Best-in-Class fund manager Bin Shi at UBS shares his secrets on how he drives the success of this investment on demand, to the top quartile ranking among its peers while keeping risk under control.
BENCHMARK: What is your investment style and how is a decision for stock selection devised?
Bin Shi: We are price/intrinsic value investor, and we use a long-term fundamental approach. Our decision-making process is driven by proprietary bottom-up research. Most of our expected alpha are expected to be driven by stock selection. We do not use explicit screens; rather, we focused on industry leaders that we believe will be the long-term beneficiaries of China’s structural reforms and growth.
For decisions to arrive, we look at company/industry fundamentals, future operation and cash flow generating ability when we define the fair valuation of each company. Our investment universe covers the entire Greater China/ China listed equities and our stock selection often leads to significant active sector positions; however this is purely an outcome of our bottom-up approach.
BM: It looks like you have a relatively concentrated portfolio with only 67 holdings of which 43.7% are within your top 10 holdings. Can you tell us how conviction derives? What happens if a company is found to be in a scandal?
BS: We tend to focus on long-term winners and most of the listed companies might not fit our criteria for long-term winners. The level of concentration is a result of our fundamental research and our conviction level. The higher the conviction level, the higher the weighting in the portfolio. Compared to our peers, our standard of concentration is not high.
If a company we invest is found to be involved in a scandal, we will quickly run some channel checks to verify whether there is some truth in the scandal. If the situation requires, we may sell the name to minimize the impact on performance.
BM: What is the team structure like between the analysts and the portfolio manager? How benchmark-conscious is the team?
BS: For the China team, we have a team of five investment specialists dedicated solely to China, with me being the lead portfolio manager and Derrick Sun as the deputy portfolio manager. Also, the large cap stocks in China are covered by seven regional sector analysts. The final decision rests with the portfolio manager but with substantial input from the analysts. As a team, we try to develop a consensus among us so we can be more effective. We are benchmark aware but not benchmark driven. Our focus is still to identify long-term winners and the +/- weighting is a result of our conviction level.
BM: What is the story behind your bias towards Pharmaceutical and consumer discretionary, and what else do you like?
BS: We expect the rebalancing towards consumption and services to continue to drive the economy and we these sectors will do well in the long run. We prefer to play the structural growth story of China through sectors such as Insurance, Healthcare, IT and Consumers given their secular growth potential. We believe oil price is low on a long term basis, so some allocation to the energy companies makes sense in the long run.
Riding out the Risks
BM: What is your risk management policy that made you successful in keeping a volatility compared to your peers?
BS: We tend to focus on high quality and strong cash flow companies, and we only invest in companies that we can fully understand their core business models with good growth visibility. Over time, they tend to be less volatile, but short-term volatility is not something we focus on very much. When a holding breaches the investment guidelines and restrictions, we will always rectify it within the allowed window.
BM:You have a high conviction for companies like Tencent (9.4% even after the price drop). What are the portfolio limitations on single holdings?
BS: While our Portfolio Manager constructs a diversified portfolio, the size of each position is primarily based on the judgment of the Portfolio Manager. In essence, the higher the attractiveness of a company and the higher the conviction level we have on the company, the higher the active weight. The fund is also subject to the UCITs rule where a maximum of 10% is allowed in the securities of one issuer. The sum of holdings over 5% of the portfolio may not exceed 40%.
The Volatile China
BM:What are the main driving themes for the portfolio, and will the expectation of a continued China slowdown drive fund performance lower?
BS: We expect the rebalancing towards consumption and services continue to drive the economy, and it will be the main driving theme for our portfolio. The industries which used to benefit from the old investment-led growth model are contracting, and the overall GDP growth rate will inevitably edge down. However, we think that quality of growth will improve over time. While the equity market may remain volatile in the near term, we will see divergence in sector performance and the portfolio is positioned to benefit from the economic restructuring.
BM:Do you expect further SOE reform and will it potentially heighten volatility?
BS: We believe SOE reform is imperative to the equity market, even though the pace of the reform has been quite slower than expected. Investors will need to see more concrete actions from the policy makers to be more convinced. BM