30 November 2003 20:42
Keeping a tight rein on quality control standards
The father of Yang Liu never imagined his daughter would become one of China's hottest fund managers.
A graduate of the country's top school and an expert in the socialist economies of Hungary and Russia, her
father's life has been rooted in the Communist Party. "He told me that he never dreamed I would make many
times more money than him," says Ms Liu.
But, like her investors, he is starting to catch on to his daughter's stockpicking skills. The Atlantic China
Fund she launched on the day Iraq was invaded, March 19, has been one of the Chinese market's strongest performers
this year.
The fund's net asset value is up 63.2 per cent in dollar terms from launch to November 19, compared with a 47.95
per cent gain for the MSCI China Free index. The size of the fund has swelled from $18m (GBP11m) to $75m.
Ms Liu says it was "terrible, horrible timing" for the launch, with sentiment at a low ebb amid concerns
about the threat of an overheating Chinese economy and poor corporate governance.
"Very few people believed I could deliver good returns," she says. "However, if you follow the market
for a long time, if you understand the company background and who is managing the businesses, you can always find good
companies. Every society is the same."
The Hong Kong-based fund manager started her career with China International Trust and Investment Corporation, the
financial services conglomerate. In the first five years, she worked as a project manager before spending nine years as
an Australia-based fund manager in a joint venture between Citic and Colonial First State.
The New Era PRC Fund that Ms Liu managed for the joint venture rose 184 per cent over the three years to March 31
2002 compared with a 40.76 per cent fall in the MSCI China Free index. But last year she was tempted to join Atlantis
Investment Management, a specialist Asian boutique.
Ms Liu takes a bottom-up approach to stockpicking, eschewing benchmarks to focus on absolute returns. A core group of
about 40 holdings comprises 70 per cent of the fund.
To qualify for this group, companies have to be delivering a return on equity above 20 per cent, producing a dividend
yield of more than 4 per cent and have a five-year operating history.
Typically, she also targets stocks with price-earnings ratios of six or seven, or less.
The companies must also be market leaders with quality management. Ms Liu prefers small to mid-sized companies that
benefit from the boom in domestic consumption rather than exporters, which are more subject to vicious competition.
"This is where I add value, I don't buy China Mobile, I don't buy Petrochina. International investors
can access these big companies and get research from any of the stockbroking houses," she says.
Regular company visits are a key part of Ms Liu's approach, often assessing firms well before initial public
offerings. In the past, Ms Liu says she was forced to trade stocks over a three-year cycle.
"You could not buy and hold. It was always buy and sell," she says. "The Chinese investment cycle is
three years. The first year earnings are established; in the second, market share and margins are improved; and in the
third year, the competition really hits. That is when it is time to sell."
However, Ms Liu says that this year there has been a shift brought about by improving consistency and quality of
earnings. This is making it easier to buy and hold.
"We believe the investment case for China is gaining wider recognition as China is rapidly taking centre stage
as the global workshop for most industrial product categories."
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