Citywire AAA-rated Tom Naughton has told Citywire Selector he is nervous for the first time on his Asian equity income fund and has moved cash to its highest level as a defence.
Naughton, who has been Citywire AAA-rated in every month since becoming eligible in February 2014, said the Prusik Asian Equity Income fund has trailed the market over the past quarter, having returned 3.9% against an average manager return of 7.4%.
At present, Naughton has 14.6% cash in the $960 million fund, which he said is a response to a lack of investable ideas and the fact that his preference – dividend-paying growth stocks – is out of favour.
‘The problem is if China continues to grow very strongly and cement and steel and real estate continue to do strongly, then the things we own will continue to do well, but the things we don’t own will do very well and outperform. It is not a massive problem in itself but it is a frustrating place to be in.
‘If we are in this environment as we are today, does it make sense to be risk averse, slightly paranoid and defensive? And I am not saying we suddenly buy loads of Chinese steel companies, but do we tweak our investment process, so we can keep our cash level down to 5% rather than 15% so we can stay more fully invested? Is that more appropriate than the strategy we have today?’
Naughton said he is trying to make small changes to help the fund but he refusing to be drawn in by large stocks such as Alibaba and Tencent Holdings. Naughton described the growth of these very visible, high growth stocks as a ‘new problem’.
‘This is the first time I have been nervous. Because, in the past, the big stocks in Asia have been things like the Chinese banks or BHP – either I can own them or not and I am relaxed either way. The challenge with Alibaba or Tencent is that these are companies that are extremely attractive and the problem is they don’t fit with the criteria of the way I think about investing for the fund.
‘They are very highly valued, very difficult to predict and I think they will do very well,’ Naughton said. ‘But the mental models I use to do investment don’t work with those stocks. They are very big, so our decision not to own them will have a knock-on effect for our relative performance.’
The fund currently has 15.4% exposure to transport infrastructure, while the largest country bets are Hong Kong (22.4%) and China (16.8%). The largest single position at present is a 7.7% allocation to Samsung Electronics’ preferred shares.
On a three-year basis, Naughton has returned 46.5% in US dollar terms to the end of August, which has led him to rank second out of 215 fund managers in the Asia Pacific ex-Japan sector. The average sector manager returned 13.8% over the same period.