Q&A: Veritas Asset Management Chief Bullish On North Asia Region

Mar 3 2011 | 8:45am ET

Ezra Sun is head of Far East for London-based Veritas Asset Management and manager of the Veritas China Fund, the Asian Fund and the Real Return Asian Fund. Veritas has £4.5 billion in assets under management and Asian strategies account for £1.5 billion of that total. FINalternatives reached out to Sun recently and asked him to share his thoughts about investment in Asia during the Year of Rabbit.

Can you tell me something about the strategy behind the funds you manage—the Veritas Asian Fund, the Real Return Asian Fund and the Veritas China Fund?

The Veritas Asian Fund is a long-only real return vehicle offering exposure to Asia excluding Japan.

The Veritas China Fund is a long-short fund investing in companies located in China or companies not located in China but that derive the majority (over 50%) of their income from China, targeting returns between 15-20% per annum on a rolling three-to-five year basis.

The Real Return Asian Fund is a long-short fund investing in the Far East including Japan, targeting returns in excess of 15% per annum on a rolling three-to-five year basis.

In terms of Asia, what countries are you particularly excited about right now?

If we look at the North Asian region against the Southeast Asian region, we believe that the North Asian economy could give us the sort of leverage that we want in relation to the development in the U.S.. One thing that has positively surprised the market has been the strength of the U.S. recovery. Data points continue to point to recovery, which is probably still going to be sub-trend but nevertheless, it is showing quite strong momentum and we remain positive on North Asia.

Included in North Asia is Japan, which we see as a beneficiary of global recovery, as the beneficiary of global capex (capital expenditure) spending. We are seeing tightness in capacity utilization across the globe. Japan is a great play on capex and excels in producing machinery, factory automation, robotics and specialty chemicals and materials that are used in new industries, so given the strengths in the global economy, one cannot ignore the markets in Japan.

Korea is also a huge beneficiary of global capex and the Koreans possess leadership in ship-building, civil engineering, industrial engines, heavy equipment and building petrochemical plants. These sorts of areas are now seeing significant expenditure and Korea is benefitting significantly. If you look at the Korean market, it is by far the cheapest market in Asia and we are now seeing some money starting to move from Southeast Asia into Korea. We believe that this flow will continue as earnings from Korea continue to surprise on the upside.

Do you focus on particular sectors or do you tend to make investment decisions on a company basis?

The fund’s investment strategy uses specific macro themes to drive a bottom-up stock picking process in those particular themes. In analyzing companies, we are focusing on the business model, the quality of management (or lack of quality) and sustainability of the business.

China is the focus of a lot of investor attention these days—what special challenges does it represent from a fund manager's perspective?

2011, the year of the Rabbit, is likely to be dominated by a tussle between two conflicting forces: the deflationary environment in the West and inflationary pressure in the East. The abundant liquidity will tend to push asset prices up; inflation fear may, from time to time, push asset prices down. So it is highly likely we will have a re-enactment of 2010, where the norm was a frequent shift between risk-on and risk-off.

From a sector point of view, we see opportunities in two areas: consumption and capex. Consensus has been very bullish on consumption, but performance last year in the sector was varied. There have been disappointments in some segments, particular the mass-market staple sector, which we have warned about before. This means investors are less enthusiastic about the sector now.

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