Asia Pacific Intelligence last interviewed Raymond Wong of Cheetah Investment Management in March of this year. Source. Since then, the firm has continued to support and grow the funds they seeded, largely local Asian talent. Wong focuses on the Cheetah Korea Value Fund as an example of what they do best. The Korea fund was originally a joint project with Cosmo, who at that time was Korea's largest investment advisory firm specializing in equities with $3bn under management and subsequently sold to SPARX. After departing Cosmo in 2010, Kevin Choi, Cosmo's founder and former CEO stayed in fund management, setting up ANDA, and he continues to manage the Cheetah Korea Value Fund, which enjoys a compounded return of 16% a year since launch in June 2004.
Assets under management in the fund dropped significantly during the global credit crisis from $250m at peak to just $80m now. Although capital flows to Asia surged since the credit crisis, Korea has been overlooked on the back of its export dependency and what Wong calls a misconception that Korea will inevitably suffer when Japan is booming. The strategy is based in equities, similar to many of Cheetah's funds, with a long bias value style, driven from the bottom up. The management team behind the fund at ANDA manages over $450m in total.
In the universe of offshore single country funds, this is the outperforming Korean fund. Korea was the new darling on the block for a while there, particularly in terms of hedge fund growth with the government really wanting to push the hedge funds industry, encouraging brokerage houses to launch prime broker divisions and domestic financial groups to offer domestic hedge funds.
It's early days but the government push has not yet had a big effect domestically, but Korea's popularity offshore is growing as investors identify Korea as a safe haven, especially amid global macro uncertainty.
Wong says: "In the past two years, Korea has dropped off the radar screen because of the revival of Japan. Lots of investors have the misconception that what is good for Japan is bad for Korea but I think that Japan and Korea are very different."
Wong believes that Korea benefited historically from the strong yen,as competing Japanese and Korean companies saw Korean companies grabbing market share from their Japanese competitors as the yen strengthened. But Wong believes that Korea's product base is not based on cheap labour but on the competitiveness of the product. "So success for Korea is not solely contributed to by the currency factor" Wong says. "Now that the yen has weakened it does not necessarily mean that Japan can grab market share back."
What the world forgets, in Wong's opinion is that Japan is a huge economy, the third largest national economy in the world and the second largest in Asia. "So if Japan comes back to life then it generates inter-regional economic activity which benefits all Asian countries" Wong says.
Korea, as one of the largest components of the emerging markets was particularly badly hit by the initial market reaction to Bernanke's comments on tapering in May. "We saw a huge outflow of investment from emerging markets and Korea suffered too" Wong says, "but despite that, our Korea fund is up 8% so far this year."
Another fund in the Cheetah stable is the Arcus Japan Value Fund - run by three partners with long experience of small cap Japanese funds using a focused fundamental value style, and seeded by Cheetah some 10 years ago. The fund has $115m under management and has achieved 195% in returns over the last 10 years, annualising at 11.5% a year. "The performance is tremendous considering what Japan has gone through with two lost decades" Wong says. Over the same period, the Topix index is up 17% in total, annualising at 1.6%.
The Arcus Japan Value Fund has in its mandate an ability to short but it has never used it: the fund is long biased and if necessary turns to cash and cut down on net exposure. Performance has been achieved through stock picking and their size means that they can go to small and micro cap investments. "But if you compare their performance against the micro cap index, theTSE Mothers index, which is still down 30% for the past 10 years, then their alpha is tremendous."
Wong confirms that it is their ability to carry out original research which gives them the edge. "Japan has passed through 20 years of decline and neglect from domestic and international investors" he says. "It ended up with hundreds of listed companies that are not covered by analysts. - Arcus's Mark Pearson regularly tells the same story of going to visit a company and being thanked as he was their first visitor in 10 years."
Wong believes that the economic recovery in Japan won't have a negative impact on Arcus's returns. "The under researched environment persists" he says. "Year to date Japan is up 40% plus however this rebound from depressed levels has only corrected deep oversold situations. It doesn't make it a boom market or an over-valued market; it is still undervalued and international investors are only beginning to rotate back to the market. There is a huge way to catch up and in terms of whether bulge bracket brokers will come back and hire more research teams, it's still a question of one or two years."
Lester Poon's Pedder St, written up in Asia Pacific Intelligence in March, is up 17.5% year to date, against an MSCI ex-Japan index return of 1.7%. As a result, the Cheetah Pedder St. team now has $130m under management, up from $100m earlier this year.
Looking forward, Wong is keen to do something in the natural gas arena and has seeded a US based manager, Regent St, that specialises in the oil and gas, energy and mining sectors.
Cheetah has more than a third of its investor base in Hong Kong but also numbers global institutions, family offices, endowments and sovereign wealth offices among its investors.
This article was published in Opalesque's Asia Pacific Intelligence our monthly research update on alternative investments in the Asia-Pacific region.