Wednesday, 23 July 2014
Last updated 11 hours ago
May 18 2011 | 12:34pm ET
Bob Howe’s 25 years in Asian markets have given him two things: white hair and a conviction that the only sensible approach to Asia is a hedged approach.
Howe is founder and CEO of the Geomatrix group, manager of the Akamai Pan-Asia Fund. In 2009, Geomatrix was sold to the global predictive analytics firm Opera and the Akamai fund retooled with a new net exposure discipline and relaunched as the Opera Pan-Asia Fund. The fund is small, with just $5 million in assets under management, but Howe says they’re in negotiations to bring aboard another manager which would take total AUM to $10 million.
He started out as a technology analyst in Latin America for T. Rowe Price but ended up in Japan because “there’s more technology in Japan than in Latin America.” Before founding Geomatrix, he was chairman and chief investment officer for AIG Global Investment Corp (Japan), and he sat on AIG’s Global Asset Allocation Committee, overseeing some $100 billion in global assets.
His caution about this part of the world (and, he claims, his white hair) can be both be attributed to his experiences during the 1997 Asian financial crisis, during which he was running a hedge fund which, he says, was “basically long-only, but a hedge fund structure.”
“A lot of the early hedge funds were long-only,” he told FINalternatives during a recent phone interview. “What a friend of mine called ‘beta monkeys’…I lost money in that and it was pretty soul shattering.”
What’s more, Howe says, Asia tends to serve up such ‘soul-shattering’ events like clockwork:
“It seems like every 18 months [there’s something]—we just had this tsunami and earthquake and meltdown triple disaster in Japan. It’s usually not a natural disaster, although there are plenty of those too, it’s some sort of financial accident.”
“That doesn’t mean it’s going to be the same going forward. I think the economies are better managed, and the companies don’t have the debt that they had on their balance sheets in 1997. They learned lessons about US$-denominated debt and about property/asset bubbles and collapses, lessons we’re still learning in the U.S….So, it may be better going forward, but the historical evidence shows it’s filled with black swans.”
So much so that in an article on Asian investment, Howe states up front:
“Why Asia? You may be reading or thinking you should allocate/diversify your listed equity
allocations according to global GDP or market capitalization or potential future growth of either. Wrong. To do so would mean you overweight Asia dramatically.”
Howe then builds a compelling case for not investing in Asia:
“The real problem with Asia is that its biggest, best-known markets suffer a 55%-80% ‘Papa Bear’ once every five years. Institutional investors will spend at least one year in five attending quarterly meetings explaining to boards how they could possibly have been so badly fooled and lost so much money with such a poor asset class choice. Asia is NOT about sleeping at night. It is hand-wringing at the bottom of the roller coaster and sometimes jumping off at that bottom.”
Not convinced? Howe provides the numbers, using five-year rolling returns for the past 20 years averaged to remove endpoint bias. They show investors in long-only U.S. equities enjoying average S&P 500 returns of 9.40% (and a Sharpe Ratio of 0.66) over the monitored period.
The three long-only MSCI indices, on the other hand, were “far inferior”: Asia (including Japan) generated an average CAGR of 4.17% (and a Sharpe Ratio of 0.33), while Asia ex-Japan produced an average CAGR of 6.40% (and a Sharpe Ratio of 0.37).
But just when the average reader is probably ready to drop all plans to invest in Asia and head for the hills, Howe reminds them that his analysis applies to a long-only equities approach to Asia. Take a hedged approach to the market, and it’s a different story: the Eurekahedge manager mean for Asia (including Japan) equity long/short shows a CAGR averaging 11.75% and a Sharpe Ratio of 0.92. “Most important,” says Howe in his article, “the worst drawdown was 32% in the 2007-9 financial crisis.”
Countries, Not Stocks
Howe’s discussion of investment in Asia takes place chiefly at the country level because, he says, in Asia, the country matters more than the individual stock. He says that’s true of all emerging markets, where stocks are “more exposed to macro factors like what’s going on with liquidity and… foreign flows, so if the foreigners are all flowing out of a market, it can have more impact. Whereas a big market like the U.S. is very deep, has its own domestic investor base, and you can almost always find something that’s going up in the U.S., even in a bear market, [laughs] unless it’s the fall of 2008.”
“We do five markets where there are liquid, equity-indexed futures,” he says, “that’s Japan, Australia in the developed space, then in emerging Asia Hong Kong (which is mostly China these days), Korea and India.”
Asked how he currently views each of these markets, Howe said:
“We have a short-term and a long-term view and when they come together they’ll push our weightings higher and right now…our short-term models are short all but Japan. And when we’re short, we’re like, 10% short in each country, so a maximum of 40-50% net short in a scenario when all markets are short in our models. We don’t bet the farm because it’s so asymmetric when you get it wrong. We’re long 35% of our NAV in Japan so our book is almost flat with maybe 35% short markets and 35% long Japan.”
Howe says his fund is long Japan because, although it’s been “a real disappointment for 21 years,” the three things they look at—short-term technicals, nine-month liquidity cycle and nine-month earnings cycle fundamentals—are “quite attractive” right now.
By price-to-book and price-to-earnings measures, says Howe, Japan is one of the cheapest markets in the world besides being home to companies like Fanuc, a world-leading supplier of robots and numerically controlled machine tools, which are in high demand in China and the U.S. “We are avoiding domestic plays and owning these world leaders in Japan,” says Howe.
On the flipside are countries about which Howe is more bearish—like China. Howe says there are “bubble aspects” to the real estate sector where apartments in Shanghai and Beijing and other major cities are “unaffordable for 80% of the population.”
Apartments are being bought as “stores of value,” he says. Such places are “not really finished, kind of semi-finished, and left to be sold in 20 years, to be handed on to their children—I’ve seen a few of these, not many, but there are supposedly at least a million of these units being held by individuals.”
What keeps the situation from being dangerous, he says, is that the Chinese haven’t, to date, been using debt to finance these purchases. “There’s not the leverage in the system that there was in say, the U.S. with loan-to-value ratios for properties of 100% or infinite, it’s less dangerous...”
Having chosen the countries in which the fund will invest, Howe says the next step is to look at likely trends for return on equity.
“We like to be long stocks that are showing a rising return on equity expected in the future…that’s confirmed by earnings estimate revisions. We know the analysts’ forecasts for rising profitability are really going to happen when month-to-month they’re ratcheting up their forecast for profit.”
Small Funds Don’t Blow Up
His ideal investor, says Howe, would be fund of funds or high-net-worth individuals focusing on or open to investing in or seeding emerging managers. “Once we get to a certain scale,” he says, “we can get into some endowments that do invest early in the lifecycle.”
Howe acknowledges that the “bar is just much higher in the hedge fund space than it was 10 or 15 years ago. It used to be if you had $20 million under management people would look at you, and now the number is probably $100 million or $500 million.”
Asked about recent research that shows smaller funds generate better returns than larger funds (and suggestions that large institutions might be taking a closer look at smaller managers) Howe said:
“Well, we hope!...My only concern is, the interest in emerging managers is a little bit like the interest in small-cap stocks in the general investing public—it’s kind of a cycle in which in 2009, everyone was being redeemed as everyone headed for the hills or dove into their foxholes and emerging managers were the next Madoff—Bernie Madoff really did make things difficult for emerging managers. What’s interesting [laughs] is that he was one of the largest funds out there.”
Moreover, he adds:
“…It’s typically the bigger funds that blow up—the small funds, they don’t die with a bang, they die with a whimper because of lack of interest…It would be nice if people recognized that.”
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