Outperforming in Asia with boots on the ground

“The growth of China has been the biggest development”

Arnout van Rijn and Victoria Mio attribute the success of their flagship equity strategies to opening an office in Hong Kong in 2008, enabling local access to the companies in which they invest. They previously managed the strategies as part of the emerging market equities team in Rotterdam.

As the office celebrates its 10th anniversary in January 2018, both managers have been looking back on what has been achieved in the past decade, and what they expect in the next 10 years. They say the growth of China as a superpower has been the biggest development, an opportunity that is now accessible by Robeco clients in a new Chinese Equities A-shares strategy.

“The real reason to move here was to be closer to the investments, and that’s made a big difference, especially as Hong Kong is the financial center of the region,” says Van Rijn, Chief Investment Officer and portfolio manager of Robeco Asia-Pacific Equities.

The performance figures presented above correspond to the D USD share class of the Robeco Asia-Pacific Equities UCITS fund. Performance for other share classes may vary. Performance over one year is annualized. The value of your investments may fluctuate. Past results are no guarantee of future performance. In reality, costs such as management fees, transaction and other costs are also charged. These have a negative effect on the returns shown All data to 31 December 2017.

“When we set up the process for Emerging Markets Equities in the mid-1990s, we had to include a strong top-down element, because we were so far away from the investments.”

Bottom-up driven

“Here in Hong Kong we can be very bottom-up driven, meet our companies regularly, and hear more interesting stories from them about how the Chinese economy in particular is doing, rather than just relying on the economists. The companies can really tell you what is going on – such as if their margins are under pressure, or if their revenue is really picking up.”

“That was an important reason why we turned more bullish at the end of 2016 on Asia as a whole; the Chinese companies that we were meeting signaled that business was improving, and we didn’t see that in the analysts’ projections. China was not imploding: it was getting better, and companies’ earnings would benefit.”

This kind of local access has been key in building the knowledge that is essential for successful asset management, says Mio, Chief Investment Officer and portfolio manager for Chinese Equities. “We are really close the ground, so we have better access to the companies, policymakers, industry experts and analysts,” she says.

“This helps us to build stronger convictions and fundamental research for the strategies. The fact that we have boots on the ground and are meeting more with managements and all the related parties helps us to understand the local business environment.”

The performance figures presented above correspond to the D USD share class of the Robeco Chinese Equities UCITS fund. Performance for other share classes may vary. Performance over one year is annualized. The value of your investments may fluctuate. Past results are no guarantee of future performance. In reality, costs such as management fees, transaction and other costs are also charged. These have a negative effect on the returns shown. All data to 31 December 2017.

Range expands

Robeco’s Asian equities range has expanded since the office opening to include Asian Stars Equities (2011) and Chinese A-shares (2017). And there are certainly plenty of stocks to choose from when building these portfolios.

“The biggest change over the past 10 years has been the continued growth of the Chinese equity market, with new companies added almost every day,” Van Rijn says. “The Asia market has become more mainstream, and the opening up of the Chinese market has coincided with the growth of Asian companies.”

The Hong Kong office now has about 25 staff, including eight investment professionals and another three in Shanghai handling purely Chinese equities. In total the teams are responsible for assets under management which now stands at USD 9 billion. Some things have not changed though – the Hong Kong team is still regularly in touch with HQ in Rotterdam.

“We’re still very much part of the emerging market equities set-up in Rotterdam as basically an outpost applying the same investment tools,” says Van Rijn. “We use the same valuation models, quantitative ranking models and charting techniques, among other things, so we’re basically speaking the same language and ideas often develop parallel to one another.”

Best investments to date

So what have been their best investments thus far, and what do they avoid? Mio prefers the technology and consumer sectors, as these are major themes for China. “China is rebalancing; the proportion of ‘new economy’ stocks in the MSCI China index overtook that of ‘old economy’ companies in 2015, and now accounts for 55% of it. In this old economy, I avoid the commodities; there has been overcapacity and they are highly pollutive, with some bad corporate governance due to a lot of state-owned enterprises in this space.”

Van Rijn likes any company with a focus on shareholder returns, paying good dividends and buying back its shares. “That will also be a theme for Asia in the next 10 years – the companies that are actually serving the interests of shareholders will be rewarded by the market,” he says. “It is an important focus for portfolio composition; we look for companies that have upside and are clearly showing that they will improve their shareholder return policies.”

“We do have big exposure to banks; they are cheap and business gets better in the short run, but in the long run they’re less attractive, since in most countries they’re not free to move as they like because government policies determine what they can do to a certain extent.”

Focusing on China

For the coming decade, both managers say the primary focus will be on Chinese growth. “There are two main themes in China – technology and consumption,” says Mio. “The internet industry is moving from e-commerce to mobile gaming, online travel, social advertising, internet finance and cloud computing. The second-most important theme is the consumption upgrade story, with a rise in demand for electric cars, education, health care, travel and high-end consumer products.”

And don’t forget the rest of Asia. “A lot of the focus is on China, but Japan is also a really crucial market, with almost half our Asia-Pacific assets invested there,” adds Van Rijn. “We’re also heavily invested in South Korea, as we think corporate governance improvements have been quite tangible in both these countries. We’re expecting to benefit from a re-rating of the multiples of those markets.”

“When you look at all the Asian markets over the last 10 years, some have had quick spells of being in favor; Indonesia was popular for a while, along with Thailand and the Philippines, but a lot of that faded as soon as the Chinese economy started to improve. Australia is a large market with good shareholder returns. India has high expectations now but will eventually a large market for us too. We closely cooperate with the portfolio managers from Canara Robeco there.”