A review of how exposure to Asian investments can provide a low correlated addition to your portfolio.

Coming next, we have the Executive Director, Head of Distribution and Operations, Chief Investment Specialist of Premium Asia Funds Management, Mr. Jonathan Wu.

The Premium Asia Fund aims to generate positive returns consisting of both capital growth and income over a three to five-year period prior to accounting for movements in currency exchange rates by providing exposure to the Asia ex-Japan region.

The fund is denominated in Australian dollars and typically will not hedge its currency exposure.

Jonathan was named the Young Achiever of the Year 2013 by Money Management for his work and passion in the financial services industry.

Jonathan is going to give us a review of how exposure to Asian investments can provide a low correlated addition to your portfolio.

Welcome, Jonathan.

Thanks, Angelina.

Thanks investment markets for the opportunity.

So yes, so what I'm here to talk about today is effectively how an investment or an allocation in terms of your investment portfolio in Asia, which is genuinely very much underexposed for Australian investors,

can provide an added alpha.

but at the same time, it can provide a low correlation exposure to help you diversify your portfolios and get you absolute performance.

So I'm gonna sort of walk through that with you today.

Obviously, disclaimer, everything I say today is general in nature.

Obviously, if you want further information, it's best to go seek advice from your financial advisor or for yourself directed, then please refer to our product disclosure statement as well as our target market determination.

So I guess in terms of the macro environment, one of the big questions that we're seeing and being asked is, you know, if we're gonna go into a recession, okay, and one of the key drivers of the recession is interest rates have gone up quite significantly, you know, effectively look at Australia, we effectively gone from zero to over 4% in under 15 months.

And so as interest rates are increasing, as we all know, it's starting to bite.

Now, one of the key things is that when we then look at an environment where structural interest rates are higher than where they have been historically, especially in the last 10 years in a no inflation printing money type scenario, as we come out of this, which of the major economies has the ability to be able to spend harder and stronger in a more sustainable way?

And what you see here on this chart is the effectively the savings divided by GDP for both the US and China.

What you can see here is that

The Chinese household actually has more savings than the entire size of its economy, whereas the US is actually only half of the size of the economy is actually in savings.

If we then consider the level of household debt, then the US has actually got more household debt than the Chinese.

But if you actually overlay those two numbers, so household debt minus savings, the US consumer actually is in net debt, whereas China, they're actually in net savings.

So as we go into the next two or three years, if you consider who can actually spend their way out of recession and build up a strong recovery, China is actually the place to be.

Just a quick introduction on our fund manager.

So our funds management team is based in Hong Kong and we also have offices in Shanghai, Shenzhen, Kuala Lumpur and London.

And one of the key strengths of what we do is that we're one of those homegrown brands.

We're not a brand that is from the US or from Europe.

We're based in Asia, we're founded in Asia and we manage around US$6 billion.

So one of our key advantages is we're not

all that excited to grow assets under management for the sake of growing it.

We want to provide the alpha because as we know as fund managers get larger and larger one of the biggest problems that they have is that they asset gather and their ability to actually be nimble in the market actually lessens over time.

So what we like to do is we like to have a big strong team of investors based right across the region but manage a small amount of money to deliver the alpha for you as investors.

And the best way for us to do that in a region that is relatively more opaque than say Europe, Australia, or the United States is that we focus on company visits.

We don't trust anyone's external research reports.

We only trust our own visits.

And we do six and a half thousand of those company visits a year across the region.

There is no single asset manager in the world, no matter how big they are, that can compete with us in terms of just looking at the Asian region.

Now at the end of the day, the proof is in the pudding.

Our premium Asia fund has been around since December of 2009.

And what you can see here is that we've generated over 200 basis points of alpha or 2% above the benchmark after fees.

So, you know, one of the key things in our family office that we're focused on as well is that we only care about after fee performance, which is what you see here.

And furthermore to that in 2019, we dropped our fee significantly.

And you can see here that year on year, we have provided that alpha that investors are looking for in a sustainable way by investing in Asia.

If we then look at our peer group as well, you can see that besides being the three annualized return, we are a second quartile fund.

We are top of the pops in every other single timeframe all the way back to inception.

And you can see that our excess return, we have always, no matter how many years you're looking at us, we have outperformed the benchmark significantly.

So this goes to the correlation argument that I mentioned earlier, and correlation is very, very important when you consider how you construct your portfolios.

Because if you say, for example, buy an Australian equities manager, you choose a growth manager, you choose a balance manager, you choose a value manager and you put them together, you effectively bought the whole market.

And you might as well by that point actually just abort the index.

So when you look at Asia and what you can see here and how to read this chart is that you can see that as the pyramid goes from top left to bottom right, you can see that it's always stating 1.000 because that's a perfect correlation.

So what does 1.000 mean?

It means that if the S&P ASX 200 index moves up 1%, then the same index will move up 1% as well.

So the lower the number, the better it is in terms of diversification.

What you can see here is that for the premium Asia fund and the premium China fund against pretty much all markets, including Australia, including the US, including Europe, you can see the correlations are getting down to about 0.2.

And 0.2 effectively means that when the market goes up 1%, our fund, statistically speaking, will go up 0.2%.

If the benchmark goes down 1%, then our fund will fall 0.2% statistically.

So you want to be able to blend a portfolio with different assets to be able to give you that diversification.

So now that we're moving on to the fact of where we sit in terms of the economic state globally, one of the biggest concerns is what's the ability for an economy to stimulate?

So recently we have seen that the Victorian government has canned the Commonwealth Games because they effectively have no money to be able to take on the project.

And that's a critical sort of trigger point or it's a data point that you should consider when we're going into recession.

Because in order for us to get out of recession in previous cycles, hundreds and hundreds of years ago, the government has to stimulate in some way, fiscal policy, monetary policy, so dropping interest rates and spending money.

What you can see here is that the central government debt to GDP ratio, so the size of the overall debt by your federal government compared to the size of the economy, China's only about a quarter.

Japan, as we know, is well indebted, so it's over two times the size of its economy.

The US is more than the size of its economy and Australia is 70% of the economy is debt.

And so when we need to print more money, the Chinese government is one of those places that's going to stimulate longer term and more sustainably.

Then you'd ask the question, OK, so that's nice, Jonathan, but we've recently seen that Chinese economic data has been weak.

So what's the trigger point for the market to actually turn around?

We consider the political cycle within this context.

And what you see here on this screen is that it looks at the basically the political meetings that occur from the National Party's Congress all the way through to the sixth, seventh plenum.

And each plenum effectively means the next major government meeting that will occur.

And we've seen that statistically speaking in previous cycles, obviously the bars that are going upwards above the line is positive returns and vice versa.

You can see that statistically the third, fourth and the fourth to fifth plenum is where we generally see equity markets bounce stronger.

And when is that going to happen in this particular cycle?

It's sort of going to be between October and November this year.

So if you're considering what the trigger point is, and a lot of people thought it's going to be this month, we actually don't believe it's this month because there is some political issues that's happening in China at the moment to secure people's positions.

What we're waiting for is that next round of stimulus, which the government well knows it has to do.

And we think it's going to be sort of October this year onwards.

Because the argument is that the market's cheap.

It is ridiculously cheap.

So US equities are sitting at about 22 times earnings, which effectively means that it's sitting.

It means that if you put a dollar in today into the market, you need to wait 22 years to get your money back.

In China, you can see on the left hand side, it's somewhere between five years and 10 years to get your money back at the most expensive.

And on the right hand side, you can see the comparison between Chinese and U.S. markets.

The equity risk premium, basically the higher the number, the more expensive it is.

The U.S. is extremely expensive compared to China.

So you want to be invested in places that are relatively cheap.

And furthermore, I'm not going to go into this slide in detail, but what you can see is the fact that this is an Australian report by the Strategic Policy Institute that looks at the 44 most powerful emerging technologies and China is basically all but seven of them.

And furthermore, the Chinese consumer is more powerful now than any other country in the world, which is why you want to back those local brands, because Chinese consumer now is actually investing more in local brands than foreign brands, which is the previous generation, sort of my parents.

In terms of our geographic exposure and sexual exposure, I'll leave you as the audience to sort of review that in your own time.

But we do have a heavier weight at the moment to IT.

We are not participating in the AI space because we think that it's too overvalued.

And that's probably hurt us in the last two months in terms of performance.

But again, because we're a relative value manager, we are just not going to pay expensive prices for things that we don't think provide long-term value.

You can see our top 10 here, which I'll finish off my talk here.

And what you see here is effectively, we have a well-diversified portfolio of 94 different holdings, but the price to earnings ratio, which has said a reflection of how cheap or expensive the market is, is 9.6 versus the US market at 22 and even versus the Australian market at about 16.

So with that, I'll pass it over to Angelina.

Thank you, Jonathan.

We've got a few questions for you and in your presentation you talk about the Chinese market.

Now the Chinese property sector is about 25% of the economy.

So what is the outlook for the Chinese property sector and do you have any property developers in your portfolio?

So really good question.

So a lot of people have raised the point around Chinese property and that 25% that you talk about is effectively the entire value chain, right?

So from builders to workers to suppliers, that's where that 25% comes from.

So if the property market goes into turmoil, the rest of the economy generally is going to head in that same direction.

Probably that sort of what we call the great purge happened in 21, 22.

And so all the bad developers have been cleaned out of the system.

They're well gone.

They're bankrupt or they're on life support almost.

They're all going, most of them are going to die.

But what's actually what we're focusing on at the moment is actually the supply of new property.

So at the moment, the last couple of months, we've seen property transaction volumes down, prices are down.

The government's not actually allowing developers to drop the price on new property in China because they want to ensure that the land price and their ability to sell land to developers in the future retains at a good value.

But the secondary market is falling.

So what's going to change?

Well, it goes back to demand and supply.

There's no new properties being built.

right?

And when I mean no, I don't mean literally zero, but a lot lower.

But the demand over time is still going to be there.

So if you've got less supply of new property, but the demand recovers over time, then it's going to eat up the inventory, isn't it?

Okay, because you don't build a property in a day, you build a property in, you know, 18 to 24 months.

So what happens is that at the moment, the rough figures tell us that there's about 9 million

units of demand longer term.

Right now, China's only producing about six million units of new property each year, which means you've got a three million unit gap.

And as this gap closes in, then what's going to happen is that price of primary or new properties is going to increase.

But we think that's about a two to three year thesis at the moment.

And thank you for that.

And my next question is, why is there so little exposure to India in your portfolio and given how big the economy is?

Yeah, so we've got about 2% allocation to India, as you can see on the screen.

One of the key issues that we've had with India is that there is two things that hamstring the economy.

We think, longer term, it's an incredible economy and we separate that from the investment

We're a relative value manager and historically when I said the US is trading on sort of 22 times earnings, Australia's trading at 16 times earnings, India has historically traded on average about 18 times earnings.

So one of the problems for us as investors is.

you know, as a relative value manager is that do I want to pay up, okay, for that cost?

Because the one thing that I would say that India has in favor of most other Southeast Asian countries, especially China, is the young population.

It's sort of like under 50, 50% of population is under 25.

So there's a very big captive audience in terms of the consumer going forward.

But it's too expensive and at the same time the level of government inconsistency on policy and effectively red tape and corruption means that we sometimes cannot see through how successful a project or an initiative a company is going to do without having to deal with a lot of that red tape.

And that's not something that we see anywhere near as much of in a place like China.

So, India is expensive and also, which is the primary reason to be honest, but number two, we also see less or more opaque visibility on company successes.

Okay.

Well, thank you so much, Jonathan.

Great to see you.

Take care.

Thanks, Angelina.