Hong Kong-based Yuming Pan is recalling how his parents grew up in China’s planned economy and still work for government-linked companies. “Their pay was never high but, today, the younger Chinese are fully integrated into the market economy,” he says, citing his best friend who works for a number of IT companies, including Microsoft.
As an indication of how the economy in China has transformed within his lifetime, he explains how his friend was the first to purchase a car during his school years and, as such, was a pioneer.
While the many layers of distribution to be found in old, inefficient business models of the Chinese companies have been shaken up with the power of the internet and e-commerce, a lot of goods in China are still more expensive than in the UK, he says.
“What China really needs is productivity growth and the ‘disruptive force’ internet operators are doing this job.”
Career path
After spending his early years in China, Pan got a scholarship to study in Singapore as an undergraduate in 1993, which he followed up with a master’s degree, which he says is the much more typical starting point for most Chinese people who study overseas.
He joined the asset management arm of Allianz in 1999 as an analyst covering Thailand and the utilities/energy sector, after which a restructuring led to his role becoming part of a global equity team.
By 2010, he was the portfolio manager in the Hong Kong office, responsible for the Allianz greater China Dynamic and China A Shares funds.
He was also co-manager of the Allianz Little Dragons and Emerging Asia Equity funds.
At this time he left Allianz to go to CSOP Asset Management, a big Chinese asset manager that was setting up in Hong Kong, and where he became lead manager of the Greater China Absolute Return Hedge Fund, staying for three years.
“After that exercise I realised my strengths are on the long side. On the short side I did OK but not that great. My performance in 2011 was 5% – a humble amount that has to be put into context. That year witnessed the sovereign debt crisis and the overall market was down 20%. So 5% puts you way ahead of your peers.”
Bringing it all back home
The main reason Pan rejoined Allianz last year is because he found it hard to grow the assets, “despite really putting in a lot of effort trying to get the performance up”.
“You need a lot of things to work before you can grow your assets, which can take a long time,” he says. “So, I decided to come back, and it was the right decision. As a firm, we are advocating active management and I am more suitable for this kind of strategy.”
The colleague who had been running the funds in the interim left Allianz, giving Pan the opportunity to come back.
“I can manage the portfolio the way that I like and I can concentrate on more stock selection rather than following the benchmark.”
He is now responsible for the Total Return Asian Fund, the Luxembourg version of which has more than $300m (£178m), as well as other funds including Greater China Dynamic, totalling around $800m.
He has been in Hong Kong for a little over seven years, which he says has the advantage of providing easy access to companies.
“Hong Kong is the most happening place. There are more wealth managers than elsewhere, so it is much easier to network.”
He says he is also able to engage in field trips more often than those who run Asia funds from London.
Anthony Bolton, who was very successful in running Fidelity’s UK Special Situations Fund said, after retiring from his less successful China fund, he found it difficult to get clear information from Chinese companies – so how does Pan get the right answers?
Pan says being able to speak the language makes it easier and he adds that to get an overall picture he often relies on more informal sources, such as chatting to the companies’ clients or their suppliers.
GrassRoots Research, an in-house Allianz Global Investors team, is also used to get field reporters to gather information from industry players or to carry out customer surveys.
The Grassroots division combines over 10 in-house employees, a global network of over 300 independent, experienced journalists and field force researchers, and over 50,000 industry contacts. This network is used to apply innovative market research and investigative journalism techniques to identify stock and sector trends before competitors do.
For example, Pan initiated a Grassroots study on Hankook Tire Group, a Korean-based tyre maker with a global reach, to measure the quality of its product and gauge what improvements had been made over the years.
This involved talking to purchasers, such as car manufacturers BMW, Mercedes and GM, and the distributors, to get their opinions. This resulted in positive feedback that revealed Hankook’s competitive market position in the market in terms of price and performance.
“This information really gives us a better understanding, or at least reinforces our conviction,” he says.
Allianz pushes this grassroots research approach across the whole company, not just in Asia, as a way of avoiding having to rely on conventional equity analyst views. “It really gives us a strong case that it will grab more market share over time, because it’s just become more and more competitive. That’s why Tire Group is now one of my top holdings.”
Winning strategy
Turning to the strategy of the fund, the unconstrained Asian ex-Japan portfolio aims to deliver 3% to 5% pa ahead of the MSCI AC Far East ex Japan index over the market cycle.
His high-conviction stock-picking approach, focused on 40 of his highest conviction ideas, is illustrated by the interesting list of top 10 biggest stocks in Asia he has put together, looking at the past, present and future.
None of the top 10 companies in 1998 made their way to the top 10 today. “The big lesson from this is the winners of today may not necessarily be the winners of tomorrow. That’s why only two of the top 10 stocks today are in my portfolio. I want to position my portfolio for the winners of tomorrow and, although I might be wrong, I will try very hard to get it right.”
His prediction for the top 10 stocks in the year 2020 are also shown, with highlighted stocks to show Pan’s existing top holdings, including a planned stake in Alibaba when it floats.
Samsung is at the top of the list for 2014 but is notably no longer in the top 10 in six years’ time, which Pan says is because he has a strong view of its future earnings. “If you look at Samsung’s earnings today, more than 70% is from smartphones, of which 55% is from high-end smartphones, like the phone I’m using, the Galaxy S4.
“Before, I was using an iPhone 4S but I switched to the Samsung Galaxy S4 because a large screen is better for my eyes. When the iPhone 6 comes out, I think Samsung’s high-end phones will have problems because people like me will definitely switch back.”
He says that, in China, the rise of low-cost phones, including one called Xiaomi Red Rice, has been a phenomenal success, coming from nowhere to “quite a big market share in the last two years” and putting severe pressure on Samsung’s mid to low-end phones.
Samsung has also recently come under strain because of restructuring due to the company founder not being well, he says.
All the company stocks he holds must meet his expectation of 15% pa total return for the fund and in the information technology sector, Tencent Holdings, which doubled its share value during the past year, investing $500m in a Korean mobile games company, exceeded this target by far.
Pan highlights how younger Chinese people are earning much more than the older ones, mirroring his own family position, in contrast to the position in the US. Against this backdrop, he expects the fund to achieve a minimum of 15% total return pa for the next three to five years, dependant on conditions.
“If there were another another crisis then I don’t think I could deliver that, because no matter how good
the stocks are, they are going to fall. But, in normal market conditions, I do expect to be able to give you an absolute return.”
One surprising lesson he says he learned from his hedge fund experience is “not to play too much with cash” despite the fact his fund can invest up to 30% in cash, and instead to “focus on stock selection. This strategy works best, rather than jumping in and out of the market”.
