Looking for true value in Chinese markets

January 20, 2014  

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A focus on value investing across multiple industry sectors in China, including the TMT and consumer equity areas, helped new entrant Yong Rong to deliver spectacular returns in 2013

 
  Lisa Cheung
Yong Rong Asset Management, a relative newcomer in Asian hedge fund circles that racked up over 70% gains from its China strategy in 2013, is a prime example of how young Chinese managers are making their mark on the Asian hedge fund scene.

Yong Rong takes its name from a traditional Chinese idiom that means "inner peace will lead to more returns", but its culture is decidedly youthful and dynamic.

Founder Huang Yong started his investment career as a foreign exchange and treasury dealer. Hooked on the markets, the young manager landed himself the important role of running a family office, a move that allowed him to hone his investment skills and try out a number of investment ideas with considerable success.

Today, Huang heads the investment and research team at Yong Rong, and manages the $137 million China-focused Yong Rong Global Excellence Fund, which won the trophy for the New Fund of the Year at the AsiaHedge Awards 2013.

While several high-quality new launches have entered the Asian hedge fund landscape recently, the clear winner for the best new fund was the Yong Rong Global Excellence Fund - whose 12-month gain of 72.66% (over a 12-month period between September 2012 and August 2013) and a Sharpe ratio of 2.01 were a testament to the solid value-investing skills of its portfolio management team.

Creating a team spirit
While Huang spends plenty of time obsessing about cash-flows and earnings estimates of investible stocks, he spends just as much time being with his team outside office hours and playing ball with them on Friday, a designated sports day at Yong Rong.

"We often gather around a big table, at lunches and dinners like a family. Friday is sports day," says Lisa Cheung, operations director at Yong Rong.

The time Huang spends with his team gives the hands-on manager an opportunity to get to know his people and make his team feel personally invested in the company. Huang believes that people work better when they are involved in something that they are passionate about and emotionally engaged with.

The firm believes that a great company requires a great culture and great people. "The difference between ordinary and exceptional people is so huge that it is important that we find the right fit," says Cheung. All of Yong Rong's team members have their own focused approach, but always have the firm's core philosophy ingrained in their work life.

"Our analysts are in touch with people in areas they cover and bring meaningful insights that the company can capitalise on. That is how we come up with investment ideas. Huang also comes up with his own ideas and works on them with the team," adds Cheung.

Value-based investing is key
Yong Rong is a deeply value-oriented fundamentals-driven firm. Its strategy aims to keep volatility low by investing in companies that can grow earnings regardless of the economic backdrop.

The firm puts strong emphasis on the process it follows for conducting research and making portfolio decisions - believing that these research and decision-making processes are a primary source of competitive advantage.

While many managers jump onboard market fluctuations, Yong Rong does not do so. "Following trends takes too much time and effort and the effects do not last. We search for the true value of companies. About 90% of the research is done internally. This gives us a unique perspective and enhances our conviction levels. When you know the true value of a company, you only need time to prove you are right," explains Cheung.

Looking at the Chinese economy, there are many significant changes taking place, but the Yong Rong team believes that it is important to capture those events before they happen because that is where the most significant gains will be. As a result Yong Rong looks across many sectors. "Our best finds are the ones whose true value has not been discovered yet," says Cheung.

Yong Rong is never uneasy about keeping a stock until it hits its true value and profit can be made. The team usually goes for the so-called "10 baggers" rather than for 'low-hanging fruit' stocks where gains tend to be quick but small.

"We utilise our time searching for the 10-baggers," says Cheung, quoting a term coined by legendary former Fidelity fund manager Peter Lynch to describing investments that have the potential to increase tenfold.

"We are very focused on what we do. The focus strengthens our convictions. We go for the big win rather than spend time generating small returns from some 'good stocks'," she adds.

The firm invests in Hong Kong-listed shares and also looks at global stocks with China-related themes.

"At Yong Rong, we don't limit or restrict ourselves when searching for investment opportunities. If we believe that a company's true value has not been recognised, we will continue researching it no matter what its size," notes Cheung.

The team scours the vast universe of Chinese stocks in search for opportunities that have a huge earning potential over the long-term.

Striking the right balance
However, trading 'true-value' China companies is not exactly a simple or straightforward thing to do. Cheung says that 'perfect investment opportunities' take time to build. "We need to be sure that we are confident we are doing the right thing. It is quite impossible to be one hundred percent confident, so you always need know how to handle the uncertainties."

Yong Rong is a believer in long-term investment. "It sometimes takes time for the market to realise the value of a company, but we are willing to wait," says Cheung.

Yong Rong follows logical steps to ensure that it adhered to its core philosophy. It started by exploring a strategy closest to the team's heart and skill set - a China-focused fund that can capture alpha in sectors where few dare to tread, such as consumers and TMT.

In the first year since inception in July 2012, the Yong Rong fund benefited most from investing in companies that have an exposure to China. The fund looks across many sectors and found some great opportunities in the TMT and consumer sector. "The global economy is constantly changing, especially for the companies in the China space," says Cheung.

Stellar early results - a gain of over 30% in the first six months - helped considerably to stimulate interest, but the company also lost little time in transforming itself into the kind of asset manager that investors can trust. Through steps such as expanding its business footprint with the help of globally-focused service providers, Yong Rong has worked hard at building an institutional-quality set-up.

From a small initial figure of over $5 million when the fund was launched in July 2012, Yong Rong's assets under management have grown organically to $137 million in 18 months. The fund had a great 2013, with a net positive return of above 70%.

In the meantime, says Cheung, the firm is always evolving. "As Charles Darwin once said, it is not the strongest nor the most intelligent of the species that survives. Rather, it is the one that is the most adaptable to change. We believe this is true - we need to keep on top of the game."

The firm is also in search of new talent to expand the team. "The company is constantly developing and we are always looking for new ideas and new talent," Cheung adds.

A long-term game plan
Value investing will remain a core feature of its investment philosophy, but the company is also open to tweaking strategy in line with market changes.

For now, the firm is resisting any deviation from its main focus to keep its strategy simple, notes Cheung - adding that it is "simplicity [in the strategy] that brings about certainty".

But the team is keeping a keen eye out to detect any changes in the macro environment and industry climate, which may require it to re-look at its strategy.

"We are always on the look-out for some changes in the future. We believe there are many perfect opportunities waiting to be discovered. We will tweak our strategies to make them better, but I believe our core philosophy will remain the same," Cheung concludes.





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