The Billion Dollar Interview: Eric Anderson, Managing Partner at Milltrust International LLP
Milltrust International is a global investment firm that provides institutional investors with a platform of world-class regional Emerging Markets Funds each managed by leading locally-based investment managers. Milltrust now has five actively-managed and unconstrained Emerging Markets Equity Funds (Greater China, India, Brazil, Latin America and South East Asia) structured in partnership with State Street who are providing the independent custody, administration and transparency for the funds.
The Milltrust Value Partners Greater China Fund is a transparent and liquid EU domiciled UCITS fund which invests in Greater China equities primarily focused in the large cap sectors across China, Hong Kong, and Taiwan. The team pursues a fundamental bottom-up research approach with a disciplined focus on value which allows them to take high conviction positions within the portfolio. The strategy also allows for some flexibility on hedging.
Eurekahedge: The Milltrust Value Partners Greater China Fund delivered 13.42% in 2012. Which allocations across different industries and asset classes contributed the most to these returns?
Last year was a macro-driven, roller-coaster year for the stock market when value investing was put to a severe test. Fortunately in the last few months of 2012, undervalued companies with strong fundamentals were rewarded by the markets allowing stock-pickers to benefit. The performance for the Milltrust Value Partners Greater China Fund has mainly come from company-specific cyclical names with favourable valuations, predominately in the financials and real estate sectors as the fund anticipated and positioned itself for a recovery in the second half of 2012. The fund also enjoyed positive contribution from some key consumer related positions, as well as industrials.
EH: The monthly returns of the Milltrust Value Partners Greater China Fund differ from the Value Partners Classic Fund, which is supposed to be the ‘reference fund’. How do you account for these differences? How do the investments of these two funds differ?
The Milltrust Value Partners Greater Fund, while following the same investment process as the Value Partners Classic Fund, has some intentional differences. For instance, the Milltrust mandate was designed to focus on the Classic Fund’s best ideas with a more concentrated portfolio of 40 to 75 positions as opposed to the 80 to 100 positions typically held in the Classic Fund. The Milltrust fund will also have a slightly higher bias towards some of the larger caps in Greater China ensuring a higher onus on liquidity for the benefit of investors.
EH: In your quest to sign on an Asian manager to the Milltrust Emerging Markets Managed Accounts Platform, what were the key reasons that led you to choose Value Partners?
The investment team is experienced, large, fully embedded in the Greater China economy and we believe, has an informational edge in the region. Value Partners has been actively investing in the Greater China capital markets since 1993 and has emerged as one of the leading and most prominent investment firms in Asia with US$8.1 billion in assets under management. In 2007, Value Partners became the first and only publicly listed asset management firm on the Main Board of the Hong Kong Stock Exchange. The funds are managed by a highly reputable and award-winning team led by Cheah Cheng Hye (Chairman and Co-CIO) and Louis So (Deputy Chairman and Co-CIO) and supported by a team of 38 investment professionals leveraging off the firm’s 20 year history of network connections, stock analysis, and company research in the Asia-Pacific region. These are some of the key reasons that differentiate Value Partners from many of its peers in the region.
EH: With the exception of 2H 2012, the last two years have witnessed sharp downturns and high volatility in the equity markets, coupled with wide swings among other key asset classes which have significantly impacted a number of managers. As a long-biased fund, how is the Milltrust Value Partners Greater China Fund designed to handle such movements?
A strict value investing discipline has been at the core of the Value Partners' investment philosophy throughout the years. In a period of slower but higher-quality growth, fundamental research will play to the fund's advantage as company performance tends to become more differentiated; these are times when bottom-up stock picking can best capture value for investors. The Milltrust Value Partners Greater China Fund pursues the same investment diligence that has proved so successful for Value Partners since 1993 across many market cycles. As such, volatility is inevitable and should be expected – although Value Partners’ fundamental stock picking and value approach should help reduce market risk in favour of company specific risk which is more manageable to assess. The Fund also has the flexibility to mitigate market volatility through the use of futures hedging and cash.
EH: How flexible is your fund in terms of its diversification sector-wise? Do you have any cap or restrictions in place in terms of your exposure to each sector? How do you manage the limits imposed by the managed accounts platform on the underlying fund?
The Fund strategy is fairly sector agnostic, focusing more on bottom-up opportunities which allows the manager to invest opportunistically throughout the region. There are concentration limits at the company level which are monitored weekly by the Fund Trustees and daily by the Platform-dedicated team from State Street. The State Street team also monitor the investment guidelines of the Fund on a daily basis. This is in addition to the usual checks and monitoring performed by the underlying manager.
EH: What is the advantage of investing in a long-biased Asian equity fund via the Milltrust Emerging Markets Managed Accounts Platform versus investing directly with the fund? More generally, what are the advantages of investing through a managed accounts platform?
The demand for greater disclosure is one of the most positive outcomes of the global financial crisis today, with investors increasingly looking for the investment management function to be separated from the fiduciary role, where the duty is first and foremost to the investor. Similarly, as global investors increasingly look to shift assets to the growth economies of the world, such as China in this case, a platform approach will become increasingly relevant, helping investors fulfil their fiduciary obligations and better understand the risks embedded in their client’s portfolios.
The Milltrust platform, established with State Street, is wholly non-conflicted and offers institutional investors greater control designed to answer the demands of institutions who need the assurance that their clients' money is safe and unencumbered at the custodian. Controlling the portfolio through a compliant custodial account also permits enhanced liquidity and transparency. Relative to a fund that is controlled by the manager, where the manager would determine the frequency of information imparted to the investor, the Milltrust Funds allow investors to see where the returns have come from and what risk has been taken to achieve them.
Importantly, all the costs associated with the provision of the Milltrust managed accounts platform are embedded within the management fees so that the cost of investing through the managed account structure is no more than investing directly into the fund. This belt and braces safety does come at a cost but we absorb this from the fees we earn.
EH: What is the reasoning behind subscribing to the UCITS IV regulations? What effect has subscribing to these regulations had on your fund’s operations in Asia? Has it limited your ability to post stronger returns or take positions in higher yielding instruments?
The UCITS IV designation brings another independent layer of governance and regulatory oversight to the portfolio on behalf of Fund investors. Critically the UCITS guidelines do not restrict the operations and investment approach of our investment teams in any way. The individuals at Milltrust have been promoting increased transparency and safety of assets for several decades now, so subscribing to the UCITS regulations was a natural fit for our team and products.
EH: Asian funds have faced a difficult time in raising assets over the last two years while you have managed to raise US$1.4 billion. What was your fundraising strategy that helped you to achieve this in such an environment?
The first step required for a successful fundraising strategy is often said to be performance. At Value Partners, the primary focus of the investment team is to deliver outstanding performance to investors through a diligent and time-tested investment process focused on value that the firm has refined over 20 years. The team carries out over 2500 company visits a year which serves as a reminder that performance comes with hard work and is facilitated by having a local on-the-ground presence, a strong knowledge of the investment universe, and a skilled investment team. Both Milltrust and Value Partners also recognised the increasing demand from institutions for more transparency and regulated fund structures which led to the launch of the co-branded Milltrust Value Partners Greater China Fund. Once all these ingredients are combined, a dedicated sales force capable of conveying the Fund’s strategy and the sound investment opportunities pursued within the region are key to raise investor awareness.
EH: Would you like to comment on the profiles of investors in your fund and how you think the fund would be suitable for a potential investor looking to gain exposure through the growth in China (or Asia)?
All our clients are institutional in nature although the Milltrust Value Partners Greater China Fund is suitable for all investors looking to gain exposure to the growth in China by accessing the Value Partners' award-winning investment team, with the additional benefits of greater transparency, daily independent risk monitoring, better liquidity safeguards, and greater control over assets at no extra fees.
EH: With regards to the Milltrust Value Partners Greater China Fund, can you provide examples of tactical macro overlays and in which situations you will (or have in the past) used them?
The investment team uses macro overlays as a way to protect the portfolio from downside beta, especially during periods of high market volatility. Historically the team has put on around 10% of macro overlay via index futures; mainly used as portfolio protection measures. In the last six to eight months, no macro overlay was actively deployed as the markets rallied during the second half of 2012.
EH: Which sectors do you expect would do well in 2013 in Asia and globally, and what are your assumptions for your preference for these sectors?
In the Banking sector, currently one of the largest allocations in the fund standing at 18%, the team has taken the view to switch exposures from the larger banks, which had been the theme of 2012, to some of the smaller banks. The small banks have suffered more recently due to the shorter duration on their loan books; however, now, with the bulk of the re-pricing done, it provides an interesting entry point whereas some of the larger banks have yet to go through this process.
In China’s property market, one of the world’s most important sectors impacting a range of industries from commodity to power generation, the team believes that a fine balance is being maintained between price and demand. While the government has vowed to keep property market regulation in place, further tightening is unlikely when there is no sign of over-heating. To reduce over-investment in property, real estate tax might be expanded to cities besides Shanghai and Chongqing, but it will likely take the form of pilot schemes before going nationwide. Meanwhile, we may continue to see a dual-track development, with commodity housing for the relatively wealthy and social housing for the low-income group. The two-tier system will serve the government’s purpose in a balanced growth for the sector. The sector appreciated last year on recovering transaction volume supported by genuine demand emerging after the implementation of tightening policy for the past two and a half years. The team remains engaged in this sector, and anticipates that real demand will continue to return, boosted by steady income growth for urban workers and continued urbanisation. The team has gradually begun to switch from property companies exposed to the 3rd tier cities to those exposed to the first and second tier cities in China.
Domestic consumption also plays a dominant theme in the portfolio with 20% of NAV, particularly in the Autos space, Textiles, Casinos, Beverages, and Cosmetics.