Dear friends,
We spent an hour on Tuesday, January 22, talking with Teresa Kong of Matthews Asia Strategic Income. The fund is about 14 months old, has about $40 million in assets, returned 13.6% in 2012 and 11.95% since launch (through Dec. 31, 2012).
Here's the offsite link to an .mp3 of the whole call:
78449.choruscall.com/dataconf/productusers/mfo/media/mfo130122.mp3I'd be delighted to hear what other folks consider some of the highlights. My list includes:
1. this is designed to offer the highest risk-adjusted returns of any of the Matthews funds. In this case "risk-adjusted" is measured by the fund's Sharpe ratio. Since launch, its Sharpe ratio has been around 2.0 which would be hard for any fixed-income fund to maintain indefinitely. They've pretty comfortable that they can maintain a Sharpe of 1.0 or so.
2. the manager describes the US bond market, and most especially Treasuries, as offering "asymmetric risk" over the intermediate term. Translation: more downside risk than upside opportunity. She does not embrace the term "bubble" because that implies an explosive risk (i.e., "popping") where she imagines more like the slow leak of air out of a balloon. (Thanks for Joe N for raising the issue.)
3. given some value in having a fixed income component of one's portfolio, Asian fixed-income offers two unique advantages in uncertain times. First, the fundamentals of the Asian fixed-income market - measures of underlying economic growth, market evolution, ability to pay and so on - are very strong. Second, Asian markets have a low beta relative to US intermediate-term Treasuries. If, for example, the 5-year Treasury declines 1% in value, U.S. investment grade debt will decline 0.7%, the global aggregate index 0.5% and Asia fixed-income around 0.25%.
4. MAINX is one of the few funds to have positions in both dollar-denominated and local currency Asian debt (and, of course, equities as well). She argues that the dollar-denominated debt offers downside protection in the case of a market disruption since the panicked "flight to quality" tends to benefit Treasuries and linked instruments while local currency debt might have more upside in "normal" markets. (Jeff Wang's question, I believe.)
5. in equities, Matthews looks for stocks with "bond-like characteristics." They target markets where the dividend yield in the stock market exceeds the yield on local 10-year bonds. Taiwan is an example. Within such markets, they look for high yielding, low beta stocks and tend to initiate stock positions about one-third the size of their initial bond positions. A new bond might come in at 200 basis points while a new stock might be 75. (Thanks to Dean for raising the equities question and Charles for noticing the lack of countries such as Taiwan in the portfolio.)
6. most competitors don't have the depth of expertise necessary to maximize their returns in Asia. Returns are driven by three factors: currency, credit and interest rates. Each country has separate financial regimes. There is, as a result, a daunting lot to learn. That will lead most firms to simply focus on the largest markets and issuers. Matthews has a depth of expertise that allows them to do a better job of dissecting markets and of allocating resources to the most profitable part of the capital structure (for example, they're open to buying Taiwanese equity but find its debt market to be fundamentally unattractive). There was an interesting moment when Teresa, former head of BlackRock's emerging markets fixed-income operations, mused, "even a BlackRock, big as we were, I often felt we were a mile wide and [pause] ... not as deep as I would have preferred." The classic end of the phrase, of course, is "and an inch deep." That's significant since BlackRock has over 10,000 professionals and about $1.4 trillion in assets under management.
We'll work on an updated profile (written and audio) for February.
If other folks could offer either amendments or additions, I'd be grateful for your impressions.
As ever,
David
Comments
Great, great conference call; it really illuminated what they're doing at MAINX, very much to my satisfaction anyway.
I'd add to your #6 that TK said explicitly that they have no neutral position or target bands of allocation for anything, i.e., currency exposure, sovereign vs. corporate, or geography. They try to get the biggest bang for the level of risk across the portfolio as a whole, with as much "price stability" (she said that a couple of times) as they can muster.
The "Blackrock moment" was a hoot. I thought I noticed a little pause there where she was really, really trying not to say "an inch deep."
Cheers, AJ
Thank you for a really great call and one that gave me a level of confidence in the fund that is difficult to obtain through standard/manufactured material. I don't know whether its just me but I believe the managers seem less guarded in these MFO conference calls allowing them to be more natural than would otherwise be the case in a formal presentation. As a side note the SAI indicates Teresa Kong has $100,00 - $500,000 in the fund which is a good sign.
Great Job
David, superb call. Ms. Kong is a class act. Really enjoyed her perspective on "index bias" that promotes investment in countries with highest debt versus countries that are more credit worthy, like Asia. Matthews has made a great enhancement to their fund line-up with MAINX.
Can't thank you enough.
I nod: "hedge fund managers, mostly."
David
I've been following these calls with great interest, and thank you-all for all of your time and effort on these.
Regards- OJ
Thanks again.
davfor
Dave C.