Saturday, 20 December 2014
Last updated 16 hours ago
Feb 2 2012 | 8:02am ET
Mark Martyrossian is a founding partner of UK-based Tiburon Partners and responsible, along with Mark Fleming, for managing the firm’s Tiburon Taipan and Taurus funds. Martyrossian was based in Hong Kong for a number of years—first with Crosby Securities, and later with Warburg Dillon Read—before leaving to establish Tiburon Partners with Richard Pell-Ilderton. He remains focused on—and bullish about—Asia and spoke recently to FINalternatives Senior Reporter Mary Campbell to explain why.
Can you tell me something about the fund you run, it’s the Taurus Fund, is that correct?
Yes, Taurus is the Asian fund that we’ve been running since 2003, it’s Asia ex-Japan and it’s about $50 million in size. [It] was bigger, obviously, before the shenanigans of 2008…and we’re gradually building it back up.
How have the Asian markets changed since you first began investing there?
They have grown enormously. When we first started investing there was no market in China and markets in India, Korea, Taiwan and Indonesia were closed to foreigners. Those markets that were open were limited in scope: Hong Kong consisted of a couple of banks, several property companies and some utilities; Singapore had banks, some plantations and property.
That has all changed with the number of stocks rising and the markets comprising a decent range of sectors. But perceptions sometimes lag. I remember marketing in the U.S. in 2005 and there being a fair amount of consternation about whether the Asian markets were big enough and broad enough to actually allow you to run a sensible long/short strategy. They are. This growth and the increased liquidity has been reflected in the fact that borrowing costs have fallen dramatically. When we launched the fund, the cost of borrowing in a couple of our jurisdictions was 6-7%. In those same markets now, the cost to borrow is 2 [%]. Asia’s a big place, clearly, and the markets, while still categorized by some as developing have come a long way.
What can you tell me about your investment strategy?
We’re bottom-up stock pickers. Fundamental analytics is the name of the game for us and whilst we do pay attention to momentum and other indicators which perhaps go to market timing or market smarts, really, the sine qua non for any investment we make is simply, ‘Is this stock cheap or expensive?’
You describe yourself as “keen on Asia,” why is that?
…[B]ecause Asia doesn’t display any of the horrifying, debt-laden trades of the developed market counterparts, whether in Europe or the United States…[A]lso, fairly critically, we see ample evidence that Asian governments have policy flexibility, and by that I mean, quite simply, they are in a position to cut interest rates and are doing so. For example, China reduced the reserve requirement ratio a [late last year]. The RBA has cut rates twice [in December]. We believe that other Asian central banks will follow; whereas, again, their Western counterparts have thrown the monetary kitchen sink at their economies but failed to stimulate any growth at all.
At the corporate level…you get a lot of gloom-mongering about Asia. I think people do hark back to the days when Asia was seen, perhaps rightfully, as a manufacturing workshop for cheap products and the whole of Asia was built on export-led industries. That is no longer the case. Clearly, there are big export sectors in Asia and, equally clearly, those same sectors are going to face trade headwinds with Western consumers not spending anymore. But there’s a lot of other stuff going on in Asia other than just exports…it’s the domestic economy, the development of local infrastructure, the galvanizing of the Asian consumer to spend some of his savings into spending, that’s really what the main attraction in Asia is.
While momentum will slow in the region by dint of the recession in the West, Asian economies are still growing. So whilst the rate of growth may slow somewhat, it is still a roaring rate of growth….[A] hell of a lot of ink is spilt on China slowing from 8 to 9%—big deal. It’s not a piddling little economy, it’s the second-biggest economy in the world. So, we are fairly sanguine about it slowing.
That’s not to say the number 8 rather than 9 [won’t] temporarily undermine the dumb money’s confidence, but I think at the macro level, growth still looks pretty well underpinned and there are already signs of the Chinese government beginning to loosen. Just this last month we’ve had four provinces given the go ahead to issue bonds on international capital markets which will be guaranteed by Beijing. There’s a…policy that banks must start allocating more money to SMEs who have been relying upon the third market, the sort of underground banking market that does charge usurious rates of interest….
A number of these policies are already being implemented. They don’t tend to get too much press coverage, but it is happening and it does show that Beijing is doing something about it because they can. The macro story still looks pretty damn good to us. However, we invest in stock markets and the stock markets have clearly been under the cosh for much of the last year and recently have suffered pretty badly by dint of the mayhem that’s going on in Europe. I think there’s been a fairly wholesale reaction to the travails of the euro and Asia, perceived as a high beta part of the world has come clattering back just as much as Europe.
But this has thrown up some great with valuations in Asia coming back to the levels we last saw in the depths of the Lehman crisis in 2008. In terms of valuation—and remember, valuation is our starting point for every stock that’s in the portfolio—we’re seeing a lot of stocks that are dirt cheap. And our net exposure, which typically ranges between 20 and 50%, we’ve actually been putting a bit more money on the table lately.
You feel the Western press is negative in its coverage of China, why do you think that is?
I don’t have the answer but I can conjecture, I think partly it’s Schadenfreude… I think it’s partly commercialism, in the sense that I think there are a lot of business editors out there that, on a quiet news day, ring their reporters and say ‘Bring me a scare story on China.’…[T]o give you an example, last March the FT ran a full-page article about China and the photograph at the top of that article showed a New Town development in China which was empty…The article itself was pretty measured—there are two or three of these places in China which is not, statistically, particularly relevant. But…the text was considered. It didn’t say, ‘Oh my goodness, it’s a property bubble and this is typical and it’s all going to end in tears’... What made the impact though, was the photograph.
In November last year I was in New York and the New York Times ran the same article. Not in the business section but on the front page of the main paper — I don’t know, was that a quiet week? I can’t remember what was going on that week. But it was the same damned article and interesting from my point of view because…I’ve been going to China since 1986 [and] at the moment I think it’s in pretty good shape. People are upset about the level of local government debt. Well, it’s effectively guaranteed by Beijing so should we get really worried about that? I don’t think so, in the near term. They’re upset about bank NPLs going up because, after all, Beijing did tell the banks to open the credit floodgates in 2008 in order to stimulate the market after the GFC. Yes, NPLs will go up, but Beijing stands behind them and we’re not invested in any of the Chinese banks so, are we worried? No. And, obviously, property prices at the luxury end of the market in the major cities are high so headlines are obsessed about a property bubble. But there isn’t a hell of a lot of leverage in China and, of course, it is leverage rather than the price of property that poses a systemic risk, so again…I’m not worried about the Chinese property sector dragging down the economy as the subprime sector did in the United States.
Another Chinese story that made headlines was the Sino-Forest deal, what did you make of that?
Well, you know, there’s an old proverb that says Caveat emptor. To start with, when something is described as a backdoor listing, what do you immediately think?
Why do you have to be a backdoor listing? Why couldn’t you use the front door?
Exactly. That’s exactly what we think. The second thing is, I don’t know whether Sino-Forest owns those trees or not, and the fact that I don’t know makes me think that I should be investing somewhere else. I don’t want to sound holier than thou or too clever by far, we’ve invested in things that have gone wrong on us, but I think, from that bitter experience, when Chinese companies which are in a new sector where property rights are not capable of easy proof come through the back door for a listing, even when it’s a brilliant story, I think risk-adjusted returns are better elsewhere.
In your company materials you say you like to let your portfolio managers, within agreed limits, pursue their own investment styles. What’s the thinking behind that?
When we set the business up, each of us had come from bigger firms…We’d pursued our careers in equity investment and we learned a lot, in our formative years, from working in larger organizations. When firms become too big then the manner of decision making perhaps becomes sub-optimal. When we launch a fund, we’ll have a lead manager on that fund and that lead manager, not to put too fine a point on it, carries the can. He has the ultimate responsibility for picking the stocks, forming the portfolio, monitoring the metrics, everything. He might have people supporting him and giving him advice, he might have analysts, but he’s where the buck stops.
And we think that’s a good thing because we think managing by consensus where you have joint managers or teams of senior portfolio managers who all have to agree on things before they go to the bathroom is, as I said, sub-optimal. When we take on a new partner with a view to launching a fund for him, he will manage that fund according to his experience and his beliefs. Consequently you do not get a Tiburon process across all the Tiburon funds—each fund follows a mandate or process with which the lead manager is familiar. For example, our Asian strategy lead manager is my partner Mark Fleming who is a fundamental, bottom-up stock picker. The Japan fund is managed by another partner, Rupert Kimber, again, he’s a stock picker but Rupert has an added layer in his process—he is looking for companies that are cheap and where he believes that there is some sort of restructuring process going on which will positively impact the share prices. It’s a different process. He also runs 20 stocks in his portfolio; we run 40 to 50 in ours.
Taurus Fund started as the Tiger Fund and it has become a UCITs fund. What was the reasoning behind the decision to launch as a UCITs vehicle? Does operating within that framework present any challenges?
As I said, 2008 was rather hairy and although, as you’ve seen by our numbers, we had regained our high-water mark by 2009, the investment world was still pretty battered and bruised. Risk appetite really didn’t start appearing again until third quarter 2009 and when it did, people had become enthralled by the UCITs concept. I think the trauma of 2008 had, perhaps justifiably or perhaps unjustifiably, led investors to conclude that it had been a failure of regulation in the financial world and therefore anything that was regulated was going to be better than anything that was unregulated. They wanted the safety of a regulated vehicle. Consequently, we decanted the small amount of funds that were left in Tiger—about $15 million—into the new structure and we started to get investors interested [and] it has grown, not by much, but it is growing and I think it has got some traction.
We used to have monthly liquidity in Cayman and, we took the commercial decision to go with UCITs for the reasons I’ve mentioned and we made it daily liquid. Now, we could do that because it didn’t make much odds to us whether it was monthly liquid or daily; we invest in liquid underlying stocks, so it didn’t pose any change in what we were doing anyway, so why not give the benefit of that greater liquidity to our investors?
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