OAM: Betting On Asia

Overseas Asset Management was founded in 1989 by Desmond Kinch. It manages the OAM Asian Recovery Fund, a fund of funds vehicle that was launched in 1998 to take advantage of investment opportunities in the region shortly after the Asian financial crisis. The fund was an early investor in a number of successful, value-oriented funds in the region, including Overlook Investments (see my post here), Arisaig Partners, CAM-GTF and Target Asset Management. Since inception, the fund has returned 13.7% per annum, well in excess of its MSCI Asia ex-Japan benchmark index.  

Every year, Kinch writes an update to the fund’s investors. These letters are available on the firm’s website and date back to the fund’s year of inception. I find the letters clearly written and insightful, especially for investors interested in Asian markets. Below are some of the takeaways from his 2016 letter, although my suggestion is to read it in its entirety.

1) Favourable starting point for investing in Asia today
In comparison to US equities, a number of Asian equity markets look attractively valued. In his letter, Kinch includes a chart of the P/B ratio of the MSCI Asia ex Japan index since the fund’s inception some 17 years ago. He points out that the ratio is now close to its lowest level over this period of time. US equity markets, by contrast, are near historic highs across a number of valuation metrics, including CAPE (cyclically adjusted P/E) and P/B. This combined with what he thinks are already undervalued Asian currencies make his outlook for investing in Asia generally positive.

Having said that, a sustained correction in US equity markets or other external shocks could still have significant knock-on effects on Asian equity markets. The other big unknown, in his view, is how the quantitative easing policies pursued by central banks around the world will end. He calls it “an experiment without historic precedent.”  

2) Asian indices do not accurately capture the region’s growth
This actually echoes a similar point that Richard Lawrence of Overlook Investments made in his 2015 talk at the Richard Ivey School of Business. He said that while he would like to think that his fund’s outperformance over their benchmark index was attributable solely to his team’s actions, it might in fact have more to do with the MSCI. Specifically, a number of the Asian indices are often weighted towards large but inefficiently run, state-controlled companies (particularly those in China and India). As a result, an index investor in Asia might not get much exposure to the underlying long term consumer growth story in the region.

3) Asia’s economic progress to date is real and still has a long ramp ahead
I want to expand slightly on Kinch’s point here, even though others have surely written more eloquently about it. Over the last two decades, millions of people across China, India and Southeast Asia have been lifted out of poverty despite the numerous speed bumps along the way. Having grown up and lived across the Asian continent since the early 1990s, I have witnessed much of this progress first hand. There are certainly many challenges ahead, but the rise of the Asian consumer is a long term story that is still very much in its early innings. Investors certainly don’t have it easy – the global macroeconomic outlook remains uncertain and Asian markets are not as inefficient as they used to be – but a disciplined, long term approach to equity investing still seems to be a reasonable approach.