The Neutron Asia Absolute Return Fund did rather well in 2020. HFC’s Stefan Nilsson checks in with portfolio manager Jonathan Garrick in Hong Kong to talk about the investment strategy, its performance drivers and the recent expansion of the investment team.
Hong Kong-based Jonathan Garrick is the Portfolio Manager of the Neutron Asia Absolute Return Fund which is part of BRIC Neutron Asset Management. Jonathan has over 19 years’ experience in the financial markets working in London, Singapore and Hong Kong specialising in Asia ex-Japan equities. He graduated from Nottingham Trent University with a BA (Hons) in European Business with Spanish. Formerly, the bulk of his career was spent focusing on hedge fund coverage at HSBC, Bear Stearns and Citigroup. There, he was responsible for broking strategies that included equity long/short, event-driven, value and growth. Prior to that, he was Head of Asian Sales-Trading at Cazenove responsible for pan-Asian trading for a global client base. In 2009, Jonathan left investment banking to set up a concentrated long/short greater China fund with private money based in Hong Kong.
Tell us about your Asian absolute return strategy.
It is a concentrated, high conviction portfolio employing a bottom-up, fundamental approach seeking to generate positive returns in all market conditions. We focus on identifying companies in the process of change or transformation. For example, emerging industries, corporate re-organisations or companies with a clear catalyst of change such as regulatory changes, new products or services. When industries or companies transform, we aim to capture the benefits.
You have opted to manage a relatively concentrated portfolio of stocks. How concentrated is it and why and how did you arrive at this approach to managing a portfolio?
We aim for a maximum of 20 long positions with the top 5 holdings typically accounting for 35%-45% of the NAV. Our research process identifies candidates that fit our strategy and criteria then our analysis determines a high conviction case for investment. By limiting the number of holdings in the portfolio it allows us to focus our attention on the best ideas we can find, then allocate our investors’ capital to these best ideas. It also provides hurdle criteria for new investment ideas that must improve the portfolio. All the holdings in the portfolio are due to their specific investment case and uncorrelated to the broad market indices or an ETF.
Your strategy had quite a good result for 2020. What were your performance drivers last year?
In 2020 we focused on numerous corporate actions throughout the year. Several of our main holdings were involved in corporate reorganisations or spin-offs as the new listing criteria, valuations and investor appetite were highly favourable. In many cases, companies with loss-making emerging business units were able to create a separate listing for the unit at an attractive valuation for growth investors to the substantial benefit of shareholders. The IPO market was also buoyant. However, for many of the popular deals, the allocation for a smaller fund was virtually zero so IPOs made little contribution for us. With regards to sectors, there was notable exposure to the fast-expanding internet of things and healthcare companies.
Your portfolio seems to have quite a lot of exposure to Greater China. How have the US-China tensions of recent years impacted how you look at this market?
Adverse changes in regulations are a major risk to our portfolio. In the last couple of years, the US-China trade tensions have weighed heavily on the broader markets. The imposition of tariffs, executive orders and the entities list together with abrasive headline tweets created a volatile environment and heightened the risks and uncertainty. For us, we remained focused on specific investment ideas with a distinct catalyst. In Greater China, we were domestically focused and positioned in companies that were to benefit from government policy, corporate action or behavioural changes.
You have recently added your old colleague Leon Chik to the investment team. You have worked together in the past but at bigger institutions. How is it different now that you’re working together in a small team at an independent business?
We first worked together in 2005 and have kept in touch over the years talking at length about companies and markets. He is dedicated and highly experienced with a broad knowledge of companies from many diverse industries. He was the number 1 rated analyst for Institutional Investor for HK/China Small & Midcaps and consistently in the top 3 from 2011 to 2017. More importantly, he has a strong work ethic and a good nose for ideas. In a bigger institution, you both have your specific roles and responsibilities and only interact when they overlap. In the fund, we will both work towards our common goal and interact at many different levels. He has a thorough in-depth research process with a strong analytical foundation. With a long history between us, we can speak freely and it is more efficient and effective to have quick frank conversations and be able to stress the investment case and gauge the level of conviction. This level of communication is critically important to us.
2020 didn’t follow the plan for any of us. What macro factors do you think are the ones that may impact Asian equities in the coming year?
In the coming year, the main macro factors look to be increasingly constructive for Asian equities. The Biden administration should bring the benefit of a less antagonistic US-China relationship. The likelihood of a larger US government stimulus and spending together with highly accommodative monetary policy brings the fair wind of a weaker US dollar that should prompt more equity inflows to emerging markets. Global governments including China will look to ramp up their domestic economic recovery with consumption boosting measures and infrastructure spending. For us in Asia, the impact of Covid restrictions seem to be diminishing. There is a notable improvement in the economic data and company operating statistics and as a consequence, the corporate earnings rebound in 2021 and beyond should be considerable. Asian companies, particularly in Hong Kong and China, are now incentivised to re-organise with new listing rules and enticing valuations. In 2021 there will be more IPOs, M&A and spin-offs to crystalise value providing a rich pipeline of opportunities for investors.