Harvest Investment Partners manages the Harvest Asia Fund, an Asia ex-Japan, long / short equities fund. Singapore-based Harvest Investment Partners was established in July 2003 by Tiong Jin Yan, Michelle Tan-Chian and Michael Liang. The fund has generated returns of 2.33% year-to-date and 5.51% since inception (November 2003).
- Please briefly explain your investment process and how you combine a bottom-up equity investment approach with a macro overlay?
We believe that Asia is essentially a stock picker's region with information inefficiencies that can be uncovered through a combination of a thorough understanding of the factors that drive different industries and fundamental research on a company-specific level. As such, we divide our stock-picking responsibilities along sector lines, and not the more typical country or North/South regional split. However, recognising that local market effects could, at times, account for a significant portion of stock returns, we have a dedicated portfolio manager who spends his entire time analysing and managing the portfolio's country and currency risk exposures as an overlay on the underlying stock positions.
- Is the macro overlay only to hedge out inherent risks in the equity long / short book?
Our macro overlay manager runs a proprietary quantitative macro model, combined with a qualitative assessment of non-quantifiable factors and technicals, to determine whether and where there are pockets of risk or opportunity at a country level. Given the underlying portfolio of long and short stock exposures, he then makes an active decision on hedging. This active hedging accounts for a majority of his trades. A small portion of risk capital is allocated towards active macro trades where our macro model shows opportunity but where we may not have any underlying stock positions.
- You have three senior managers on the team. How are differences of opinions both over stock selection and sector/country weightings finalised so the portfolio does not become static by inaction?
We believe there is value in independent thinking. Therefore, we have chosen to take a "multi-manager" approach to investment and have carved out our portfolio into three distinct sub-portfolios. Each of the two stock-pickers (Jin & Michelle) makes his/her own investment decisions within his/her assigned sectors, given certain investment and risk parameters. Mike, our macro manager, then applies a macro overlay as he sees fit. There is some fungibility between sub-portfolios so that capital is not idle for lack of opportunity in a particular carve-out. However, where risk management is concerned, we have two levels of control. Firstly, Mike through his macro overlay manages risk on a daily basis. Secondly, we sit down together as a team on a weekly basis to review the portfolio in its entirety, discuss overall investment views and prospective actions. In practice, because we've worked together in a buy-side team for many years before starting this hedge fund, and we sit three feet away from each other, we tend to use each other as sounding boards for our ideas before putting them into action although consensus is not required.
- Is being based in Singapore a disadvantage in following companies based in North Asia?
Of course there is nothing like being on the ground in whichever country you are investing, but there is no way we could be in 11 or 12 countries at the same time! So, Singapore is as good a place as anywhere else in Asia to cover the region. With a critical mass of fund managers on the ground here, and the Singapore government itself being an important global investor, Singapore is a key stopover for company roadshows for both North and South-east Asian companies. We do go on the road regularly to "kick tyres", or otherwise a well-placed phone call or email usually gets a reasonable response from corporate management.
- Moving on to your current market views, are there any specific sectors where you see earnings surprises for the third quarter?
HK/China consumers are coming in slightly better than expected. The early tech reporting is in-line to lower against recently lowered 3Q expectations, and guidance is muted.
- Indices in the "exporting countries" like South Korea and Taiwan are down this month by 3% and 1.2%, respectively (as of October 25) and H shares in Hong Kong are down 3.37%, after rising substantially in September. Is this just a short-term correction due to flows, or do you believe we are seeing a fundamental, multi-month decline for markets in North Asia?
We believe the short-term correction in these "tradable economies" is partly liquidity and partly fundamental. Regional inflows drove markets higher in August and September after the summer lull, and, given the rally we've seen in these markets, it is not surprising to see some profit-taking. Fundamentally, slowing external demand is affecting Asian export momentum, and we expect more headwinds ahead. We think these markets will remain range bound and volatile into year end. Forthcoming economic data (i.e. China, OECD growth) will likely scatter inconclusively around a weakening trend, while liquidity ebbs and flows will exacerbate market movements.
- The macro economic data out of the United States shows a clear slowdown, while the country is in a rising interest rate cycle. This is similar to the conditions in the first quarter of 2000; do you believe that Asian equity markets in 2005 will be a repeat, maybe at a more subdued level, of 2000?
We think there are several fundamental and technical reasons to suggest why 2005 is unlikely to be a repeat of 2000. First, in late 1999, policy-driven Y2K easy liquidity created valuation excesses that corrected painfully in 2Q00. Clearly, liquidity flows this year have been nowhere as exuberant as in 1999. Second, the absolute level of interest rates in 2000 was much higher than rates today. We believe that for this current cycle, the US Federal Reserve's primary objective is to bring abnormally low rates back to a more normal level, and that they will do so only gradually. Disinflation is more of a concern now, in contrast to the 1990s which was a period of inflationary pressure: thus, we expect the Fed to allow inflation to drift higher. Third, we think Asian central banks are more likely to lag and only partially match Fed rate hikes for domestic reasons, and therefore, the overall policy stance is likely to remain relatively accommodative in the region.
- How are you hedging the portfolio against higher oil prices and are you taking off US dollar hedges with the fall in the dollar against Asian currencies?
We have market hedges in oil-sensitive economies like India and Korea. We have been hedging out currency exposures during periods of event risk (e.g. during the Indonesian election) but have generally been comfortable staying long Asian currencies as we feel that Asian currencies are asymmetrically biased towards the upside given their balance of payment surpluses.
- It appears that the commodity theme is returning among Asian managers; are you following this trend?
Not really. With most metals trading at or near all-time highs, we believe there is more downside risk to this sector than upside. Some commodities producers, e.g. steel, have announced new capacity additions and typically this signals the top of the cycle. If China or global demand were to decline, even slightly, the price of the marginal tonne of most commodities is likely to decline sharply, as we have seen recently in the volatility of some of the metals. There is probably less risk to coal and paper / timber at this point; however, the metals, steel and petrochemicals sectors look fully priced.
Tiong Jin Yan
Harvest Investment Partners
+65 6254 8386