As an Asia fund manager, Hermes’ Jonathan Pines is a true contrarian as they come, spotting juicy opportunities in flatlining South Korea when most investors are focused further south
The concept of non-voting shares is one that regularly attracts controversy. Rupert Murdoch has maintained an iron grip on News Corp even though he’s a minority shareholder, as his stock has the voting rights but most other shareholders don’t. Google and Facebook, like many internet firms, launched with non-voting shares so their founders could maintain control. Typically, the non-voting shares trade at a small discount, about 5-10 per cent, to the ones with voting rights.
However fund manager Jonathan Pines has spotted an interesting arbitrage opportunity in Korea, where non-voting shares in Samsung trade at an extraordinary discount to the voting shares.
Pines manages Hermes’ Emerging Markets Asia fund, and his third largest holding is Samsung’s Preferred (non voting) stock. It has been trading at a 45 per cent discount to the voting shares in the electronics giant, a gap that must, Pines believes, close over time.
“It’s not that we are arbitrage guys, but the discount is just too big. We researched these earlier this year and not only are the discounts very high, they are also inconsistent across companies.” In every other developed market, the discounts have narrowed and Pines sees no reason why the same won’t happen in Korea.
The fact that he’s even in Korean companies may surprise some investors. The Seoul market has flatlined for two years now, with the Kospi index trading at about 2,000 this week compared with 2,100 in 2011. The yen’s sudden decline has made investors nervous that Japanese corporates might claw back the ground lost to competitors such as Hyundai and Samsung.
But Pines is not afraid to take what appear to be very contrarian positions in Asia. Currently the two most out-of-favour markets in the region are China and Korea, while the most in-favour are all in south east Asia, especially Thailand and Indonesia.
Although he’s not a top-down macro buyer, Pines is currently heavily overweight north Asia and underweight the South-east. At the stock level, the market loves consumer staple stocks in Asia, feeding the emerging appetite for everything from soap to dog food. But Pines reckons they are some of the most overpriced stocks in the world and cites Unilever Indonesia as an example. It went from 8,000 rupiah in 2009 to 33,000 last week. Great if you were in it early, but madly expensive now. It’s a similar story at Hindustan Unilever, he says. Even the Chinese staples stocks, although on lower multiples, look overvalued.
Instead Pines prefers out-of-favour cyclicals, with port operator and container leasing company Cosco Pacific his single biggest holding. It traded at HK$25 before the financial crisis struck but has since fallen to HK$11. That translates into a price/earnings of just 10, and if you adjust the price for exceptional items, it’s on just one times book value. Yet Cosco is comfortably profitable, and is growing its earnings.
“It’s difficult to fall into a value trap if the company is growing its earnings,” he says, adding that Cosco has real assets – its ports – which give the share price a decent level of downside protection.
Like many Chinese stocks, Cosco has suffered as the glamour has faded from the China story. Pines himself says that it has “undeniable macroeconomic problems.”
He adds: “There are well-founded concerns about China’s banking system, and the ability of its government to stimulate further growth through fixed investment.”
The banks make up about a half of China’s stockmarket capitalisation, and Pines is invested in none of them. “But because the banks have derated so much, everything else is so cheap in China. The concerns about the banking sector have thrown up opportunities in stocks we can more easily understand than the banks.”
He likes China Dongxiang, which distributes Kappa brand products in China, but which saw its share price collapse from HK$7 to just HK60c as the brand went out of fashion. “When we started buying, at 60c to 70c, it had cash on its balance sheet worth HK$1.25 a share. We thought that it didn’t need to retain its former glory, it just had to remain profitable to be a reasonable investment. It also had a share in Alibaba which we valued at around 25c a share.” The bet paid off, with Dongxiang now trading at about HK$1.50.
Another aspect of Pines’ approach to running money is that he dares to say that he doesn’t always buy quality. Every other fund manager tells me they buy quality at a reasonable price, but Pines says so many have done so that quality stocks are now trading at record premium levels. Buying now makes no sense at all, he says.
“People are hunting for safe yields, but paradoxically that has made these stocks very unsafe. Any stocks with low visibility of earnings are being marked down by the market, but that is where the opportunity may lie.”
It’s interesting how the Shanghai and Seoul markets have missed out almost entirely on the equity boom in Wall Street, London and Frankfurt. But it tells Pines that for an emerging markets investor, now may be a great time to jump in.
“The greatest predictor of future returns is not future GDP growth, but the price you are getting in at. China is currently trading at an exceptionally good valuation. 40 per cent of Korean companies are on a book value of below one. Contrast that with South East Asia, where valuations are at a record. We are very positive on north Asian emerging markets right now.”
Pines reminds me of when I first interviewed the manager of British Empire Securities, who had a fascinating story to tell about Scandinavian family holdings and the value waiting to be unlocked there. It turned out to be one of the best fund purchases I ever made. My guess is that Pines may be on to something similar.
Patrick Collinson is the Guardian ’s personal finance editor