Lumiere Capital is shopping for bargains on the Hong Kong and Singapore stock exchanges, where valuations have seldom been as cheap as they are today, according to Yu Liang Wong, fund manager of the deep value strategy.
“If you look at the STI and the Hang Seng index, they are trading at single-digit prices [in terms of median price-to-book ratio] and are the cheapest markets in the whole of Asia,” says Wong.
His Singapore-based hedge fund firm runs the Lumiere Value Fund, a long-term, long-only vehicle that seeks out stocks in the region with high growth rates, priced at low valuations. The fund, which manages about $30 million, delivered returns of 163% in 2009 and 51% in 2010.
However, given its focus on mid-cap stocks – which are typically more volatile than large caps – Lumiere had a loss of -23% in 2011. “We buy stocks that are under the radar [and] out of favour with investors, says Wong. “We usually do not hold onto the big blue-chip names.”
This puts Lumiere at a disadvantage during periods of mass panic selling, when “investors will tend to hold onto their blue-chips and sell everything else”, he notes. Lumiere has since managed to recover its losses, returning 22% in the year to March 31. The portfolio is up 38% since its October 2007 inception.
While the Lumiere Value Fund has a pan-Asia focus, it currently has “a big exposure to China”, says Wong, with about 70% of its stocks listed in Hong Kong and 30% in Singapore. Both exchanges are trading at price-to-book ratios of 1.4x, a level that has only been seen in three other periods over the past 20 years: during the Asian financial crisis of 1998, the SARS epidemic in 2003, and the global financial crisis of 2008, he notes.
Lumiere has a bullish view on China, particularly the consumer discretionary sector. “We believe that with China promising growth of 15% in minimum wages every year [through 2015], there is going to be a huge middle class.”
Funds such as Lumiere’s are thin on the ground in Asia, where investors typically seek steady annual returns, rather than the winding path that deep value strategies take to deliver gains over the long term.
Hong Kong’s Value Partners is an Asian pioneer in the investment style. Others include Galaxy Asset Management, which opened its China Deep Value Fund to external investors in 2008, and Wykeham Capital which, like Galaxy, initially started running money for friends and family of the investment manager before publicly launching its Asia Value Fund in 2010.
About 80% of Lumiere’s investor base is in Asia, where its clients are largely high-net-worth individuals. It also has family office investors, including one from Europe which allocated to the fund late last year.
The firm is optimistic about adding more investors seeking exposure to Asia’s long-term growth story and perhaps side with Lumiere’s stance that “we can either have good news or cheap stock prices, but not both at the same time”.