“One of the reasons is that information flow in the region is not as good as in developed countries. So if you do your homework properly and you’ve got the resources, you should be able to find a company that still is undiscovered by the market,” Mr Ebrahim says.
This stock-picking strategy - where they invest only in companies they really like without following specific benchmarks weightings - has been reflected in the HSBC range of Freestyle funds. “What we are doing is investing in companies we like based on valuations and fundamentals. We invest in companies that create value for shareholders and we are throwing away the benchmark.”
Across asian region
The HSBC Asian Freestyle fund invests in a portfolio of 30 to 50 stocks across the Asian region, excluding Japan and Australia. “We have limited the maximum weightings for the smaller countries – Thailand, Indonesia and Philippines – to 10 per cent each just for liquidity purposes. In the larger markets we put a cap of 40 per cent,” he says. Launched in April 2004, at the end of May this year the fund was up nearly 20 per cent – in US dollar terms – where the market return over that period was 8.8 per cent. “And we did that with significantly lower volatility,” says Mr Ebrahim.
“This is not a punting fund. It is not looking for short-term ideas to get in and out,” he emphasises. “It is a fund that is focusing on companies that we genuinely think will create absolute returns for investors over a period of time. These are companies that are well managed, have a vision and create cash flow and shareholder value.”
As an example of this investment concept Mr Ebrahim cites Samsung Electronics, a company with an 11 per cent weighting in the regional benchmark. “Even if you hated this company, if you have a fund that tries to outperform the benchmark you would still have a 4 or 5 per cent weighting in that stock. So what we are saying in Freestyle is that we will not invest in Samsung Electronics if we don’t like it.”
This investment style demands huge resources and local presence, which HSBC already has. At present, the company manages around $12bn (€9.9bn) in Asian equities and has 43 investment professionals based in Hong Kong, Singapore, Taiwan and India. This makes the firm one of the largest asset management operations in Asia. And it is about expand further in the next few weeks by adding a China-based team.
Mr Ebrahim is a big fan of China. The Hong Kong-based executive talks about the main reasons why his company wants to have investment professional on Chinese soil. “First there is the business opportunity. China is rapidly growing market with a middle class of around 200 or 250m people,” Mr Ebrahim explains. “Ten years ago nobody really thought that China had a middle class.”
The growing prosperity of the Chinese middle class means the level of savings are significantly rising, impacting on the demand for savings and pensions products. “So we are seeing very exciting opportunities on the business side,” he adds.
“Also placing investment people on the ground in China will help us in developing our research capabilities for Chinese companies and that would make it easier for us to manage funds that are dedicated to China and pan-European mandates where we have Chinese exposure.”
Currently, HSBC manages the largest China-only equity fund that has assets under management of $1.6bn. This added to the assets going into two other Chinese funds managed by the company makes a total of around $2.5bn invested in China, without taking into account pan-Asian mandates with some exposure to China.
“We already have significant money invested in China and we still believe that the market will continue to grow,” he says. “It is still in its infancy and therefore we want to invest in it and build the resources to grow in that market.”
This local presence is crucial for the in-depth research needed to find sustainable companies across the region. “The quality of disclosure [in the region] is still very far from developed countries standards, so being close to the ground gives us some added value,” he explains adding that, contrary to fund managers working in Europe or the US, dealing with companies in Asia requires a certain level of cynicism. “One cannot rely on annual reports or corporate statements. You really need to dig much more into companies.”
Fact checking
“If you are sitting down with a company and they are telling you A, you still have to treat that with a degree of scepticism. You go and talk to company B and check with them if they are seeing the same sort of things. Then you talk to industry specialists, so you really need to double check your information.”
Mr Ebrahim says the attitude towards investment in the region changed considerably after the Asian financial crisis. Before the crisis many investors got excited about investing in the region although they weren’t necessarily making much money out of it. “In fact, unless you timed it very well, you could have lost a lot of money in Asia,” he points out. “However we think the crisis led to a number of significant changes in Asia which continue today, with companies essentially realising that shareholder value needs to be created and that focusing on just building total assets is not going to be rewarding in the long term. Now there is much more focus on the bottom line.”
Also, government policies are now much more balanced and there is a realisation that Asia shouldn’t just rely on exports. “It has large saving rates and a large population and therefore, for a more balanced growth going forward, domestic consumption should be encouraged,” adds Mr Ebrahim.
This new landscape is changing investors’ attitude to Asia investments. In the current global environment where equity returns are not going to be as great as they were in the 1990s, investment in companies that create value and make payouts to shareholders have more potential than simply following a benchmark.
“We are just focusing on companies that really create value. In this trendless world where we don’t think markets are going to go up by 40 per cent in any given year, this type of company will give consistent returns over time,” he says.
It is clear that Asia will continue being the largest growing region in the world and investors are now more willing to increase their exposure to the area. However, the region still remains underweighted in global investment indices but this will change as the equities markets in the region develop further.
“Asian equity markets, and even bond markets for that matter, haven’t developed as fast at the underlying economies yet,” he says. “For instance, China’s reform and restructuring began in 1978 and they have made a lot of progress, but they didn’t open their first stock market until 1992.
Rapid increases
“We now see rapid increases in market size by new economies coming to tap capital markets as they continue to grow. That would lead to growth in the equity markets,” he says. With the exception of Hong Kong and Singapore that are already very developed markets, the future economic growth in the rest of the region will make the overall market capitalisation of Asia much bigger resulting in benchmarks weightings being increased.
Mr Ebrahim believes that HSBC’s Asian roots and presence will help it continue growing in the region. “I’ve been with HSBC for two and a half years and I was with a very successful fund management operation for 11 years prior to that, and we have very good performance. But one thing I’ve noticed very significantly is that with HSBC the access you get to companies in Asia is that much more.
“For Asian companies, especially Chinese companies, this whole concept about shareholders is still very new. Corporate management in China is not used to giving information to shareholders and a lot of these managers view their companies as their own power building exercise in many ways. They see HSBC as very long-term players in the marketplace and we can get access to many senior managers in the region much easier than other fund management companies.”
AYAZ EBRAHIM: THE MAKING OF A CIO
BSc (Hons) in Accountancy and Finance from the University of East Anglia, UK
1985 – Auditor at PricewaterhouseCoopers in London
1988 – Moves back to Hong Kong where he works as an investment analyst at Barclays de Zoete Wedd and then Hoare Govett.
1991 – Joins Credit Agricole Asset Management – formerly Indosuez Asset Management – as an investment manager.
1997 – Appointed as CIO, Asia (ex-Japan) at CAAM, responsible for overseeing the firm’s investment teams in Hong Kong and Singapore.
2003 – Joins HSBC as CIO, Asia-Pacific (ex-Japan) Equities
