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Prasad was in Hong Kong last week to accept BatterymarchÆs award for best five-year risk adjusted performance in the Asia ex-Japan equities category at AsianInvestorÆs 2008 Achievement Awards. He spoke to AsianInvestor about the firmÆs quantitative and fundamental approach to investing.
How do you combine the quantitative and fundamental approach when managing your portfolios?
Prasad: Batterymarch was founded under the premise that you could use computers to analyse the market and actually pick stocks that could do very well. Over the last 35 years, that is what we have been doing. The model has been refined over the years. Quantitative models require data and the better the quality of the data, the better the model.
When we first started our emerging markets product in 1987, there wasnÆt really any quantitative data available. The first real data became available in the emerging markets boom of 1992-1993. Until then, we were using fundamental opinion to build our portfolios and pick our stocks. In 1995-1996, the depth and liquidity of the markets improved and data became more available because a lot more analysts started covering emerging market stocks.
What quantitative factors do you look at?
We look at quantitative data in four dimensions: valuation (how attractively is it valued), growth potential (in terms of demonstrated earnings growth and whether the company can continue that level of growth going forward), expectations (how analysts perceive that company and whether they are revising earnings up or down), and technical factors (whether the stock is showing relative strength versus the market or not).
We have approximately 55 factors within these four dimensions. These dimensions are combined in an equal-weighted fashion. That gives us a very core approach that is not biased towards either value or growth. If you look at other quantitative managers, they are very value-biased. Since ours is an equal-weighted approach, itÆs balanced. We are able to add value in all market environments and we do not have to indulge in timing with respect to style. Batterymarch is focused on stock selection.
We have a team approach and the members of the team are very global in their outlook. The Asian team is essentially embedded within the emerging markets team. The three of us manage the Asian portfolio. We have a global perspective when we are looking at stocks, when we are forming our opinion, evaluating names, and talking to management.
How do you screen the quantitative data?
Out of those four basic dimensions, we come up with a quantitative score or rank for each particular stock. For the stock to rank well quantitatively, it has to rank well across each of those dimensions. Right now, we are able to evaluate about 1,500-1,600 names on a daily basis. We rank each of the names from one to 100 and the top 20%, which we call buy-rated or attractive stocks, are pre-identified by our stock selection model as the ones that will outperform the index.
On any given day, I can open my spreadsheet and you can ask me about any stock and I can tell you if that is a good or bad stock to own. I donÆt need 20 analysts sitting in Hong Kong or Singapore to give me the answer. The three of us sitting in Boston can manage money in Asia for the long-term.
What do you look for on top of the numbers?
We try and weed out all the losers and some of the ways we do that is by looking at corporate management, management quality, corporate governance, and regulatory or political risks. Those are things our quantitative model is not yet able to catch. Within Asia and within emerging markets, country risk still plays an important role. We have a country allocation model and it is constructed in a similar manner. We get a ranking of countries on a quantitative basis and then we input our fundamental opinion and that takes care of earthquakes, disasters or political issues.
Which carries more weight?
Back in 1995, it was fundamental opinion because back then we were looking at 300 to 400 names. At that time, we used to put opinions on 70%-80% of the names. It was more of 50/50 quantitative and fundamental. Today, because of the changes and innovations we have done to the quantitative model, the improvements to the depth and breadth of the quality of the data, and the higher number of stocks in the universe, we end up putting opinions on around 10%-15% of the names. For a stock to be put in our system, it needs to have three brokers covering it and it has to have a basic liquidity of $2 million to $3 million dollars.
Why is your Batterymarch Pacific Equity Fund overweight in Korea, Thailand, the Philippines, Malaysia and Pakistan?
We are overweight in those markets because of the criteria we have defined and the stocks in those markets that meet our criteria.
In Korea, stocks have decent growth and valuations are very attractive. In Thailand, the market is cheap and growth is being revised upward. In Malaysia, stocks that we are in such as Digi.com are well managed and continue to surprise the market; we have other stocks that we like there especially in the plantation sector. In the Philippines, we have Philippine Long Distance Telephone Company and Manila Water.
In Pakistan, we have one stock, which is Fauji Fertilizer, the fertilizer company of the Pakistan military. The stock is cheap, stable, and liquid, and the price of fertilizer is rising. Having that one stock is enough for us to be overweight in that market because Pakistan has a very small weighting on the MSCI index. We donÆt want our bets to be so small that it wonÆt have an impact on our portfolio.
What is your assessment of Asian equities markets in terms of valuations and challenges they present?
Asia has more growth and investments than the US. But the price-to-earnings (P/E) ratios are no longer very attractive. We tend to be a little cautious.
It has been 10 years since the Asian financial crisis and so debt-to-equity ratios are low, corporations are awash with cash, and income growth is very strong. You donÆt have that in Europe or in the US.
Asia is now experiencing a much needed pause that should refresh the region. During this time, Asian governments have time to look at their policies, look at their regulations, and make their economies stronger because they have the wherewithal to do it. Without this pause, inflation numbers could really go up and that could really hurt.
What is the greatest risk in Asian equities markets and how are you managing that risk?
The biggest risk right now is inflation. In the medium-term, the bigger risk is the US and global slowdown. If that slowdown is more protracted then it will start affecting Asia. We think the US slowdown will be more protracted and it will take more time to resolve. We think the bottom is here and the markets might fluctuate around current levels. The markets are just waiting for the US economy to give direction. We are in a transition period right now so we have to be cautious and selective.
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