Robertson’s Tiger Funds – From Asia to Pacific…and back?

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The Hedge Fund business is littered with interesting anecdotes, success stories and subsequent humble pie by some of the perceived greatest minds on the street. What makes Julian Robertson’s investment story fascinating is that he is, by most peoples and investor standards, one of the most prominent and successful (hedge fund) investors and incubator. What went wrong then?

The story starts with Bill Hwang who ran Tiger Asia successfully for many years. The story ends with a firm now called Tiger Pacific. You ask what is the difference between ‘Asia’ and ‘Pacific’? And the answer is, we do not know.

At this stage what is apparent, Tiger Asia closed since it was never able to end rumors, allegations and accusations by the Hong Kong SFC regarding some form of insider trading. The case has been going on for years. Earlier in 2012, Julian Robertson probably decided that the asset drain on the one hand and the potential reputational consequences on the other, may have a significant impact on his legacy. In fact, in the New York Times DealBook article, Mr Robertson is quoted by saying “I am saddened by the news but certainly understand Bill’s decision. …I have worked side-by-side with Bill for 20 years. I have enormous respect for him as an individual and an investor. He has always been a great partner, a great person and a great friend. I continue to hold him in the highest regards.” We do not doubt that these words are sincere, quite the opposite in fact. However, these words sound awkward once the launch of Tiger Pacific was announced. Why?

The new team at Tiger Pacific is, well, not new. It is essentially the old team of Tiger Asia bar Bill Hwang. We ask the following questions:

  • What can investors do, do prevent old teams posting as new? And, should they? Is it not time to move on or is legitimate to run a quasi successor fund with essentially the same variables?
  • How do investors rate ethics, sustainability, corporate governance with regards to a Funds life cycle? Should a Fund be declared defunct for good? Is the re-launch under a new name simply false advertising?
  • What reputational concerns are there? Why couldn’t Tiger Asia simply retire Mr Hwang and nominate a new management team as we would expect from any corporate? Hewlett Packard et al wont close down shop after some news a la Autonomy and later re-emerge as Hewlett-Whatever.

Although we do not possess all the answers to the above questions, we do suggest that the hedge fund industry still struggles in defining its own business model. It still appears that hedge funds life-and-die by the fact that the portfolio manager is the product. If that is true, there is no accrued goodwill in the brand per se. Is it not time to create hedge fund firms that can survive irrespective of its founders malaise? Or is this simply not possible given the Fund terms and offering memorandum structures that contain key man clauses and other restricting provisions.

At CITE, we suggest that a (hedge) fund Product is defined by more than just its portfolio manager and its performance history. From an asset allocators perspective, we suggest to focus entirely on total value creation. Value creation is not simply a function of total return but very often takes shape in form of other elements too, including

  • access to local market knowledge, insight and expertise
  • access to a diverse viewpoint from other smart investors
  • sharing and debating global newsflow, investor trends and sentiments
  • networking benefits: access to local firms, analysts, experts
  • investor communication: up-to-date news flow with added manager editorial and comment; reality is, some news may be missed and/or the media may clout the intricacies of the news/event

Our view concerns the ubiquity of available funds yet very few actually deliver value beyond capital return, if that. In our mind, sharing of information and thus acting in a transparent manner, creates equal value to the asset allocators. From the fund managers perspective, creating some form of investor intimacy may lead to a reduced risk of redemptions when times are tough with regards to performance.

The cost of switching one fund for another simply because short term performance results are out of sync with peer group funds, are already high. Once the investor adds the costs of losing access to the aforementioned variables of network, information flow, exchange of ideas etc, a redemption notice may potentially be delayed by a months, quarter or even a year. This should be enough time to prove that performance follows insight and also demonstrate to the investor that trading (hedge) funds is for amateurs.


China growth outlook – is anyone concerned?

The Federal Reserve Bank of San Francisco published a recent review (‘Is China Due for a Slowdown‘) of the Chinese economy and whether  we can finally expect a slowdown. The summary reads “While average income in China appears to be headed towards levels that have been associated with growth slowdowns in other countries, high income inequality between wealthier coastal provinces and the less-developed interior suggest that deceleration may not be severe”. So is this good or bad news? As to the consumer story, we look to the US and Asia’s regional consumers in a little more detail below.

Further we read the Goldman Sachs A-Share piece with great interest. In its recent update, Goldman Sachs suggests the following companies, among others, as a Buy-Rating:

– Baosteel – Steel company
– Beijing Capital – Real Estate Developer: Residential, Office, and Commercial in Beijing
– Better Life – Supermarkets
– BlueFocus – Public Relations
– Fiberhome – Telecommunications
– Hualu-Hengsheng – Chemical manufacturer
– Industrial Bank – Industrial Bank, Top 10 in the country
– Jiangsu Yuyue – Medical Equipment
– Jizhong Energy – Coal products
– Ping An (A) – Insurance
– SAIC – Automotive
– Yantai Wanhua – MDI manufacturer, largest in the region

Other stocks that offer a potential upside (on current share price) are Lushang Properties, Jiangsu Zhongnan Construction, China Merchants Bank (A), Shenzhen World Union Properties and Zhejiang Yankong Group.

While this list is interesting and gives a broad range of exposure to various sectors, it masks the wider implications that currently drive the regional and global economy. Access to the these companies is restricted to many investors. Therefore other proxies may serve as an indication of what is truly happening in the region. Below, we take a look at the state of the domestic Chinese banking sector, the regional and global consumer sentiment as gauge for current consumption trends.

Deloitte commented in a report on China’s Banking Industry in its 2012 outlook. The conclusion of the report starts by stating:

“The banking industry of China faces challenges on many fronts – to asset quality, non-performing loan levels and liquidity, to name a few. Emerging risk is perhaps the greatest challenge. With the expected
slowdown in domestic economic growth and weak external demand, new risks in the industry are growing. Industry risk is being controlled, in part, through greater regulatory scrutiny, monetary policy easing, and
local debt approval. The reform of rural financial institutions continues to move forward, further supporting growth in “Agriculture, Farmers and Villages”.”

We couldn’t agree more. The transition from an inward looking banking sector towards an industry that strives to be part of the globalization effort will take time but the forces are at work. Not only is the sector catching up fast, it will certainly lead in a number of segments not before long. The easing of the RMB exchange rate ‘gridlock’ is likely to enable a more balanced approach by its domestic banks in line with investor expectations both domestically and internationally. The domestic banking sector certainly must get its act together to avoid any of the fallacies of earlier decades. Nonetheless, while the housing sector is overheated for some and therefore poses a significant risk, the individual consumer is still striving and aspiring to developed market levels.

To balance our (global) view, we explored KPMG’s US Retail Industry Outlook Survey (2012) to look for evidence that spending on the domestic, eg consumer level, are intact and demonstrate signs of robustness despite the gloom in the global economy. After all, someone has to spend their income for (consumer) goods and thus make the trade to go round; if not the Americans who else we ask. The authors of the report conclude “…retail executives expect the industry to proceed on a path of gradual growth over the next year, supported by continued modest gains in revenue and hiring. Concerns over the US economy are evident, as many executives have pushed back their expectations for a substantial recovery until 2014/2015 or later. While waiting for the recovery to take hold, sector executives are focusing on spending the cash built up on their balance sheets by investing more over the next year in information technology, including data analytics and digital marketing channels.” This makes an OK reading and does not worry us too much as we would expect some level of re-balancing at the individual consumer level. But signs are certainly pointing sideways if not upwards over a medium term view.

PwC - 2012_Retail_Consumer_Products_Asia_Chart16

PwC: 2012 Asia Retail and Consumer Products, Chart 16

The Asian regional consumer behaviour is certainly becoming an ever more important factor as far as the decoupling from the developed world versus developing world is concerned. PwC put out a report entitled 2012 Outlook for the Retail and Consumer Products Sector in Asia and hits the nail on the head. Numbers in China are always big and staggering but these do not change the fact, there are what they are. China’s spending on Food, Beverages and Tobacco will double during period 2011-2015 potentially achieving US$1.4tr in sales. It is thus interesting to note that China has only 2.5 hypermarkets per million people. France, the US, and South Korea have 25, 12.3 and 7.6/ per million respectively. The conclusion is obvious.

In a nutshell, the consumer story in Asia appears to continue to gain traction. Although some believe it is slower than analysts had forecast, it is still a momentum that is gathering pace. And if the classical S-Curve is anything to go by, Asia will soon have a major impact on corporates that serve the regional consumers.

We look at the global conglomerates that can serve the market (Unilever, Kraft, Mars, Procter & Gamble, Johnson & Johnson, L’Oreal, Walmart, Carrefour, TESCO, Metro to name but a few), have the capabilities to develop regional if not local strategies, and the capital to have staying power when things get tougher than anticipated. A clear road map is certainly required to take on these markets. Entering them all at the same time, may just a little bit too challenging for most.