Optimism on asia fuels pledge to outpace index

Carmel Peters, the joint manager of the new RWC Asia Ascent fund, talks to Frances Hughes.

Carmel Peters co-manages the RWC Asia Ascent fund, which is launched this week. Before joining RWC, she co-managed the Sofaer Capital Asia Hedge fund.

Q: Can you explain the investment strategy behind RWC Asia Ascent?A: The investment strategy is to outperform the Asia Pacific ex-Japan benchmark, on a risk adjusted basis over the investment cycle. It is a relative return fund, not an absolute return fund. I can use some of the instruments I used in hedge funds to generate some of that performance. With these added instruments and flexibility we think we can significantly outperform the benchmark over the cycle.

You would expect the volatility to be much less [in this fund] than the index. When we talk about the cycle, for example five years, three-and-a-half years of that is upward trends. During that period this fund would look like a long-only fund. I have run that kind of fund for many years.

But on the down cycle, in this fund we have the added instruments, so it will not look like a typical long-only fund. It would have less exposure to the market. The idea is to cut off the tail of the protracted down markets, anything over 10% you would be protecting.

Q: To what extent will you be protecting the fund when it is launched?A: A week is a long time in the markets right now. But I expect the fund to launch with between 30-50% net exposure [to the market]. Markets are still very volatile.

Q: You have said this fund should not be mistaken for an absolute return fund. Is it because the fund uses shorting techniques that you expect confusion?A: There is a lot of confusion between Ucits III and absolute return. We are not going to protect short-term volatility. But those periods would be much less severe [in this fund] than the index. This fund will have some volatility in it, but it can cut off significant draw down in the market much more aggressively than a normal long-only fund.

Q: Which countries have the largest weightings in the portfolio?A: The largest weighting is China and Singapore. Singapore is a defensive market and a cheap market. What we are looking for is large-cap companies with strong balance sheets, good cash flows and earnings sustainability, which is key. We are going through a slowdown. Management is another key element in our decision-making process. Short term we will still be quite defensive.

Q: Where will you be overweight and underweight – both on a country and sector level?A: China’s economic policy is the key driver for Asian markets and I will be looking to benefit from that policy. China has twice cut interest rates [recently] and it has been relaxing real estate policy. The beginnings of an outright relaxation policy are there. Real estate is an important part of the economy in China. They have said they are going to bring in policy to help rural development.

Exports are still growing from China. They are not contracting; they are growing at a slower rate. They are trying to have stronger consumption in China and move from an export-led economy to a domestic demand economy. We are looking for areas that will benefit from that transition. We think domestic demand-orientated stocks are attractive.

Q: What will your exposure to India be?A: We will be underweight India, but will buy some infrastructure-related stocks. Now energy prices have come down the spending power of governments is recaptured. These stocks have come down [in price]. They are attractive. I will also be underweight the Australian market, but there are some defensive stocks in Australia we will have.

We will be underweight Korea. We do not like what we see. It’s almost like a European country in Asia. Korea is the area where small corporates are very over-leveraged and have got caught up with the lack of liquidity in global markets. Korea’s growth was almost 5%; next year it will probably be 1.5%.

In Taiwan we will be underweight. We are underweight exporters for now because of the global downturn. We’ll be looking to buy China-related stocks in Taiwan. We expect these stocks to become more attractive.

The other things we’re looking for is interest rate sensitives. Now all the Asian economies are in a much stronger position to reduce interest rates. A key part of our initial policy will be interest rate-related stocks, for example banks. If we get clearer policy direction on real estate policy in China we will [increase] these stocks.

Q: How many holdings do you expect to have in the fund?A: We will have between 50 and 70, but on the first day we will start with 20% [of that].

Q: Has Australia and Taiwan’s restrictions on short selling affected the fund at all? And do you expect other Asian countries to follow suit?A: Yes, it does affect the portfolio. You cannot short stocks in Korea right now. That was an important market. In Australia it is the same. In non-financials you cannot short at the moment and in financials it is till the end of January next year. They are not opportunities we can exploit. We will use specific shorts if we think there’s 20% downside in a stock. We will use cash and futures for protection and there is no restriction in that.

Q: Asian equity markets have fallen dramatically over the past three months, does this worry you?A: Asian markets were collateral damage. They were hit by global deleveraging and hedge fund deleveraging. The inflation threat has receded in Asia [because] commodity prices are much lower. Another fear is that the global recession had affected exports, but that is reflected in the prices now. Asian investors are normally a long way behind the curve. Earnings downgrades are the last part of the cycle. They are dong this now.

Q: What are the main catalysts for the upside in Asian markets?A: Incentives coming out of China. The markets are freeing up now. We are past the eye of the storm. Long-term we all know the arguments for Asia. This is a great opportunity to get into Asia for the next five years. We are trading on the bottom now.

This is an asset class you should be looking at. Lower commodity prices are extremely good for Asia. They are importers of energy. China is fiscally very strong. They can bring in financial packages. India was fiscally constrained. But now with lower commodity prices it’s very good for the government.

There is more spending and growth is coming. They won’t be called emerging markets anymore. They will be developed Asian markets. The long-term thesis remains. These people are savers and workers. All the things that are essential in terms of growth are there.