Whether she’s sipping tea with Indian dairy farmers or interrogating company executives in a Hong Kong skyscraper, Elina Fung brings the same techniques to finding stock market winners.
During multiple trips to central India — and many cups of masala chai — Fung says she questioned farmers about cow numbers, the variability of the monsoon season and how their milk is collected. It’s intelligence she then used to go bullish on Indian dairy company shares, and reflects an almost forensic approach to investing informed by Fung’s time as an auditor.
Four years at Ernst & Young LLP gave the Hong Kong-based fund manager some handy skills for navigating her current universe: the at times murky world of Asian small-cap investing. Now at HSBC Asset Management, Fung’s $1.3 billion fund — which invests in smaller companies from Singapore to South Korea — is streaking ahead of its peers, with demand so strong she’s had to stop taking new money.
“In the small-cap space, the first thing that comes to investors’ minds is corporate governance,” Fung said in an interview. That’s why you have to get on the ground, she says, whether it’s venturing into rural India, or checking out factories in China. “If you don’t go there you would feel like you’re just investing based on what you understand on paper. You don’t get the sense of how it impacts people.”
Far from the radars of most traditional investors, small caps often get little analyst coverage and receive less attention from the financial media. Fung takes advantage of that shortfall — the team, which includes co-manager Alex Kwan and an analyst, visit more than 1,000 companies across Asia every year.
It’s a level of diligence that’s paying off, as her HSBC GIF Asia ex-Japan Equity Smaller Companies fund beat 97 percent of its peers over the past five years with an annualized return of 17 percent. Its gains are almost five times those of MSCI’s Asia ex-Japan Small Cap Index over the same period.
As this week’s rout in Hong Kong small caps showed, it pays to do your homework when it comes to smaller companies. “Research is not just working on the numbers based on what the management tells you,” said Fung, who worked on some of the first Chinese companies to list in Hong Kong during her time at Ernst & Young. “You have to cross check with different channels and people in different parts of the supply chain to confirm your understanding of that trend or that company.”
Fung focuses on the bottom 25 percent of Asia ex-Japan equities by market cap. She zeros in on those she views as having good growth prospects, while steering clear of stocks with questionable corporate governance. But Fung doesn’t just analyze data, she makes a point of meeting with — and observing — management. One of her tactics: throw hardball questions and watch for changes in their facial expressions.
“When I meet up with the company, I put myself in the auditor’s shoes and imagine — if I were your auditor, would I be able to be comfortable with the company’s business model?” said Fung. “If the CFO is always trying to stop the CEO from elaborating further then that would be one of the red flags.”
She would know: Fung was chief financial officer of a Chinese auto-parts manufacturer after a stint as an analyst and her time at Ernst & Young.
One of the fund’s top holdings, according to its latest fact sheet, is Lonking Holdings Ltd., a Chinese construction machinery maker listed in Hong Kong that has more than doubled over the past year. They also invest in Brilliance China Automotive Holdings Ltd., which hit a two-year high this month. Not all Fung’s holdings are star performers: BGF retail Co., a Korean convenience store operator the fund said it held in May, has plunged 25 percent since then.
Lonking advanced 2.5 percent, while Brilliance China climbed 2.4 percent at the close in Hong Kong on Thursday, while BGF dropped 2.9 percent.
Fung first short-lists potential investments by valuation and other criteria. Then she scrutinizes the company’s fundamentals and sees how it sizes up versus some macro elements — like the economy and the sector the firm is active in.
Going forward, that equates to a firmly bullish position on China and a budding interest in Southeast Asia. Companies in Hong Kong and China make up 36 percent of Fung’s fund. On India, she likes the dairy plays, but says small-cap valuations have risen a lot already.
A crash in 17 Hong Kong-traded small caps earlier this week wiped out more than $6 billion of value, reinforcing anxiety over risks in one of Asia’s most important equity markets.
Back in April, Fung said the fear and uncertainty that often dog small caps can be fortuitous.
“Usually the client would choose to take out their money at the bottom of the market — when you need it the most,” Fung said. “But if it’s something that is just due to noise or market turmoil or other companies being attacked by a short seller and there’s nothing within the earnings model that I could change, then it’s a good buying opportunity for us.”