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 opportunities.
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 2000.
- 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 very seriously.
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 investment style?
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 another recession.
- 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 Indian companies?
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 in volatility?
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
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