Kevin Bertoli

The PM Capital Asian Companies Fund (‘Fund’) is now available on Netwealth platforms, giving more investors the opportunity to take advantage of a differentiated approach to the world’s fastest-growing region.

The Netwealth inclusion coincides with the Fund achieving compound investment performance of 16.6% per annum since inception, beating the relevant industry benchmark by 7.6% per annum.*

Portfolio Manager of the Fund, Kevin Bertoli, said: “It’s time to pay particular attention to Asia. It will be the epicenter of global growth over the next decade.

“The quality of the opportunity subset has improved considerably. It’s no longer just low commodity industries and companies, nor is it a China-only play.

“You can no longer view Australia as a proxy for Asia. As the Asian region shifts from capital and resource intensive fixed asset development toward a consumer driven economy, owning Australian mining companies as a proxy for Asia is not going to give you exposure to this evolution.

“The changing economic structure in Asia requires investors to rethink their approach. A hand-picked portfolio of securities is required, centred on genuine long term opportunities.”

“The Fund gives unrestricted exposure to the world’s fastest growing region. It’s highly focused, holding 15 – 35 stocks, rather than being built around index or country exposures. Instead, we build the portfolio based on our fundamental, bottom-up investment process.”

The PM Capital Asian Companies Fund has been added to Netwealth’s Wrap and Super public menu, joining the PM Capital Global Equities, Enhanced Yield and Australian Companies Funds. It is already available on platforms including CFS FirstWrap, Macquarie Wrap and Hub24.

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Kevin Bertoli

PM CAPITAL has said that at times of geo-political or environmental disruption it is common for investors and markets to over-react and retreat from conviction positions or abandon a logical investment strategy.

According to the Portfolio Manager of PM CAPITAL’s Emerging Asia Fund, Kevin Bertoli, investors need to look beyond the headlines and daily events and follow a well thought out strategy. Mr Bertoli said analysis of disruptions shows that for the most part, they are short lived, and that short-term events should not cause major concern for long-term objectives.

“The daily news headlines out of China regarding its economic data, or the potential problems in the banking sectors create fear and uncertainty for investors. Geo-political tensions arising from issues like we are seeing in the Ukraine also fall into the same category.”

“However, during such times it pays to hold your nerve and remain focused on longer term outcomes.  This is particularly the case when it comes to emerging markets.”

Mr Bertoli said the reality is that the share market is far more volatile than the underlying businesses it represents, and this is more prevalent in times of crisis.

“Anxiety around geo-political issues will always have a short term impact on the market. However, history shows us that the underlying earnings power of the businesses the market represents, for the most part, are relatively unaffected by these events. The herd mentality of the market has a way of pricing near term events as if they are permanent in nature.”

“The cost of decisions influenced by short term global events can be large if it means an investors sells up or fails to go ahead with a logical strategy of investing based on the quality of the underlying businesses. In fact it is these occasions that investors can actually take advantage of the market underpricing quality companies, and can use this volatility to buy businesses at a discount to intrinsic value.”

“If you have a longer term investment time horizon, events which only impact markets for a temporary time should not sway investment decisions. Investors need to look down the road, and understand that the earnings growth potential of these businesses over the next three to five years is what will drive real share price appreciation.”

Mr Bertoli said the Asian market in particular is very volatile and sensitive to macro events.

“Near term economic data in China has the potential to disappoint. However, if you look deeper and understand the factors driving each individual business it highlights that there are sectors of the economy that are still growing. Consumer spending remains healthy and there are quality businesses driven by this long term positive trend in spending that we want to be long term owners of. It is this growth story we want to exploit over the long term. Geo-politic disruptions will not change this view.”

“At the same time, the financial markets in many Asian economies are under-researched compared to markets in the west and can represent excellent buying opportunities for those investors willing to take a bottom-up approach, which is exactly the PM CAPITAL formula for analysing and investing.”

According to its latest report, this formula has seen the PM CAPITAL Emerging Asia Fund deliver a total return, since inception in 2008, of more than 190%, outstripping its benchmark by more than 170%.

“Look for underlying trends and long-term structural opportunities, such as the rapid rise in consumer consumption in Asia and take a bottom-up approach to access superior risk reward situations that are not widely on offer in Australia, which will also help portfolio diversification.”  Mr Bertoli said.

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Look beyond Chine for opportunities: PM CAPITAL

PM CAPITAL has said that the majority of the Australian equity market appears to be fully valued, and with the growth forecast in China likely to decline, investors need to look beyond the generalised macroeconomic thematics (which tend to dominate peoples thinking) as they consider regional investment opportunities.  After consistently posting market leading annual returns since the Fund’s inception, the investment manager of the PM CAPITAL Emerging Asia Fund has said regional investors require a targeted, bottom up approach.

PM CAPITAL’s Kevin Bertoli said the investment team remains wary of risks to China’s growth outlook.

“Within our Asian Fund, exposure to the gaming and internet search/portal themes, with exposure to Malaysia, Philippines, Singapore as well as China, continue to drive our performance as did underweight positions in financials and commodities,” he said. “We see the biggest risk in Asia being China growth related and will remain cautious and selective as this slowdown reverberates around the region, given its importance to most of the neighbouring economies.”

“Our method is a research intensive bottom-up approach and despite the lower growth forecast, we are finding genuine value  in industries that are supported by rising domestic consumption or that are benefiting from changes to consumer consumption patterns. These structural growth stories coupled with sound business fundamentals, which are not largely impacted by the macro-economic environment, are our main target,” Mr Bertoli said.

PM CAPITAL’s sector leading Emerging Asia Fund recently posted another strong result in the last twelve months, recording a 45.1% return compared to the 16.8% growth in the MSCI Asia (ex Japan) benchmark.

Mr Bertoli said regional equity markets continue to be skewed to the financials and commodity sectors, which have a high presence of state owned industries. “We believe the outlook for these industries remain uncertain and do not present the best investment opportunities.”

“Currently only approximately 38 percent of the fund’s capital is invested in businesses operating primarily in China, with the balance allocated to companies focused outside of this, particular South East Asia as well as globally and cash,” said Mr Bertoli.

The one investment made during the last quarter was Malaysia based brewer Guinness Anchor Bhd, which is controlled by Heineken, whilst positions in China Resources Enterprise and PT Tower Bersama Infrastructure were closed out after reaching recent highs and internal target prices.

“We remain concerned about the sustainability of Chinese growth in the short to medium term and deliberately seek investment opportunity beyond China.”

The result continues the stellar performance run of the Fund, which has averaged a return of 21.9% per annum since inception in 2008, the corresponding benchmark return (MSCI ASIA ex Japan index) was 3.6%. The Fund has also generated a total return since in inception of 197.8%, outstripping the relevant benchmark many times (21.4% comparative benchmark return). The results are particularly notable given over the last six months the Fund has remained, on average, less than 80% invested.

PM CAPITAL believe the Australian dollar is over valued and results for this quarter were aided by a depreciation of more than 4% in the Australian dollar and the funds un-hedged currency position.

Fund positions

Investments in internet franchises form the largest single allocation of funds (35%) with positions in the Malaysian based iProperty Group, which has a similar business model to realestate.com.au and operates leading search sites across the region; Jobstreet, a SEEK-style online jobs business with a strong presence in Malaysia, Singapore and the Philippines, in which Seek has a 22% stake; and Baidu, a China-only internet search provider with 70-80% industry revenue share, whose position has been further strengthened by the departure of Google from the Chinese market.

“Gaming holdings were the largest contributor to the December results with ASX listed Donaco International, purchased in the September quarter, appreciating in value by more than 100% after receiving its gaming table allocation and a 30 year licence for its Casino in Vietnam adjacent to the Chinese border.”

“The PM CAPITAL investment style for the Emerging Asia Fund is a contrarian, high conviction one where investments are purchased on the merits of their risk reward characteristics, which typically reduces the investible universe to 15-20% of the market. It is a bottom up approach which also explains why our fund is likely to significantly differ in composition from a benchmark focused fund,” Mr. Bertoli said.

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Potential problems for ETF’s in emerging markets.

Sydney-based specialist equity fund manager, PM CAPITAL, yesterday warned that investment into Emerging Asia ETFs is a dangerous strategy because the instruments are heavily skewed to businesses that are at the mercy of the macro environment and dominated by questionable state-owned enterprises (SOEs).

Kevin Bertoli, portfolio manager for the PM CAPITAL Emerging Asia Fund, said although the timing is uncertain, when the cracks in emerging economies proliferate, it would cause serious problems for ETF’s.

“Emerging markets are typically dominated by businesses that have a high degree of uncertainty, such as those driven by the macro environment or businesses of lower quality with no long term sustainable advantage.  Additionally, the recognition by the Chinese banking system of deteriorating asset quality and liquidity tightening could prolong this year’s disappointing results.”

Mr Bertoli said the equivocal outlook for the region highlighted the importance of active management and a maintaining a high degree of conviction in investment decisions.

“A large portion of the market is investing solely for broad base thematic reasons, such as the rise of China. These investors will typically buy the market as opposed to diving deeply into the underlying stocks, and this can be seen in the rise of ETF’s in the region over the last decade.  However, these investors typically have a low level of confidence in the underlying earnings power of the investment, so when sentiment turns they tend not to differentiate between good and bad businesses. This mentality creates the opportunity to invest in the 10 to 15 per cent of the market that represents good value.

Mr Bertoli said the dominance of state-owned enterprises (SOE) could also create problems for ETF investors.

“On top of the widely know issues surrounding transparency, SOEs ultimately act as leavers for their majority government shareholders to grow the economy. This often results in management being little more than ‘yes men’ who often make irrational investment decisions for the benefit of the country as a whole, rather than in the interests of shareholders.

“Additionally, long term success in China requires the economy to transition to one driven by the public sector; this is going to have a negative impact on SEOs.   Around 43 per cent of China’s total industrial and business profit comes from SOEs, which have showed significant growth reductions over the past twelve months.”

In the first quarter of 2013, SOEs reported 5.3 per cent growth, compared with 2012’s first quarter growth figure of 7.7 per cent*.

“For this reason, we cannot stress the importance of investing from the bottom up, based on fundamentals and in genuine businesses where the valuation displays a meaningful dislocation from its share price.   Investors should also not be investing for investing sake, or for fear of underperforming if you miss a market rally. But with market volatility on the increase, we believe there is ample opportunity for us to deploy our strategy and take advantage of the market mispricing.”

PM CAPITAL’s Emerging Asia Fund delivered 35.0% for the financial year and a five year annualised return of 19.3% (the Fund’s inception date) – the strongest performing Emerging Asia Fund recorded by Morningstar.  This lies in stark contrast to the iShares MSCI Emerging Markets ETF return of 14.3% return for the 2013 financial year (-0.2% 5 year annualised return).

PM CAPITAL adopts a concentrated approach to investing where underlying portfolio holdings are driven by bottom up stock specific stories and not broad based macro themes. The Emerging Asia Fund is ideally looking for opportunities that are being driven by underlying structural dynamics, which have been seen to play out in other parts of the world and can easily be repeated. The Fund is not investing in exotic Asian companies, instead they are simple businesses similar to Australian businesses such as Seek Ltd., Woolworths or Asciano.

*Source Xinhau

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