Q&A: Marco Polo Goes For The Gold In China

Aug 15 2008 | 7:33am ET

In Chinese, the words for "risk" and "opportunity" are the same. Aaron Boesky founded Hong Kong-based Marco Polo Pure Asset Management with that in mind.

Marco Polo began its journey shortly after the Chinese government first allowed foreign investors to enter the A-shares market—shares of mainland China-based companies quoted in Chinese yuan that were formerly available only to Chinese citizens—in 2004. Boesky tells FINalternatives that post-Olympics China presents another such opportunity with potential to be a veritable goldmine.

FINalternatives: What is your firm’s investment strategy?

Boesky: What our strategy has been is to conduct intensive bottom-up, audit style research on these A-share companies. Our goal has been to give investors a conservative and intelligent means of participating in what is now the largest market in Asia (ex-Japan).

FINalternatives: What changes have you seen in terms of hedge fund investments in China and China-related securities since the beginning of this decade?

Boesky: The single biggest change, bar none, is the opening of the Chinese domestic equity markets in Shanghai and Shenzhen to foreign investment.  Before 2004, hedge fund managers could only invest in Chinese companies listed in Hong Kong, New York and other markets.  Now a whole new universe of companies is open for investment inside an entirely different currency and fund flow arena of domestic Chinese savings. And the A-share market is more significant than the Greater China market in terms of both the total number of companies and their market capitalizations. 

FINalternatives: Asian hedge funds have been beaten up so far this year. Is this a good time to wait it out on the sidelines or should investors add to their portfolios?

Boesky: It really depends on their time horizon. Any investor who can commit for at least six months should absolutely begin building a position in the A-share market. We avoid working with tactical short-term investors. 

The A-share market is the worst performing market in 2008, down more than 50%, and is down more than 60% since it peaked in October 2007. In fact, it has now given back nearly all of its recent bull market gains. The fact that the A-share market is down so much is simply not rational at this point just as the run-up to a 72 P/E last year lacked some rationality. The current P/E has dropped to an estimated 15x estimated 2008 earnings and this environment creates a window of opportunity for investors to buy at near-historic valuation lows. 

FINalternatives: What are you hearing from investors in terms of their overall sentiment toward hedge funds?

Boesky: We have been meeting with institutional investors in Europe and the U.S., including some of the largest non-profit investors in the world. Investors are still very positive about hedge funds, despite their underperformance this year. As far as long/short emerging market managers, who tend to be more directional in nature, it seems like there is a lot of money waiting on the sidelines for the right time to reinvest. 

FINalternatives: What trends are you seeing?

Boesky: The trend we are seeing right now and for the remainder of the second half of 2008 is for a continued softening in commodities. We saw a huge speculative buildup in hard and soft commodity prices on the back of growing global demand and a weakening of the dollar. Now with global demand tapering off, notwithstanding China’s resiliency, we expect to see further drops in commodity prices. This may prove to be only a pause in what we believe is a long-term Asia-centric equity bull-market cycle.

FINalternatives: What happened in the markets in the run-up to the Olympics and what do you think will happen after they are over?

Boesky: Contrary to many people’s expectations, which was for a continuing bull market through the Olympics, China’s equity markets have been in a steep decline since October of last year. In the year leading up to the Olympics, the Shanghai-A Share Index was down nearly 40%. However, we do not expect the trend to continue much further after the Games. With the market off more than 60% since its peak, the A-share market is trading at or near all-time historic lows on a PE basis. While there is still a lot of uncertainty in the economy, valuations have dropped so low that it seems likely that we are at or close to a bottom. 

FINalternatives: Where do you see the next wave of investment opportunities in terms of sectors or industries?

Boesky: In the short- to mid-term the most attractive investment opportunities in China are in consumption-related sectors. We favor the pharmaceutical, retail, agriculture, and food and beverage sectors. These sectors stand most to benefit from the fast growing consumer class and other favorable trends like the government’s push to transform the economy from export-driven to domestic consumption-driven. 

Longer term, we are looking at sectors and industries that stand to benefit from structural changes and upgrades to the economy. For example, the central government wants to promote more energy efficiency, less pollution and advances in technology. Investors have been focusing on obvious plays, like solar panel and wind turbine manufacturers, but there are less obvious names such as companies which produce energy saving equipment that assist companies in reducing costs, which is extremely important in a time where margins are under pressure due to inflation.

By Hung Tran

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