Since the emergence of “Modern Portfolio Theory” and the “Capital Asset Pricing Model” in the late 1960s, institutional investors have taken a quantitatively driven approach to portfolio construction, looking to create portfolio diversification and obtain better risk-adjusted returns by balancing their asset-class exposures. This journey has seen several important advancements in thinking about how to optimally achieve desired results.
Funds that want to take the total portfolio approach first need to get the total portfolio view. To do that they not only need data – and lots of it – but a rock-solid understanding of exactly how they’re going to use it.
Stonehorn: fear = opportunity
They say that the first year of a new business is the hardest. Although there were moments when it felt like it might be, it hasn’t turned out that way for Sam Lecornu, Duke Lo and John Lam, partners in new Hong Kong-based Asian fund manager Stonehorn Global Partners.
From a standing start in June last year, to-date institutional and professional investors from Europe, Asia and Australia have invested over $300 million with Stonehorn. Following advanced discussions with potential new clients, CEO Lecornu believes the $1 billion mark may not be far away.
Since inception, the Stonehorn Asia Equity all-cap fund has returned 18.6% net of fees to 31 July, beating the MSCI Asia ex-Japan benchmark by 497 basis points and the MSCI Asia ex-Japan Small Cap Benchmark by an impressive 1,414 basis points.
And yet the simplicity of the performance figures obscure the complexity of the environment in which those returns have been achieved.
Stonehorn’s first year was a period when Asia took centre stage. In March last year, the Hong Kong pro-democracy protests got underway, resulting in China’s recent and contentious national security law for the city state.
The first reported case of Covid-19 followed in Wuhan in December, with the subsequent pandemic escalating tensions between the US and China. “Asia has become a global focus over the past 12 months,” Lecornu says, “and not necessarily in a good way.”
It would be easy to see a trade war, a pandemic and China’s assertive approach to Hong Kong as an impediment to outperformance. Lecornu argues that it’s one of the reasons for it. “As high-conviction investors, we thrive on uncertainty. There have been some unbelievable bargains, especially in March. And especially in China, which is now public enemy #1.”
Stonehorn’s approach has a value investing foundation, applied to a region with a rapidly expanding middle class with growing disposable incomes. Core Stonehorn portfolio holdings like South Korea’s Kakao, up 194% since the original purchase in June last year; JD.com; and Hong Kong Stock Exchange are examples of the opportunities of the period.
Stonehorn’s aim is to always buy cheaply and enjoy the returns whenever they come. This can often take years but in the June quarter, with perceptions turning on a dime, it took a few months.
Chinese company BYD, which makes batteries, solar panels and battery-powered bikes and vehicles, is one of the fund’s biggest holdings, an example of the kind of innovative, growth-oriented stocks Stonehorn seeks out.
With Covid getting a foothold in Wuhan in late January, BYD changed tack and began production of masks and disinfectant gels. By mid-March, the plant was producing five million masks and 300,000 bottles of disinfectant per day. In June, capacity had increased to 50 million masks a day.
In a matter of weeks, BYD had become the world’s largest mask manufacturer. In January, Charlie Munger, Warren Buffet’s business partner, had described BYD in January as a “damn miracle”. A month later, he said that “the strongest companies are not in America. The Chinese companies are stronger than ours, and are growing faster.”
Many westerners remain unmoved, seeing China as a country of cheap labour and poor environmental regulations. “That view changes when you go there as often as we do,” says Lecornu. “China isn’t just moving up the value chain, it’s producing products that the very best high-tech companies in Europe would struggle to beat. And with growing attention to ESG criteria.”
From a western perspective, there is low trust in China’s government, negative perceptions of Chinese attitudes towards corporate governance, poorly understood social and environmental obligations and questions over market access. Even differences between China A, B, H, shares, to say nothing of red chips and N shares, can be confounding.
This is an outdated view, says Lecornu, who contends that China’s rise is inevitable. “It’s at a point now where the United States was 70 years ago – a rising global power with a huge and growing middle class aspiring to the kinds of lives Americans enjoyed in the post-war period. The question is not whether this will happen but how the US and Europe will accommodate China’s rise.”
It is this complex geopolitical environment combined with the industrialisation of the most populous nation on earth that forms the essence of the Stonehorn pitch: to be the western investor’s eyes and ears on the ground in Asia, navigating the complexity with a steady hand while taking advantage of the enormous opportunities with a keen yet discerning eye.
Lecornu admits that investing in places like China and India entails risks that simply don’t arise in the West. This explains why many western investors remain sceptical of the “China model”. The Stonehorn team, having run Macquarie’s Asia desk during the global financial crisis, developing an impressive track record along the way, have no such qualms.
“Duke is Taiwanese and John is a native Hong Konger. “Like me,” says Lecornu, “they were both educated in Australia. We’ve lived in Hong Kong most of our working lives and travel in the region extensively. We can see over both sides of the fence but, personally, most of my wealth is here in the region where I live and work, not where I grew up in Australia.”
Lecornu isn’t suggesting that investors go all-in on Asia but to encourage them to tilt their portfolio allocation in favour of reward over risk. It’s in his interests to do so, of course, but Lecornu also believes that “for too many investors, Asia is a missed opportunity”.
Stonehorn seems intent on playing its part in putting that right. The company has recently recruited Jonathan Goll, formerly of GMO and Bank of Montréal, to distribute Stonehorn’s Funds in Australia
Says Goll, “having worked in Hong Kong, Sydney, Singapore and the US, I’m looking forward to helping Australian-based investors develop a better appreciation of the kinds of new economy opportunities in Asia that you just don’t get in the west, and usually not at the same prices. It’s very exciting.”
With a cap of $1.5 billion on Stonehorn’s fund, Goll might not have to work too hard to make that happen.
