Q&A: Veritas Asian Fund

There are two important aspects of our investment philosophy. Firstly, we believe in the concept of total return, comprising of dividend yield, earnings growth and possible long term currency appreciation. This concept looks at stock returns from a holistic point of view. Our belief is that if one can derive a large part of expected return from dividend yield, it reduces the burden of EPS delivery and therefore reduces volatility of share prices which usually come from a mismatch of earnings expectation with delivery.

Secondly, we believe excess return can be generated from selectively investing in companies leveraged into economic and industry cycles across Asia as well as companies embarking on restructuring or industry consolidations.

The investment strategy is long only equity which uses specific macro themes to drive a bottom up stock picking process in those particular themes. In analysing companies we focus on the business model, the quality of management (or lack of quality) and sustainability of the business. Particular attention is paid to free cash flows. Investment can be made in small, medium or large cap companies. However, a minimum of 75% will be in liquid large cap companies in the Asia Pacific region excluding Japan.

The portfolio consists of core ideas which focus on companies that have sustainable and predictable growth to provide steady returns over the longer term (3-5 years), and cyclical and special situation ideas which cover winners of economic and industry upturns as well as corporate restructuring or industry consolidations.  The proportion of each is dependent on the availability of opportunities in the market.

Our investment horizon is long term and we are prepared to tolerate volatility in the short term, which is prevalent in the Asian markets.

Market risk is occasionally hedged using exchange traded index futures and options. Foreign currency hedging, when used, is achieved via the use of currency forwards.

Q.2. Over the last 12 months what factors have driven performance?

Stock selection has been the overwhelming contributor to performance over the last 12 months.

For the 12 months to 30-November-2017, the Veritas Asian Fund returned 32.78% compared to 21.30% for the MSCI AC Asia pacific ex Japan.

On a country level, China, Australia and India were the greatest contributors to performance. At the sector level, Information Technology and Financials were the strongest performers, followed to a lesser extent by Consumer Staples and Consumer Discretionary.

Q.3. Within Asia which countries do you see as the most attractive at present and why?

Please see a quote from our Fund Manager, Ezra Sun, on outlook for 2018. This was from the Veritas Asia Investors Update Conference Call on 26th October 2017:

“We have just seen the successful conclusion of the Chinese Party Congress, and the leadership that has been confirmed has very strong credentials in the management of the economic policy. So, we are quite encouraged by the fact that we are very likely to see a very stable and reform-oriented policy agenda going forward, which provides a strong support for the economic stability and economic growth in China.

In India, we’re also very encouraged by the recent announcement to recapitalise the public-sector bank which, as you know, had been a big drag on the economy, because they really have been paying the penalties for past mistakes and have not been particularly active in supporting growth. So, the recapitalisation of the public-sector banks will provide a new impetus for growth. On top of that, we continue to see strong global growth pushing the technology sector, particularly in Taiwan and Korea, to a new phase of growth. So, domestically, export-wise, Asian outlook is very positive, particularly given the low inflationary environment we are in. The central banks seem to have a very accommodative policy, and it looks like inflation is not going to force their hand, in the short term anyway.”

Q.4. Do you see any key themes that are specific to the Asia region?

The fund uses a thematic approach which applies a top down analysis leads to the identification of themes. We rely on both in-house and external research to determine the themes. This exercise involves analysis of five factors:

• Social
• Political
• Economic
• Cultural
• Technology