DWS Investments, the retail mutual fund business of Deutsche Bank, has launched its latest fund -- DWS Asia Select -- in Singapore.
The long-only DWS Asia Select fund will invest across all market capitalisations and will build its portfolio through active stock picking and quantitative screening, followed by qualitative analysis. The fund seeks to take advantage of attractive valuations of Asian shares amid the current gloomy market environment by investing in financially-sound and undervalued Asia-focused companies.
Richard Jones is the lead fund manager. In constructing the portfolio or around 25 to 30 stocks, Jones and his team will be looking for low price-to-earnings and price-to-book ratios, sustainable business models, strong free cashflows, healthy balance sheets and a track record of consistent growth in earnings and dividend payouts. The fund has a sales charge of up to 5% and an annual management fee of 1.75%.
Jones plans to construct a portfolio of "60-cent dollar" companies by purchasing their shares or assets at a significant discount -- usually 40% to 50% -- to intrinsic value. The discount is commonly known as the margin of safety and it allows investments to be made with minimised downside risk. The discount will be measured against the company's business, management and valuation through a combination of quantitative and fundamental measures.
"We found that many Asian corporates score highly on these counts,'' Jones says.
Cheung Kong Holdings, Jardine Mathieson, and VTech Holdings are examples of companies that would meet the fund's criteria, and DWS Investments explains why:
- Cheung Kong is Hong Kong's best economic proxy. The group dominates residential property development together with Sun Hung Kai, utilising strong cashflows from a diverse collection of port, retail and infrastructure businesses. The management team is generally regarded as one of the best in Asia. Li Ka-shing has been acquiring shares in the last nine months from HK$120 down to HK$80 per share. The group is trading at 0.7 times book. A net debt/equity ratio of only 10% means that the group is well positioned to increase market share and do value-enhancing deals.
- Like Cheung Kong, Jardine Mathieson usually prospers in hard times. It has a strong financial position, with group net debt of $600 million. With a gearing ratio of only 5% and a free cashflow yield of 8%, the group is in a good position to make acquisitions. It trades at 35% discount to a depressed sum-of-the-parts valuation of $30 per share.
- VTech is operationally lean and should realise significant margin improvement as production costs decline in 2009. The management team has developed close relationships with its suppliers and retailers, allowing management to effectively control the company's supply chain. The company has demonstrated superior inventory management during the current downturn and as a result the company is well-positioned to emerge as a stronger competitor. At a price-to-earnings ratio of 6.7 times, the company trades at a significant discount to its peer group.
The fund doesn't have a market or sector bias, but a model portfolio allocation shows the bottom-up approach being heavy on stocks listed in Singapore and Hong Kong as well as property and domestic consumer-related companies.
Jones says investors should buy companies that are likely to be materially bigger in the future for less than their present intrinsic value.
DWS Investments believes valuations provide a reliable guide to getting in and out of stock markets. Sixteen months of decline in global equity markets have brought valuations to multi-decade lows. In January 2009, the global equity market's trailing price-to-earnings ratio was around 10 times.
"Deep value has clearly emerged in the markets. For the patient investor with discipline and a long-term horizon, this is the time to capitalise on some very solid wealth-building opportunities," says Ed Peter, head of Deutsche Asset Management in Asia-Pacific and the Middle East. "The crux, however, would lie in differentiating true value, from value traps."
The current phase of the economic cycle is starting to provide good entry points for value-oriented investors, including those who are keen on blue-chip and large-cap stocks, according to Scott Jaffray, CIO of Deutsche Asset Management in Asia-Pacific and the Middle East.
For DWS Investments, value investing basically means focusing on the purchase of assets for less than they are worth, which is technically defined as intrinsic value. Value-style fund managers aim to compound capital over the long-term, so as to ride out the risk of poor outcomes, and also implement strategies that minimise the possibility of capital losses.
DWS Investment notes that recent weak investor sentiment in the markets stems from a bleak economic outlook and deteriorating corporate fundamentals. However, from a long-term perspective, current share valuations have rarely appeared more attractive, the fund house says. The MSCI Asia ex-Japan is trading at a price-to-book ratio of 1.3 times, for example, against a price-to-book range of between 1 to 3 times between the years of 1974 to 2008.
''We believe that the expected reduction in earnings of Asia-focused corporates should only be temporary rather than permanent," says Jones.