Wilfred Sit rejoined Barings in 2011 as chief investment officer, Asia after four years in a senior position at Mirae Asset Management. In his current role, he is responsible for managing the Asian investment team based in Hong Kong.
How would you describe your investment style?
We have a ‘growth at a reasonable price’ or Garp style across our funds, which combines both value and growth components. This style is particularly appropriate in Asia where economies are expanding rapidly, new firms are being formed and many are raising capital in the equity markets. The idea is to identify the right ones.
So how do you select them, what is your investment process?
Again, like our style, our process is eclectic: it involves both top-down and bottom-up analysis with quantitative screening. We are supported by a strong macro team in London that guides our asset allocation, and then country and sector choices. Managers and their analysts evaluate selected stocks and companies based on five main checks, namely growth potential, liquidity, currency, management and valuation. In addition, there is an intuitive element for overall market allocations that takes into account what we think is driving markets at any time.
For the past six months, macro sentiment has been the main engine.
How can you be sure that your research is accurate?
On-site visits to companies are essential. Of course, it’s impossible to gather all information on our own, and in fact it’s not necessary.
External analysts, independent corporate governance reports, collective wisdom and simple qualitative judgement all have a role. Unusual or unorthodox behaviour can often be a good guide to poor governance, for example a strange management structure, an odd selection of auditor or just a decision to list on a market with limited disclosure requirements.
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Are there unique features in Asian markets compared to Europe or the US?
Many investors don’t appreciate the cultural differences, and assume that business is conducted in a universal way. It’s not that standards are worse, just that business models, methods and incentives can vary. For instance, there is a family business culture in China and much of Asean that contrasts with a text-book management style in the US. And after all, is corporate governance really better in the West, where executives are financially rewarded for boosting returns on equity by taking on irresponsible levels of debt?
Nevertheless, there are problems such as the poor treatment of minority shareholders and disparate accounting rules, but these are changing. In the end, the most important difference is to understand that the landscape in Asia is highly competitive and fluid, and that means both tremendous opportunities and also risks for investors. Do you feel constrained by the restrictions on conventional long-only funds compared to hedge funds? Certainly not. Asia and emerging markets in general are growing, so it makes sense to take long positions.
What lessons have you learned from the “black swan” events since 2008?
All black swan events are not equal; some are more likely than others. For instance, while the disastrous and rapid escalation of the global financial crisis after 2008 could not be fully anticipated, we can build scenarios should Greece default on its sovereign debt. A key lesson is that it makes sense to stay with liquid assets and securities.
Another is that a black swan event might actually be short-lived and so provide us with a buying opportunity if prices fall dramatically. Far worse for investors is a continuous, long-term decline in prices, such as Hong Kong’s bear market between 1998 and 2003.
Which countries in the region offer the best investment opportunities?
Most market valuations in Asia are cheap, although some in Asean are a little more expensive due to their out-performance last year. As a result, our active positions are quite moderate. On the other hand, we are conservatively in “risk-on mode”, so we are underweight more defensive markets such as India and Malaysia, and overweight China, Indonesia and Korea, with a bias towards countries whose economies are less vulnerable to the current global problems.
Which sectors do you like?
We’re keen on technology stocks, especially makers of electric goods, chips and other complex products. Barriers to entry to these industries are still high, and we favour those companies with strong brands and dominant global positions. Most of them are in China, Korea and Taiwan, which are gaining on or over-taking Japanese companies. China’s internet sector is especially interesting, because of the country’s vast domestic market and the proliferation of local content providers.
Other sectors that offer great potential in the region are consumer retail and construction. The rise of a high spending middle class supports the former, especially in populous countries such as China, India and Asean nations and increasingly home-grown companies are emerging. The construction industry is cyclical, of course, but large spending programmes are underway in India and Indonesia as well as China; and it’s notable that Korean and Chinese firms are going global. Finally, we like the banking sector in countries where there is still a lack of penetration.
And the immediate outlook?
As I said, we are now in risk-on mode — but not aggressively. There is certainly a rebound taking place in markets, but we’re not quite convinced that is sustainable yet. Greece still overhangs sentiment. When that’s resolved we might well be in the early stages of a bull market.
