Martin Currie's investment approach
Summary
We manage US$15.7 billion* from our headquarters in Edinburgh. We describe ourselves as the 'big boutique'. In practice, this means we are large enough to command all the necessary information such as data feeds, broker research and access to the best analysts. But we are also small enough and with sufficient liquidity to act decisively and quickly. This allows us to run concentrated portfolios where risk is managed at all levels but the pursuit of superior returns is the main goal.
The key elements of our investment style for Greater China portfolios are:
- An active approach, consistent and disciplined
- Bottom-up, recognising China's inefficiencies
- Growth-orientated
- Bias to smaller, entrepreneurial companies
- Research led, with a strong emphasis on company visits
- On the ground research
How the team interacts
The chart below illustrates how the members of the investment team interact in the management of our China portfolios.
Investment strategy
At 31 March 2010 there were 4,517 listed companies in the Greater China region with a market capitalization of US$6,592 billion.
Sources: Thomson Datastream; Wind information: HKEX, SHEX, SZEX, TWSE. As at 31 March 2010.
Investment process
We have a bottom-up approach with a top-down overlay that enables us to take advantage of the gap between investor perceptions of a company and the real situation. We invest in companies which we think will grow faster than market expectations, recover more rapidly, have undiscovered value about to be realised, or benefit from economic or regulatory changes in a way not yet anticipated by other investors.
Being based in both Edinburgh and Shanghai supports our approach. The quality and availability of research in China is poor, but our large team enables us to take a very labour-intensive approach with regard to research. We typically visit over 1,000 companies each year and never invest in a company where we have not visited the factory, shop floor or building site.
Our investment process allows us to identify, evaluate and exploit change at an early stage in our portfolios.
We believe the following factors to be important in finding the best opportunities in China:
- A credible management owning equity in the company
- High growth with sustainable margins
- A balance sheet unhampered by high accounts receivables and intra-group transactions
We tend to avoid poorly managed state-owned enterprises, except for tactical investments to take advantage of commodity price moves, quasi-monopolies or new policy initiatives.
For our Greater China portfolios we invest in the best companies wherever they are found. Our market coverage include Chinese companies listed on the "A" and "B" markets in Shanghai and Shenzhen, Hong Kong, Taipei, Singapore and Nasdaq.
We also look at macro trends. At present, there is a strong currency and so we tend to focus on investments in the domestic economy rather than exporters. Similarly, policy changes are very important in the Chinese market and we will consider any government action and how it might affect the stockmarket.
Evaluating ideas
Daily discussions take place among team members and ideas are tested and validated against the knowledge of other team members. Ideas are either adopted, rejected or put on hold, pending additional work, or changes in the company's circumstances or stock price.
We hold weekly formal meetings and conference calls linking Shanghai with the regional and sector team in Edinburgh. We also meet regularly with our risk and portfolio analytics team.
Portfolio construction
The listed portfolio is focused, but diversified. The smallest target positions are typically 1% and the largest initial position is 5%, but we can allow this to grow to a maximum of 10% of the portfolio.
Whilst we are aware of the components of benchmark indices, our investment process is bottom-up and we make no attempt to replicate index compositions. Nor do we use any guidelines for weightings by sector. The portfolio tends, however, to have lower volatility and turnover relative to the markets in which we operate.
Direct investment
A unique aspect of the China Fund Inc is our direct investment portfolio. We are able to invest up to 25% of the total portfolio in unlisted companies. These companies offer some of China's most exciting investment opportunities - opportunities that are under-researched and often overlooked. Since 18 June 2007, Martin Currie has managed these investments directly. The China Fund Inc thus provides access to the very best Chinese enterprises - listed and unlisted.
Buy disciplines
- We do not invest in companies that we have not visited. There are a number of reasons for this:
- There can often be a strange dislocation between the real economy and what's reflected in the stock markets
- The quality and availability of research in China is very poor. So there is a lot of self-reliance for research
- China has a 'good news' culture, so there is no substitute for actually getting out and visiting the factory, because what we read in a report or get told by the Chief Accountant's office has often got nothing to do with what's happening on the factory floor
- We do not invest in companies where we are unhappy with the quality of management
- We cross-check whatever we are told by companies with their competitors, suppliers and customers
- We double-check some of the key problem areas in China, particularly major shareholders' other lines of business, cross-holdings, intra-group transactions, accounts receivables and inventories
- We try to accumulate shares in a company when it is out of favour, but where we expect good news
- We make regular phone calls to invested companies to check progress
Sell disciplines
We are likely to sell stocks for the following reasons:
- The rationale for buying the stock no longer applies - typically the fundamentals have changed and the outlook has deteriorated
- Broker coverage and volume picks up substantially, indicating that the stock has become widely recognised by the market, thus reducing the risk/reward ratio
- Management integrity is compromised, for example unnecessary placements, investments in non-core projects, lack of willingness to return surplus funds to shareholders or credible rumours about wrong-doing by senior management
- Directors selling shares
- Top-slicing after strong performance - generally only when the holding exceeds 10% of the fund or when liquidity is an issue
- Idea replacement - another stock idea is far more compelling and cash is tight
- The stock no longer fits within our overall macro or risk parameters
Our China credentials
- Martin Currie has built an international reputation for investing in China. Our formal relationship began in 1997 when we established a dedicated business and opened an office in Shanghai. Today we are one of the largest international investor in the A-share market, where we have over 13 years' experience.
- We have a deeply resourced China team, including two investment directors with an average investment experience of 18 years. Nine dedicated China analysts (plus one trainee) with an average of 10 years' investment experience support them. The team focuses exclusively on Greater China and all members are fluent Mandarin speakers. We also have significant sell-side experience, so are not reliant on brokers, while our contacts at government level are excellent.
- We place a heavy emphasis on our own research, visiting over 1,000 companies in China each year. The responsibility for conducting research in mainland China's 32 provinces is divided among our analysts in Shanghai, two have responsibility for Taiwan company research and one healthcare specialist. Each team member is responsible for conducting regular visits to their particular regions.
Our Corporate credentials
- Martin Currie is an independent firm, owned and managed by it's employees. This enables us to attract and retain some of the most talented people in the industry, who are able to build a long-term equity stake in the business. Our ownership structure means we answer only to our clients, and promotes stability across the team, something that is highly valued by our existing clients.
- Managing specialist active equity portfolios is Martin Currie's only business. We manage US$15.7 billion* for clients around the world, including financial institutions, pension funds, sub-advisory clients, charities and foundations. Our pooled funds include an Oeic, Sicav and range of hedge funds.
- We describe Martin Currie as the 'The Big Boutique'. In practice, this means having the solidity, professionalism and robustness of process of a large investment management business, combined with the distinctiveness, client focus and personal ownership of a small company. Around 50% of our new business comes from existing clients. This is a strong endorsement of the quality of our products and depth of our existing client relationships.
* As at 30 June 2010.
