies in Asia with strong and improving Return on Equity parameters. This focuses on the underlying asset values as well as the utilisation of these assets to secure future earnings.
How is your fund different from other funds that trade Asian equities? What sort of an edge does the fund offer its investors?
The fund aims to deliver low volatility risk-adjusted returns to investors. This is somewhat unique in the Asian space. Unlike most funds, we can incorporate an element of volatility management by using macro hedges in commodities and fixed income to reduce volatility. This allows the fund to deliver significant returns to investors without the increased volatility. That said, this element of volatility management does inherently reduce the fund’s performance to other equity funds that do not employ this strategy in a rising equities market, however we have proven that over a five year business cycle this in fact works much better for total returns.
On an average, how many positions do you hold at any given point in time? And how often do you rebalance your fund’s portfolio?
On average, we hold about 25 positions in our portfolio. As we actively manage the portfolio on a daily basis, there is no set period for rebalancing the portfolio; it largely depends on valuations and our view of the market.
How flexible is your fund in terms of its sector-wise diversification? In terms of your exposure to each sector, do you have any cap or restrictions in place?
We manage the stock picks via a high thematic selection process. Allocations to these themes are monitored closely. At the same time, as a drop-out of the process, country allocations are noted, although never decided top-down. There are no restrictions per se other than single stock limits.
Can you please tell us a bit about your geographical allocations? Which country in Asia do you have the largest exposure to? How do you manage currency risk of the different investments?
We do not do top-down country allocation per se. By virtue of bottom-up stock picks, we have a big chunk in high cash flow stocks and thus a good proportion listed in Singapore. That is just the listing country exposure as some of these companies have limited operations in Singapore and only use it as a listing venue. Exposure by listing is not a true reflection of underlying exposure to business and commercial factors. We prefer to be cognisant of the thematic/sector wide risks than listing status risk.
We manage our currency risk during the investment decision process as we factor in the currency and country risk of each investment and how it will impact our returns. On occasion we take a tactical currency trade but these are not the main stay of the portfolio decision making.
Could you tell us about the risk management tools you have in place, that help you safeguard your fund’s investments? Have these changed over the last few years to implement the key lessons from 2008? Has your risk management been more stringent over recent times, owing to the high volatility across equity markets?
We actively manage and evaluate the fund’s positions on a daily basis and engage in macro hedges and fixed income investments to offset any declines in the equity markets. We have benefitted from the higher volatility in markets as by staying with the low-volatility philosophy we have avoided some big losses e.g. in 2008 and in 2011.
What classes of investors (fund of funds, high net worth clients, institutions, etc.) is your fund targeted towards? And what are the types of investors that have shown interest in your fund so far?
Our investors are made up of high net worth clients and institutional funds. The fund does not target any specific group of investors; however, high net worth individuals and family offices tend to be attracted to the lower volatility returns of the fund.
Could you give us your medium term outlook for the Asian equity markets? Any sectors that you are particularly bullish on?
We continue to believe there are always interesting earnings growth stories in Asia. The more important point is valuation. We believe equity markets are starting to get a little frothy as a result of the renewed monetary easing policies from the various central banks. There is just too much liquidity slushing around in the capital markets and this is creating a false sense of euphoria that continues to push the markets higher. Although there are pockets of fundamental growth in Asia, particularly in Southeast Asia, some of these markets have surged such that their fundamentals no longer justify the high prices being paid. Overall, we expect some form of correction in the near to medium term once this euphoric bubble bursts. As such, we continue to hedge our long positions to avoid being caught off-guard when this happens. In the meantime, we have reduced our net equity position in the last weeks to better position ourselves for the ‘earnings growth ideas’ when they come to more attractive levels.