Adam Schor, client portfolio manager on the investment team at US asset manager Janus Capital, spoke to AsianInvestor while on a trip to Hong Kong last week. He represents the firm's equity strategies to clients and prospective clients. At the end of September, the Denver-based firm held $151.8 billion in global assets under management.
Before joining Janus in January 2007, Schor was chief investment officer on international small-cap equity portfolios with Bee & Associates. His responsibilities there included serving as co-portfolio manager for the Oakmark International Small Cap Fund and as analyst for the Oakmark International Fund.
What are the big trends you're seeing globally and how are they affecting equity investment?
There's been a tremendous recovery in the markets; you've got to be excited about that. But it did come from incredible depths -- people were trading on an end-of-the-world type scenario. Then once we realised the world wasn't going to end, there was a huge pick-up.
Obviously the markets have been helped tremendously by what governments are doing -- lower rates, quantitative easing, the massive stimulus programme in China. So globally a lot of stocks have revalued, there are some precarious economic situations, it's hard to find a lot of economic growth outside Asia, and you still have relatively cautious consumers and corporate buyers.
When all these things combine, we enter a period when it's really a stock picker's market.
The other element that's happening is that we're seeing a major shift from developed markets to emerging markets in terms of opportunities. When there's a slow growth environment in the US and Europe and robust growth in emerging markets, it's going to change the way people approach those markets.
The risk premiums for emerging markets are going to come down -- they've already started to in spreads on sovereign debt, for example. As those risk premiums come down, it becomes more of a stock picker's market. It's not going to be about buying big macro trends.
What about the US specifically?
In the US on a headline basis, there were nice GDP numbers, with third-quarter year-on-year growth of 3.5%. But if you strip out the benefit of the 'cash for clunkers' scheme, first home buyers' credit and other stimulus programmes, you take 2.5 to 3 percentage points out of that.
What you have is stabilisation -- the rate of decline is slowing, but we're not seeing robust acceleration of growth, and I don't think we will for a while. It will probably be more of a square-root than V-shaped recovery in the US; that is, a bounce then flat or very gradual recovery.
We are seeing signs of confidence, but that level won't be high until employment really starts to slow down. The high rate is really going to sap consumer confidence for a while. We've seen a bounce in retail sales thanks to cash-for-clunkers, but consumer confidence is still very low.
The other issue -- and a key dynamic -- is the US 'exit strategy'. There has been a massive government stimulus, $787 billion of approved packages. This is a massive expansion without a lot of consumer activity to offset it. That's unsustainable in the long term.
So what you need and what [US Federal Reserve chairman Ben] Bernanke talks about is an elegant exit strategy, where the Fed slowly pulls liquidity out and consumer demand increases. It's slowly going to happen, but it's a very difficult dynamic to achieve: to encourage spending as people are trying to reduce debt. As a result of all this, we feel there'll be a sustained low-growth period.
So how does that affect Asia?
In Asia, we have very exciting growth opportunities, and as a stock picker you have participate in it directly by investing in Asian companies, but also indirectly because US companies are going to be finding great opportunities in this region, in China in particular. And we see that as a long-term shift of focus.
If you're going to take advantage of these opportunities in emerging markets and China, you still need to be stock picker; valuations can get out of whack, as the risk premium comes down, more value comes from buying the right companies. And that means it helps to have the kind of basic, grass-roots, fundamental research that we base our whole investment strategy on.
Which areas or geographies in Asia do you see as having the strongest fundamentals?
There's a shift going on towards a more domestically driven economy in Asia, which creates opportunities in the retail sector. We've been involved in retail in China -- not directly in retailers but more in mall developers, which have underlying asset protection in the form of prime locations and robust double-digit retail sales growth. We're talking about companies like CapitaLand in Singapore and Hang Lung Properties in Hong Kong.
In addition, we have some exposure to education in China, due to a strong demand for higher education. For example, we have invested in [Singapore-listed] Raffles Education, which operates a series of vocational, technical schools in China with a focus on graphic design. We also have a similar investment in a holding company in Brazil, for example.
There's tremendous demand for that [higher education] and not enough government institutions to satisfy it. This is a consistent theme in countries with a young population and strong wealth creation.
What's your view in terms of Asian stock valuations now?
In a pure valuation sense, we're less excited about what's happening now than six months ago, when companies were very cheap. China's up some 60% in 2009 [as of November 4], and valuations are more stretched today.
So if anything, we're more bullish economically. China has been posting very strong GDP growth [8.9% in the third quarter, year-on-year]. If you had a doom-and-gloom scenario, predicting say 4% or 5% growth, as some people did, you're not taking that view any more.
From a stock-picking point of view, you have to be more careful today, but there are still good stocks to buy in terms of prices.
Are clients showing a greater awareness of downside risk now? If so, how?
Clients are still emerging from the shock of last year and they're cautious. People are questioning diversification, allocation, how much liquidity they really had and have; they're concerned over avoiding liquidity traps, such as some hedge funds turned out to be.
So they have broader awareness of valuation sensitivities and are looking at areas with some kind of liquidity. I'm referring to both institutional and retail here, with the retail component passing though financial intermediaries.
How about Asian regions and countries other than China?
Our biggest focus is the massive change in the economic power coming out of China, and India is not far behind -- and we have big investments in India as well. We don't try to make big macro calls, in the sense of saying 'we're bullish this week on Malaysia or Thailand', for example.
In India, we have some financials exposure there. You're seeing more mortgages, more traditional banking there, so that allows banks to increase their deposit base and therefore become more profitable. If you get the money you're lending from depositors rather than from banks, the cost of that money comes down and the profitability on your loans goes up. That's a natural evolution of the banking environment.
You're seeing a continued opening of the financial services sector, and you're going to have a general reduction of regulation there. It's not going to be rapid and it won't be in a straight line -- India has a lot of grass-roots pressures and a lot of bureaucracy -- but it's happening.
I understand Janus uses an analyst team-led approach as well as the typical individual portfolio manager-led approach? What are the benefits of each?
We have a team of analysts that creates 1,400 stock recommendations at any one time. And there's two ways recommendations get into portfolios: one is portfolio manager-led portfolios, where the manager adds his own insight, sector weights, country weights, themes etc.
And there's the team-led approach you're talking about, which essentially takes the best ideas of the analysts, which typically is sector-neutral or close to it -- this highlights the stock picking and gets away from some of the other sources of volatility and deviation from the index.
We think both create decent excess returns. Some clients think the team approach brings out the best ideas, while others like having one person they can sit across the table from and pat on the back or slap on the hand depending on how things are going.