Value Partners Classic Fund Q4 letter to investors.
Value Partners (Trades, Portfolio) Classic Fund (the “Fund”) and Value Partners (Trades, Portfolio) High-Dividend Stocks Fund (the “HDF”) primarily invests in stock markets of the Asia-Pacific region, with a Greater China focus.
? HDF will primarily invest in higher-yielding equities and debt securities, while maintaining a flexible allocation to other assets including gold, REITs and cash.
? HDF may invest in higher-yielding debt and equity securities that are below investment grade. Such investments can involve material risks, e.g. counterparty risk, liquidity risk, credit risk and default risk, and may expose the Fund to significant losses.
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? Investors should note that there is no guarantee that the underlying securities in HDF will pay out dividends. Therefore, there is no guarantee that HDF’s investment strategies will succeed. There is also no guarantee of dividend or distribution payments during the period an investor holds units in HDF, and a positive dividend yield does not represent/imply positive return.
? Please pay particular attention to the risk of investment in China and other markets in the Asian region and in companies with medium or small capitalization. The value of the Fund and HDF can be extremely volatile and could go down substantially within a short period of time. It is possible that the entire value of your investment could be lost.
? The Fund and HDF may also invest in derivatives which can involve material risks, e.g. counterparty default risk, insolvency or liquidity risk, and may expose the Fund and HDF to significant losses.
? You should not make investment decisions on the basis of this document alone. Please read the prospectus for details and risk factors.
A look back – 2013 review and performance
2013 was a soft year for the Hong Kong and China equ ity markets. A relatively directionless first half of the year hit a low in late June after th e Shanghai Interbank Offered Rate (SHIBOR) spiked, but made a steady recovery in th e second half. In particular, th e markets made more significant gains after the Third Pl enary Session of the 18 th Central Committee of the Communist Party in November, but this initial positive goodw ill seems to have somewhat abated.
The Value Partners (Trades, Portfolio) Classic Fund rose 11.2% for th e year 2013. For reference, the Hang Seng Index was up by 6.5% and the MSCI Chin a Index gained 3.6% over the same period. Since its inception in 1993, the Fund is up 2,252.1% (net), with a compounded annualized return of 16.4% and a positive return made in 16 of the 21 years reporte d. For reference, the Hang Seng Index has risen 390.5%, with an annualized return of 8.0% and saw 13 years of positive return over the same period.
In 2013, we utilized cash to fine-tune the risk of the portfolio as China saw an economic growth slowdown during the year and the mid-year SHIBOR interest rate spikes weighed on investment sentiment. At the beginning of the year, the Fund borrowed cash to raise equity exposure to participate in improving sentiment as the Chinese leadership went through a successful transition. Throughout the second quarter, the portfolio’s ca sh position had steadily increased till around mid- July when it peaked at double-digit levels. Howe ver, the depressed markets at the time were a trigger for us to turn more aggressive and cons equently, cash levels steadily declined as we put more money to work.
Our strategy this year saw notable investments in the consumer discretionary and healthcare sectors. We believe the transition to a consumption-based economy is on track for China’s long-term growth. Meanwhile, the anti-corruption concerns did not materially impact our investments in this sector as we focused on mid-tier consumer businesses which have continued to perform well in the year.
We also positioned the portfolio with the Third Plenary Session in mind by making a number of investments in the infrastructure space, such as railways. Other sectors of note include our exposure in gaming, while we reduced our exposure to traditional sectors such as banking and telecommunication.
In addition, in light of tapering expectations, the portfolio has significantly reduced its exposure to physical gold. We had put a minor part of the Fund into gold more than ten years ago, treating it as a form of “inner reserve” for the Fund. Gold turned out to be an outstanding performer in that period, profitable in every single year, but in 2013, gold finally suffered a loss. We sensed the change in sentiment, and sold off our gold from mid-2013, but we still like the concept of putting some of the Fund’s reserves in gold rather than cash, and we await an appropriate opportunity to return.
We continue to remain bottom-up focused looking for attractive value investment opportunities. Our investment team made more than 2,500 company visits and research meetings (excluding phone calls) throughout the year. We have poured in more resources to the team and are adding further expertise in more sectors and markets.
Investment case study 2013 – Chongqing Changan Automobile (SZSE:000625)
One example of our high conviction idea in the consumption sector is Chongqing Changan Automobile (“Changan”) – a key investment in our portfolio and a top contributor in 2013. The company is a domestic Chinese auto manufacturer traditionally manufacturing its own branded passenger vehicles and microvans.
Changan has a number of joint ventures with Japanese auto makers but a significant part of its success was due to its subsidiary, Changan Ford, a joint venture with Ford. While Ford initially struggled with its China sales some years back, Changan Ford has really turned it around in 2013, in large part due to the success of its mini sports utility vehicles (SUV) models – EcoSport and Kuga. As a result of the success, the company’s profitability had tripled in the first nine months of 2013.
Looking ahead, the one-child policy easing may have a positive impact on passenger vehicle sales in China, especially for SUVs. The policy could likely add an extra 25 million to the population and by some estimates, bring approximately 4.5 million units of additional auto sales in the next five to six years. While the share price of Changan has already made a significant move, we remain invested in the company as we believe the brand is only beginning to expand its presence in China and may be a key player in China’s growing automobile market.
Looking ahead to 2014 2013 was a key turning point for China’s devel opment, as the Third Plenary Session provided significant updates and changes for the country. A number of key reforms outlined include the one- child policy relaxation, urbanization, and price liberalization, etc. These measures will likely have a very positive and profound effect for China’s long-term developmen t, arguably the most important changes since the country joined th e World Trade Organization in 2001.
We would note key proposal s such as the financial restructuring (e.g. Chines e banks are set to issue negotiable certificates of deposits) and hukou (China’s household registra tion system) reforms, most notably in third-tier cities, as specific examples of positive measures in progress. We also expect continuing anti-corruption actions and policies – a positive for the country as a whole, especially from a corporate disclosure or accountability st andpoint. Although these measures will take time to implement and the effect of some will be le ss instantaneous, the markets were looking for something more immediate and impactful. As a re sult, we have seen a re latively slow reaction to many of these favorable measures with some of the initial euphoria and goodwill mitigated.
Consequently, we believe this presents a profound opportunity for investors. We remain optimistic about the longer-term future for China following the Third Plenum as it laid the foundation for China’s success in the next decade. Much like a slow burn, while the flames of changes have been lit, the embers have yet to heat up to their true potential. While we are positive about the outlook for market s in 2014, we do recognize that a re-rating may not happen immediately. In addition, we still see so me risks, most notably overcapacity in certain sectors, shadow banking and debt uncertainty, as we ll as further concerns on the property market in China. However, we believe the Chinese government is well aware of these and taking appropriate steps to help allay these threats. As a result, we continue to remain fully invested and are committed to our value investing discipline and strong research-driven idea generation. We believe an ove rly bearish consensus view on Chinese equities is still putting pressure on the Chinese markets, which are trading at depressed price-to-book and price-to-earning s valuations. As a result, we are very enthusiastic about the potential investment opportunities in China in 2014. As a long-term invest or in China, Value Partners (Trades, Portfolio) is well positioned to navigate through thes e volatile times. We look forward to the journey ahead.
Since Value Partners (Trades, Portfolio)’ establishment in 1993, we have grown to become one of Asia’s largest home- grown asset management firms. We are proud to announce th at the unaudited assets under management of Value Partners (Trades, Portfolio) Group and its subsidiaries surpassed a milestsone of US$10 billion in 2013, the same year that we celebrated our 20th anniversary. This was the result of both solid investment performances and positive inflows of funds. We see this achievement as an endorsement of Value Partners (Trades, Portfolio) as a key member and partner for Asian investments. Meanwhile, we are named winner of outstanding fund management business in Hong Kong-based newspaper Wen Wei Po ‘s 2013 Outstanding Company Awards. This attests to our contribution to the local financial industry and outstanding achievement s in the asset management field.
Furthermore, our funds continued to receive positive ratings by external agencies such as Morningstar, which has awarded a four or five-sta r rating to all of our applicable funds^. In addition, in the recent Benchmark Fund of th e Year Awards 2013, Value Partners (Trades, Portfolio) High-Dividend Stocks Fund was named the Outstanding Achiever in the Asia-Pacific E quity Fund category*. These accolades highlight Value Partners (Trades, Portfolio)’ long hi story in Asian investi ng and the quality of our fund products. The latest prize adds to our colle ction of more than 70 performance awards won by Value Partners (Trades, Portfolio), in a continuous stream, since incepti on more than twenty years ago. As we enter into our 21 st year of operation, we look forward to fu rther achievements and a prosperous year ahead, and are excited about the outlo ok for the markets and our company.
Value Partners (Trades, Portfolio) Investment Team
9 January 2014
^ As at 30 November 2013.
* Based on data as of 30 September 2013.
Fund performance mentioned referred to Value Partners (Trades, Portfolio) Classic Fund “A” Unit. All performance figures are sourced from HSBC Institutional Trust Services (Asia) Limited and Bloomberg (Data computed in US$ terms on NAV-to-NAV basis with dividends reinvested) as at 31 December 2013. Performance data is net of all fees.
Individual stock performance is not indicative of fund performance.
Investors should note that investment involves risk. The price of units may go down as well as up and past performance is not indicative of future results. Investors should read the explanatory memorandum for details and risk factors in particular those associated with investment in emerging markets. This commentary has not been reviewed by the Securities and Futures Commission. Is suer: Value Partners (Trades, Portfolio) Limited