Zhou Ping recently left GE Asset Management in Shanghai to set up his own investment shop specialising in Greater China equities and fixed income, taking most of his team with him.
Until last month Zhou was senior vice-president and managing director for Greater China at GE Asset Management (GEAM), a firm he had worked at for 17 years, initially in its Stamford, Connecticut headquarters.
GEAM is not replacing him in Shanghai. Instead, two managers in the US are assuming his responsibilities, although GE says it intends to set up a research function in Hong Kong.
Zhou helped the firm to launch a China fund in 2002, and later took on a global emerging-markets role as well. He moved to Shanghai in 2005 to build the firm’s China office, acquire a QFII licence and begin investing in A-shares by 2007.
Since then, the GEAM China fund has seen assets rise from an initial $200 million to about $400 million, and Zhou and his team have been highly ranked by Wind Information Company.
Now he is setting up a new fund firm that is meant to replicate the institutional quality of GE Asset Management in terms of operations, compliance, client service and so on.
But it will be a partnership, presumably without the distractions of being part of a larger organisation. For the time being Zhou is also serving as CEO, but once the company is active he would like to recruit a full-time chief executive so he can focus on investments.
Four portfolio managers and analysts from the GEAM team in Shanghai are also joining Zhou at the new company; they resigned last week, leaving a sole analyst at the firm.
Zhou’s new company also has a COO based in Hong Kong, not from the Shanghai GEAM team, whom he declined to name.
GE Asset Management, with $115 billion as of December, is assigning two investment managers based in Stamford to handle the firm’s A-share strategy: Mike Solecki, CIO for international equities, and Andrew Xiao, portfolio manager for China H-shares.
“Both are very experienced,” says a GEAM spokesman in Stamford. “Mike has been with GEAM for more than 20 years; Andrew has been with GEAM since 2006 and in the investment industry since 2000.”
Nonetheless, that marks a major scaling down of its Shanghai presence, although the firm retains one equity research analyst there.
In response, GEAM says it will add staff in Hong Kong for research coverage of China and emerging markets. The firm already has alternative investment managers in Hong Kong, and says it will place equity research analysts there in the coming months.
Meanwhile, Zhou is setting up a fund-management company from scratch. The company has a name but for compliance reasons he declined to reveal it. The firm is still in the final stages of obtaining the necessary licences in Hong Kong.
The fund will be domiciled in the Cayman Islands, trade in Hong Kong (where it will also maintain its COO and operations) and maintain a research office in Shanghai.
Assuming regulatory approvals move apace, Zhou hopes to be live by the end of this year. He expects to begin with $50-100 million, seeded by North American pension funds with whom he has relationships. Over time, however, he wants to build a clientele among Asian institutions, too.
The fund’s focus will initially be equities, but Zhou wants to provide a more balanced offering and he will look to develop both Chinese fixed income and pan-Asian investment capabilities.
Zhou intends to maintain his investment style, which is long-only, driven by fundamental research and, because it’s China, rides momentum to add extra returns. The portfolio is meant to have low turnover. Zhou describes it as “value to growth, not deep value”.
He believes now is a good time to build a China track record for institutional clients. The A-share index is currently low (although it will likely go lower in the near future, Zhou predicts), and over the next decade global investors will need to expand their China exposure to be more in line with the country’s economic size and market capitalisation. “There is a huge opportunity to build a brand name and prepare for change,” Zhou says.
In terms of outlook, he expects valuations in A-shares to decline a bit further on the back of negative corporate earnings. Chinese manufacturers are losing price competitiveness to Southeast Asian countries such as Vietnam.
At the top end of the value chain, particularly in technology, companies are struggling to retain or win new foreign clients. Many companies face overcapacity. And the government is digesting previous rounds of stimulus, which has resulted in gigantic misallocations of capital.
But Zhou also believes the markets have been overly pessimistic about such news. He thinks certain sectors offer good pickings on a three-to-five year term, including tech companies that provide energy-saving products, or service providers to manufacturers such as design, tech and consulting. He also likes clean tech and the automation industry.
He has been a bear on commodities and commodity-related companies for two years. He avoids infrastructure-related companies such as steel and cement makers.
China’s economic recovery will require political reform. Stimulus packages in 2009 saw most capital allocated to big state-connected banks, which in turn lent to state-owned enterprises. But private companies generate most of the country’s employment and pre-tax earnings, so this imbalance needs to be addressed.
Zhou is confident the government will make the necessary correction, and he will invest the portfolio incrementally as he sees that take place. “We want to be ready for the next wave of growth,” he says. “We’re not investing everything on day one.”