The biggest investment opportunities for American stockpickers are in China, says Russell Cleveland, manager of the £50m Renaissance US Growth Investment Trust. About 60% of the fund’s assets were invested in American-listed Chinese companies last month.
But far from making a top-down call on the Chinese economy, Cleveland built the allocation through company-by-company analysis. He focuses specifically on entrepreneurial firms which satisfy four key criteria.
Chief executive officers must have “skin in the game” (own a significant stake in the business) and a “big vision”, he explains. In addition, companies must be profitable and trading at a reasonable price. “If I can get these four together, I have an 80% chance of winning,” Cleveland adds. “It is Pareto’s law.”
Of the stocks currently in the portfolio, Cleveland says AnchorFree has the biggest upside potential. The firm’s free Hotspot Shield programme allows Chinese users to bypass the telecommunications companies and avoid state monitoring of the internet.
Users have so far downloaded 3m copies and are viewing 25m web pages each week. AnchorFree earns its money from advertising and the firm began making profits in June, as earnings hit $12,000 (£7,300) per day, surpassing its daily costs of $10,000.
After AnchorFree failed to get venture capital backing, Cleveland invested $2.5m in the firm, giving him a 40% stake. “The advertising model is starting to work,” he adds. “If that continues the business could be worth a lot—perhaps $20m or $40m.”
Other firms in the portfolio include Sinohub, HemoBioTech, Cover-All Technologies and AuraSound—a firm supplying speakers for computers and phones. Recent investments include a Chinese outdoor advertising firm which Cleveland describes as “low-tech but profitable.”
About 25% of the portfolio is in privately-owned firms. “Most of the private companies in the fund will be publicly-traded within six months,” says Cleveland. “Companies decided not to list when the market collapsed, but I would expect the proportion to come down from here.”
According to its annual report for the year ending March 31, Renaissance US Growth Investment Trust has returned an average of 8.5% per year since launch, in sterling terms, beating the Russell 2000 and S&P 500 indices by about five percentage points.