Turning around performance

(May 10, 2005) Eng Hock Ong admits he has his work cut out for him. The Asian equity manager is charged with improving performance on the AGF Asian Growth Class fund in markets that are not wildly popular with Canadian investors these days.

One of his key strategies is to position the fund to benefit from domestic consumption and the emerging affluent middle class in China. Although manufacturing is still an ongoing theme, one that has been in play for a long period of time, the consumption trend is still relatively new.

“The Chinese middle class are becoming more adventurous, they’re traveling out and spending money,” says Ong. “It benefits a lot of countries, not just China itself.”

Recently the Singapore government approved the construction of two integrated resorts that depend on casino earnings, retail activity and performances. Disneyland Hong Kong is also slated to open in September this year. The Hong Kong Tourism Board says it expects the city will attract more than 27 million visitors in 2006.

Although the GARP (growth at a reasonable price) investor picks stocks based on the merits of each individual company, on the whole, Ong says Taiwan’s market is the most interesting after underperforming for so many years. Nearly 50% of the market is made up of technology stocks, many of which haven’t fully recovered from the tech bubble fallout in 2000. As well, he says investors are adding political discount to Taiwanese share prices, reflecting ongoing tensions with China.

Earlier this year China adopted an anti-secession law threatening war if Taiwan tries to secede from the mainland. “It basically says if Taiwan pushes for independence, they are obliged to attack Taiwan,” Ong says. “I don’t think that will happen. Economics will be more important.”

Right now, shares in Taiwan are trading at 10-year lows and Ong says a correction that began last September to rectify the buildup in semiconductor inventories is nearly over. “We actually expect a modest technology recovery in the second half of this year.”

Furthermore, the market is expected to benefit from additional institutional investment when the Morgan Stanley Capital International increases Taiwan’s weighting at the end of this month.

Overall, he says compelling equity valuations and improved balance sheets, along with the upside potential for Asian currencies if Beijing reevaluates its restrictive currency controls, creates a favourable outlook for Asian investments.

When looking at other parts of the region, he says Thailand and Malaysia are attractive markets although finding attractive investment candidates is a challenge in commodity-rich Malaysia. For the time being, Ong also expects to stay out of rallying Indonesia and Indian markets.

Ong comes to the job with 16 years of experience investing in Asia. In addition to building a new team to oversee the fund (manager Mary Tan left the company earlier this year to pursue Chinese studies), part of his task is to build up investing experience in the AGF offices in Singapore. To help, he’s recruited an analyst and another co-manager who starts in June.

Since taking over in January, Ong has partially transitioned the portfolio, selling 31% of the securities and buying 23%. Roughly 8% of the securities sold are being held in cash. Current top holdings include new names for the fund but old favourites among Asian fund managers like Kookmin Bank, Hutchison Whampoa and Keppel Corporation. He expects the process of transitioning the portfolio will be complete by the middle of this month.

Although there is no set timeline to turn around the fourth quartile performer, Ong hopes the process will only take 12 months. “Obviously we all want to do it tomorrow but all these things take time,” he says. Of the top 20 Asia ex-Japan funds, the AGF Asian Growth Class fund currently has one of the lowest performance scores and one of the highest management expense ratios.

“You’re right, I have a task in front of me,” he admits. “I think the key thing is to make sure that the process is strengthened. The team is in place and over time I think performance will pick up.”

Filed by Kate McCaffery, Advisor.ca, kate.mccaffery@advisor.rogers.com