Halbis opts for consistency of performance
Investment Outlook Series: Ayaz Ebrahim, CEO for Asia-Pacific at Halbis, says there is no substitute for quality investing, even if this may result in underperformance in rising markets, where people often end up chasing momentum.
This is part of an AsianInvestor series on the 2009 investment outlook of fund managers with Asian portfolios.
Ayaz Ebrahim is the CEO for Asia-Pacific at Halbis, which is one of four specialist investment businesses of HSBC Global Asset Management. He is responsible for HalbisÆs overall investment teams and equity and fixed-income investments in Asia ex-Japan. He is also the lead fund manager for regional equity funds. Prior to rejoining Halbis in May 2007, he was regional CIO for Asia-Pacific at Deutsche Asset Management.
Halbis manages around $68 billion worldwide, including around $29 billion in Asia.
What are the biggest opportunities that you see in the coming 12 months?
Ebrahim: Investing for deleveraging and dividends is something we have been talking about consistently for the past 12 months, and it is one of the rare strategies that have rewarded investors this year. It remains a valuable defensive approach in these difficult markets.
From a valuation perspective, small-caps look interesting in terms of the risk/reward trade-off. It is a specialist asset class and we are one of the few managers with genuine small-cap expertise.
What is the biggest lesson you have learned from the US credit crisis?
The crisis has reinforced one of our central views that managing risks in portfolios is as important as managing returns. Multi-standard deviation events can derail years of hard work, and happen more often than people expect. Managing risk is a core component of our investment process, and the financial crisis has emphasized how important this is to achieving long-term outperformance across cycles.
I would say that the biggest lesson for all investors is that there is no substitute for quality investing, even if this may result in underperformance in rising markets, where people often end up chasing momentum. For truly long-term investors consistency of performance is the key. It is unrealistic to expect managers to outperform in all markets. However, by managing risks sensibly, the higher probability of outperforming in falling markets, coupled with positive returns when markets are rising, will lead to more consistent performance over the long-term.
Have you made any significant changes to your asset allocation in terms of markets or sectors in the past few months?
We have moved more overweight to companies with defensive qualities û low debt, visible earning streams and strong cash flows û who have been rewarding shareholders through dividends. In the environment of high volatility we have been seeing, liquidity has also been an important factor in our investment decisions. In general, we have become more overweight defensive sectors, such as selective utilities and telecoms, while being careful to assess valuations in sectors that have borne the brunt of negative sentiment. Investing in stocks with attractive valuations, that also consistently reward investors through dividends, is ultimately the most effective way of mitigating volatility.
What are your favoured markets in Asia?
China displays the most attractive combination of cheap valuations and broad policy flexibility to deal with the downturn. Markets such as Thailand and Malaysia are cheap, but overshadowed by political issues.
While we do have country-level views, fundamentally we are an active investment firm focused on finding value at the stock level. In the long-term, stock level performance constitutes the largest component of market returns, ahead of country and sector allocation, and this is where our research-led investment approach adds value.
What markets are you bearish over?
We are bearish on certain sectors in certain countries. It would appear, in the current environment, that it is sector, rather than country allocation that is driving volatility and returns; not so long ago, China and India were the two dominant drivers of returns in the region, today, an equally important decision is the allocation between cyclicals and defensives. All of this however must be viewed in the context of valuations, which for certain sectors now sufficiently reflect weakened company and economic fundamentals. At a company level, we are bearish on firms with high levels of debt, uncertain earnings streams and low cash levels.
What are your market weightings within an Asia ex-Japan equities portfolio?
Our market weightings are predominantly a function of our bottom-up stock conviction.
China - 28%
Hong Kong - 13%
India û N/A
Indonesia - 3%
Korea - 19%
Malaysia - 2%
Pakistan û N/A
Philippines - 1%
Singapore -7%
Sri Lanka û N/A
Taiwan - 18%
Thailand - 3%
Vietnam û N/A
Cash - 6%
What are the main challenges that you expect to face in the coming 12 months?
The key challenge is always how to deliver alpha for our clients in the most consistent and predictable way. This is a unique environment with a lot more variables than we have seen in some time. The evaporation of credit, the sharp slowdown in global demand, and political upheaval in Asia are some of the major issues that will affect returns and volatility in the shorter term, and whose impact on fundamentals we have to assess continuously.
Ayaz Ebrahim is the CEO for Asia-Pacific at Halbis, which is one of four specialist investment businesses of HSBC Global Asset Management. He is responsible for HalbisÆs overall investment teams and equity and fixed-income investments in Asia ex-Japan. He is also the lead fund manager for regional equity funds. Prior to rejoining Halbis in May 2007, he was regional CIO for Asia-Pacific at Deutsche Asset Management.
Halbis manages around $68 billion worldwide, including around $29 billion in Asia.
What are the biggest opportunities that you see in the coming 12 months?
Ebrahim: Investing for deleveraging and dividends is something we have been talking about consistently for the past 12 months, and it is one of the rare strategies that have rewarded investors this year. It remains a valuable defensive approach in these difficult markets.
From a valuation perspective, small-caps look interesting in terms of the risk/reward trade-off. It is a specialist asset class and we are one of the few managers with genuine small-cap expertise.
What is the biggest lesson you have learned from the US credit crisis?
The crisis has reinforced one of our central views that managing risks in portfolios is as important as managing returns. Multi-standard deviation events can derail years of hard work, and happen more often than people expect. Managing risk is a core component of our investment process, and the financial crisis has emphasized how important this is to achieving long-term outperformance across cycles.
I would say that the biggest lesson for all investors is that there is no substitute for quality investing, even if this may result in underperformance in rising markets, where people often end up chasing momentum. For truly long-term investors consistency of performance is the key. It is unrealistic to expect managers to outperform in all markets. However, by managing risks sensibly, the higher probability of outperforming in falling markets, coupled with positive returns when markets are rising, will lead to more consistent performance over the long-term.
Have you made any significant changes to your asset allocation in terms of markets or sectors in the past few months?
We have moved more overweight to companies with defensive qualities û low debt, visible earning streams and strong cash flows û who have been rewarding shareholders through dividends. In the environment of high volatility we have been seeing, liquidity has also been an important factor in our investment decisions. In general, we have become more overweight defensive sectors, such as selective utilities and telecoms, while being careful to assess valuations in sectors that have borne the brunt of negative sentiment. Investing in stocks with attractive valuations, that also consistently reward investors through dividends, is ultimately the most effective way of mitigating volatility.
What are your favoured markets in Asia?
China displays the most attractive combination of cheap valuations and broad policy flexibility to deal with the downturn. Markets such as Thailand and Malaysia are cheap, but overshadowed by political issues.
While we do have country-level views, fundamentally we are an active investment firm focused on finding value at the stock level. In the long-term, stock level performance constitutes the largest component of market returns, ahead of country and sector allocation, and this is where our research-led investment approach adds value.
What markets are you bearish over?
We are bearish on certain sectors in certain countries. It would appear, in the current environment, that it is sector, rather than country allocation that is driving volatility and returns; not so long ago, China and India were the two dominant drivers of returns in the region, today, an equally important decision is the allocation between cyclicals and defensives. All of this however must be viewed in the context of valuations, which for certain sectors now sufficiently reflect weakened company and economic fundamentals. At a company level, we are bearish on firms with high levels of debt, uncertain earnings streams and low cash levels.
What are your market weightings within an Asia ex-Japan equities portfolio?
Our market weightings are predominantly a function of our bottom-up stock conviction.
China - 28%
Hong Kong - 13%
India û N/A
Indonesia - 3%
Korea - 19%
Malaysia - 2%
Pakistan û N/A
Philippines - 1%
Singapore -7%
Sri Lanka û N/A
Taiwan - 18%
Thailand - 3%
Vietnam û N/A
Cash - 6%
What are the main challenges that you expect to face in the coming 12 months?
The key challenge is always how to deliver alpha for our clients in the most consistent and predictable way. This is a unique environment with a lot more variables than we have seen in some time. The evaporation of credit, the sharp slowdown in global demand, and political upheaval in Asia are some of the major issues that will affect returns and volatility in the shorter term, and whose impact on fundamentals we have to assess continuously.
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