Thursday, 23 March 2017
Last updated 17 hours ago
Mar 9 2010 | 7:09am ET
Jonathan Neill is chief strategist and lead portfolio manager for long directional funds at UK-based FPP Asset Management. Neill, with over 20 years’ experience in emerging markets, manages FPP’s institutional Global Emerging Markets long-only strategy, which was up over 100% in 2009, and the newly launched UCITS III version of the fund. FPP’s investment strategy involves some serious number crunching to appraise stock value and evaluate individual countries, but it also incorporates a good dose of what Neill terms commonsense: “We sell things as they get more expensive and we buy things as they get cheaper…It’s quite simple, really.”
Neill took some time last week to speak with FINalternatives senior reporter Mary Campbell about the attractions of undervalued stocks, the upside to risk aversion, and the truth about China ‘experts.’
Were you surprised by how quickly emerging markets recovered from the financial downturn?
Well, we were surprised by how quickly they were taken down by the financial crisis, since the crisis didn’t really concern them, so I think they ended up being collateral damage, really. They weren’t over-leveraged, they were just taken down in the great risk-aversion trade of 2008/early 2009. …So, I didn’t expect the emerging markets to fall 60% in 2008, I was wrong about that, but I did believe they would recover very, very strongly so we were very constructive going into February and March of last year, 2009.
How has the financial downturn changed your business or the way you do business?
I still think risk aversion is a feature of the financial landscape today, despite markets having recovered last year. There are just so many things for people to worry about. If it’s not Greece, it’s the US, the US president, it’s China… it’s everything, everyday... And I think that’s quite healthy, to have everyone worried about a whole series of things. I’d be much more worried if there were nothing to worry about [laughs]. That’s a cliché… but I think people are risk averse. It’s hard to raise money [now], not just for us, but for many other people. I’ve been in this business long enough to know when it’s easy to raise money and when it’s difficult, and when it’s difficult, it’s generally a good time to be investing. Sort of perverse, really.
Has the crisis changed the way you communicate with potential investors? Do you have to stress things like regulation and transparency more than, perhaps, before?
Definitely. I always believe in complete transparency and if someone wants to see your portfolio you send it to them. We’ve always been very transparent here. I think most people realize that. You can’t lock people into funds – you can’t have one-year lockup, three-year lockup, monthly liquidity – people want to be able to get out of things, sell funds when they want to sell them, and not be trapped. So they want liquidity and transparency more than they did, and that’s the crisis, it’s the Madoff effect…although some of the feeder funds going into Madoff were UCITS, so the UCITS regulation alone doesn’t necessarily protect you against anything!
That leads me to my next question: How effective are the UCITS regulations? Are they onerous for a fund manager or do they represent things you would be doing anyway?
They’re quite strict now. I think they’re quite helpful. You can’t invest more than 10% of the fund in certain securities and certain countries, and all these things are very sensible and they’re very rigorously controlled and implemented and I think these things are good. But, you know, nothing protects you against the rogue institution…you can’t have a car with the brakes constantly on, you mustn’t have too much regulation, then you just suffocate the creative people. You can’t tie their hands up.
Can you tell me something about FPP’s current favorite market?
China is the biggest allocation in our funds at the moment and that’s because Chinese valuations have come down a long way in the last eight months or so…they were down, on our last spreadsheet, to about 67% of what we consider to be fair value. And about two years ago, certainly in June 2007, that number was 240 – think of it, from 240% of appraised value to 67%. They’ve deflated in valuation by about two-thirds…That’s going to be the country of most interest having been of almost no interest in 2007. So that’s the top-rated country. Interest rates, although rising, are lowish–1.9% we’ve got for one-year yields–and earnings yields are about 9%, so P/Es are about 11 or 12%.
So valuations are okay. Everyone is very concerned about [a] property bubble, banking,[an] over-leveraged banking system and so on, and I don’t see that. Everyone is very concerned about loan growth, excessive loan growth, but they’ve also had massive deposit growth as well, so the ratio of loans to deposits hasn’t really moved much for five years. So I think that’s quite a stable thing. Also the amount that the banks have been loaning to the property sector has also been stable over about five years and the non-performing loans are running less than 2% (now, maybe they’re going to get worse, I mean, I don’t know…). So I still see a strong engine for growth.
And the very big companies in China are very inexpensive on our metrics. So it’s companies like China Mobile, which is 10% of the Chinese index…the stock was down last year by about 8% and you really had to try last year to find a share that went down, but that went down. It’s a big, fat, ugly share and it sells for 50% of our appraised value and it’s the biggest share in China so I say, that’s an attractive share. And all the way down through the mega cap stocks in China we see very good values–China Construction Bank, 52% of fair value; ICBC, another bank, 59%; the Bank of China, 46%; CNOOC, an oil refiner at 43%, PetroChina, another oil exploration company, refiner, 42%; so the big shares are very inexpensive on the whole. So I think that will be the big surprise for this year, is that the very big Chinese shares will perform very well despite the fact that China may or may not be slowing down and people are very worried about it.
What other markets are of interest?
In Korea, the shares are very cheap and they’ve got cheaper. Interest rates are now falling…and the currency is still very cheap having lost about a third of its value over 12 years against the dollar, and only recovered about 8% of it last year. So, we like that.
We like Russia still, but not as much as we used to in early 2009. Russian valuations are still okay and mega cap stocks are still very cheap. Interest rates have come down from 24%, 22% to 6 or 7%, so that market still looks good.
And Taiwan also still looks attractive…Taiwanese shares are not as cheap as they were, interest rates remain very low in Taiwan, the currency remains very cheap on all our measures, and we like that.
So your approach, if I understand it correctly, is to pay little attention to bigger economic trends and focus on your measures and what they tell you about shares or countries. Is that true?
I’d rather run the money like that, we say, these are the valuation of shares, and this is what we would pay for them and they’re cheap–they’re selling at much less than we think they’re worth so we’re going to buy them, rather than having a long conversation about whether China is slowing down and what sort of effect is that going to have on the world, and all this sort of thing…I think that’s just waffle, talking about what’s going to happen to China, that’s just rubbish, our business is, we have to invest money for people who entrust it into the fund, we have to invest in emerging markets and I say, this is how we invest and these are the shares the look good and the countries that look good. It’s very simple.
Suddenly everyone is a China expert–I’ve just been there–and you can’t be an expert on this place. It’s gigantic, there’s no such thing [as an expert], it’s so complex…it’s amazing how many people suddenly are experts on it. And I prefer to ignore them all and just concentrate on our own little way of looking at things.