In an exclusive interview with The Asset, a spokesperson for China Universal Asset Management (HK) reveals some of the company’s investment strategies and approaches, and how it has adjusted its portfolio in view of such events as the pandemic and US-China tensions.
Could you share your investment methodology?
Long-term and active management are two keywords for China Universal’s investment strategy. Long-term means focusing on long-term business and investment while short-term dynamics cannot present the full picture of the future. What matters most are the fundamentals behind. In terms of active management, in the A-share and H-share markets in particular, we often see good sectors and companies outperforming the index. So what asset managers need to do is to make an accurate judgment for companies and industries and select valuable underlying assets. As a professional active asset manager, this is the value we need to create for investors.
Take CUAM China-Hong Kong Strategy Fund as an example. The fund sticks firmly to the consistent investment philosophy of China Universal. They are all based on fundamental analysis, researching the company's financial strength, business models, competitive advantages, entry barriers and so on. We hope to select good underlying assets and make a medium- to long-term investment. After including stocks into our portfolio, we will generally hold them for a long time and avoid frequent short-term trading.
If we happen to have picked the right stocks, then we will make friends with time and achieve returns from organic business growth. Even if the growth potential at present has not yet been priced in, a higher valuation will still be achieved in the future. So the key to secure a sustainable and stable return is to choose a high-quality company.
In terms of asset allocation, we hold the principle called “balanced industry allocation with concentration on several stocks and dynamic portfolio adjustment”. As an active manager, we do not assign a percentage target on each industry before we make an investment. Instead, we use the bottom-up approach to screen out all the companies that we are interested in. After an in-depth analysis, we will include companies that meet our stock selection criteria into the portfolio. Therefore, the industry allocation is just a result of what we do. We are unlikely to bet on a certain industry because the probability of winning consecutive bets is very small. In the end, it turns out that our industry allocation is similar to that of the major market indices.
We hope that those well-researched and high-conviction stocks will get a high proportion in our portfolio. For example, the public mutual funds can only invest a maximum of 10% of its net asset value in securities issued by a single issuer and some of our top ten holding companies are actually close to the 10% cap and they are the ones that generate alpha to us. Meanwhile, we will still adjust our portfolio as we monitor the market. For example, in the fourth quarter of 2019, we adjusted our portfolio as the Hong Kong social event impacted tourism and the real estate sector. During the pandemic, we overweighed some pharmaceutical companies with research and development capability and competitive advantages.
Did you adjust your asset and sector allocation during the pandemic?
In terms of asset allocation, we have a major position in equity, which has constantly been in a relatively high range in our portfolio. Mutual funds pursue relative returns, so we keep a relatively constant equity position and try to seek an extra return through industry allocation and bottom-up stock selection.
In terms of industry allocation, firstly, our investment style is relatively balanced. Back to the bottom-up approach, we select good sectors, companies.. Secondly, we look at the business models. A good business model is the key for a company to win against the competition. Ideally, it will be a replicable business model, which determines the speed and possibility of future expansion. In the pharmaceutical, internet and consumption industries, for example, these sectors have more opportunities because products and services are relatively easy to replicate. Cyclical industries like chemicals and coal, which rely on resources, are difficult to replicate. Each company has its own business model, so we need to select the right ones through in-depth research and thinking.
Thirdly, we look at the management to see if they have entrepreneurship, good corporate governance, and desirable relationship between shareholders and management. The above factors are very important as they determine whether the company can grow bigger. At the same time, product, strategy, talent, and corporate culture are also critical.
In terms of industry allocation, we have made some adjustments due to the Covid-19 pandemic, social event, and US-China tensions. For example, in the consumption industry, companies that do condiments and consumer staples benefited from the longer time people spent at home. In addition, the pandemic accelerates the popularization of work from home and online learning. The proliferation of online teaching, online meetings, e-commerce, logistics, online and offline collaboration, helped some companies expand their market share. In the face of such trends in these industries, we have also adjusted our portfolio.
Major blue chips accounted for a large proportion of your top five holdings. Could you share which types of companies China Universal favour?
We have been monitoring some industry leaders and high-quality assets for a long time. And investment is a forward-looking behaviour. If you fully understand the competitive edge of the companies, you would not be affected by short-term fluctuations and would be confident in holding them. But before that, you need to have deep understanding and research on the companies.
The company we like must have a good governance structure, a management team with entrepreneurship, a good business model, and competitive advantages. These factors are possessed by many leading companies. So that’s why industry leaders account for a large proportion of our existing portfolio, which is the result of bottom-up stock selection.
How do you reflect the investment capabilities when you focus on investing in leading companies?
To test a chef, you do not necessarily need peculiar food. Good chefs can turn the most mundane food into gastronomic masterpieces, and investment managers are the same. Although they are all reputable companies, each fund manager can have different understanding and perspective towards the same company. The stock price not only reflects the market view on the company’s valuation but also reflects the view on the industry and the future growth potential of the company. If an investor does not understand the company well, maybe there is a blind spot. So back to the original intention, we picked good assets and evaluated the fundamentals of the company, profitability, business growth, sustainability, management, product and service.
How do you see value versus growth?
The performance of value stocks and growth stocks have diverged this year. Consumption, medical, and TMT stocks did better than value stocks. The value stocks in Hong Kong are impacted by the economic downturn and the pandemic, and these are all predictable. When we select companies, we do not see them by value or growth, but follow the bottom-up selection principle and fundamental analysis. We maintain a balanced portfolio. Some fund managers can predict when the themes will be switched, but everything is still based on corporate fundamentals analysis. Investors will naturally make the switch after sensing the micro signals.
Why did the fund outperform peers?
As a company focusing on stock selection and fundamental analysis, we do deep research on the companies. We understand the company, the business, the rules and the characteristics of the industry. Those advantages all come from the years of experience of in-depth fundamental research. Since China Universal was established, it has committed to being an expert in stock selection and finding outstanding companies. We have a large professional and experienced research team. In addition, the stability of the team and the methodology are also very important. Our team is very stable and our management and investment style is also evolving. At the same time, our good investment style and methodology can be inherited organically.
What are some of the opportunities and challenges in the future?
Opportunity: Since the launch of the Stock Connect, the two markets have become more integrated. The southbound investors started by buying blue chips, and then some familiar names in mainland China. Now, they have already deep-dived into Hong Kong stocks. The southbound inflow is also increasing and the proportion continues to increase. We saw greater interaction in terms of investment ideas and underlying assets. At the same time, the northbound investors are also very active, given that there are a lot of good large A-share companies. As the Hong Kong Stock Exchange's trading system becomes more friendly and inclusive, and more Chinese companies return to list in Hong Kong, we will see more good companies and investment opportunities in the market.
Challenge: With more listed companies in different industries, how to quickly understand the industry and the changes in the industry will be a challenge for fundamental researchers. Our team also continuously strengthens our ability to learn, monitor and research. At the same time, as our business continues to expand, we will have more team members to deal with those market opportunities and challenges.
