The turn of the year

17 December 2009

Even the best and most experienced fund managers occasionally go through a bad period. For Henrietta Luk, manager of the Melchior Asian opportunities sund, a particularly torrid time started in November 2007 and lasted for about a year.

This time was indeed a baptism of fire for most fund managers. The extent of the Western sub-prime mortgage problems were coming to the surface and plenty of people - Miss Luk included - thought this affair would be fairly well contained to the West since there were no similar problems in Asia. She therefore chose to remain fully invested and did not take profits in some stocks that had had an extremely good run.

Unfortunately, as we now know, the West’s woes had a knock-on effect on stockmarkets across the whole world. There was a pronounced sell-off and the areas that had risen the most were worst affected. The fund found itself battling a fierce headwind and fell by more than many of its peers. What is more, her overweight position in Taiwan (although it proved to the poor performance as that market’s reliance on export markets meant it bore the brunt of the selling.

However, Henrietta Luk’s 22 years of investment experience meant that, far from caving in as other fund managers might do, she regrouped and made the smart decision to take money out of Korea before the won collapsed by around 30 per cent.

By November 2008, she had identified several areas where she felt Asian markets had become far too cheap and by January this year she was fully invested, concentrating on the Greater China region which has now bounced back extremely well.

So the fund has gone from being one of its sector’s worst performers in 2008 to one of the best in 2009. Before this strong rally began, Henrietta Luk was amazed by the extremely low stock valuations that were available. In some cases, she was able to buy shares in a company at a price that actually valued the firm less than the amount of cash it had on its books. This was at a time when some of her competitors, spooked by the massive market fall, had been somewhat scared off and were not fully invested.

Her overweight position in Taiwan then also started to work spectacularly - the tech sector which is a major part of that market has been a top performer this year. It was notable that some telecoms companies were down to just one week’s worth of inventory and had no choice but to restock. So overall we have seen a major profit margin expansion with much better company results and big earnings upgrades by analysts. The auto sector has also seen spectacular recovery - year- on-year car sales in China are up by 80 per cent.

Stock valuations are no longer outrageously cheap but she believes they are actually better than they were in October 2007. In my opinion, Asia as a whole looks strong on a long-term view and the Greater China region is perhaps the most promising of all.

Henrietta Luk remains wary of the South-east Asian countries (barring Singapore), believing that Philippines, Indonesia and Thailand just have too many political problems at present and this makes the risk of their markets hard to evaluate.

She also sees real benefits to the Chinese infrastructure projects. One of the important things to remember is that when a road is built in China it actually connects people. When we build or improve a road in the West’s saturated transport systems it does not necessarily make as big a difference. In China, it is transformational.

She believes that China will see around 9 per cent economic growth. The credit crunch in the West has in many respects come at a wonderful time for China as it has given the authorities even more incentive to move from an export focus to encouraging domestic consumption.

In conclusion, Henrietta Luk believes there is still more potential growth to come in 2010. She had one of the most awful years of her professional life in 2008 but she has brought the fund back strongly.

In my view, her relatively aggressive approach dovetails quite nicely with the more cautious strategies of other quality Asian funds such as those from Aberdeen and First State.

Mark Dampier is head of research at Hargreaves Lansdown

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