The annual Sohn Hong Kong conference is coming up this week, so this is a great time to catch up with some of the managers who will be presenting this year. Sohn Hong Kong is always an excellent event to help raise money for some important causes while also bringing some interesting ideas from some of the best hedge fund managers in the world.
This year’s May 23 event is the 12th annual Sohn Hong Kong Conference, and it will bring together top investors in Asia to support women’s health issues by promoting research, education, prevention and treatment.
Capitalizing on distressed opportunities
Of course, one of the many reasons that events like Sohn Hong Kong are so interesting is that they bring a wide array of different investment ideas and views about how best to approach the market, and I got a chance to speak to three managers who will be speaking at this year’s event.
Aaron Stern of Converium Capital believes the best opportunities come during times of distress at the company level or within a particular asset class or geography. Events like these tend to scare away traditional investors, but Stern looks for opportunities at such times. Mr. Stern has spoken about opportunities in Japan at past Sohn Hong Kong conferences, for example Kirin and JR Kyushu, but now Converium is finding plenty of opportunities in distressed and stressed debt in Europe and Latin America.
These events present attractive opportunities to enter at a time when prices are deeply depressed,” Stern explained. “Our investment philosophy is to identify securities that we believe are mispriced due to an event or an overhang that we can identify, this sets up for an investment opportunity where we believe the downside is limited and the return profile is asymmetric to the upside. By combining that approach with portfolio hedges and shorts to take out the market risk, we believe we can design a portfolio to generate positive returns based on idiosyncratic events and not based on the ups and downs of market.”
Thinking differently
Wendy Chen of Sigmoid Capital described their strategy as a “pan-Asia long/ short equity strategy,” highlighting the inflection potential they see in their investment themes and target companies. She said one thing that makes Sigmoid’s strategy unique is that they think “differently and better than the market consensus.”
“The market is an efficient place, so if we do the same analysis as every other market participant, we shouldn’t be able to generate above-market returns over the long term,” Chen explained. “At Sigmoid, the team is organized around a major industry theme and its related supply chain. Oftentimes it involves understanding different sectors (i.e., internet + semiconductors for AI supply chain). This is different from the Street’s silo sector coverage.”
Chen added that this approach enables them to form differentiated views on the speed and duration of any market inflection. The fund focuses on mid-sized Asian companies, which tend to have more market inefficiencies.
Engagement
Seth Fischer of Oasis Management takes a much more direct approach to investing. His firm has developed a reputation for helping companies dramatically improve their operations, which benefits all stakeholders.
“We are in this for the long term, and so it is worth the investment of time by us, for months or even years, to understand the company and its opportunities, hire the best of consultants globally, learn from the leading companies in the world, and bring that all to our engagement with the company,” Fischer explained. “The best of companies consider us meaningful partners to help them grow. Their success is our success.”
When looking for companies to engage with, Fischer targets companies that are undervalued and have “a lot of unrealized potential if they improve their operations and governance and capitalize on all of their assets to create sustainable, long-term value for all stakeholders.”
China’s need to downsize in manufacturing
When asked about a top investing theme she sees in Asia, Chen highlighted China’s manufacturing overcapacity and its path to downsizing.
“China has been the world’s factory for the past 10 years,” she said. “Investment last year accounted for 43% of China’s GDP and has averaged well over 40% for the past 30 years. Put another way, China has led an investment-driven growth model. While China accounts for 18% of global GDP, its share of global investment is an astonishing 32%. If China were to grow by 4% to 5% a year on average for the next decade, its share of the global GDP would rise to 21%, but its share of global investment would rise much more — to 37%.
Chen added that the rest of the world would have to reduce the investment share of its own GDP meaningfully to accommodate China. She also questioned whether the rest of the world can actually absorb such an increase, noting that the U.S. has made explicit plans to move manufacturing back home while India and the EU have grown more concerned about the trade imbalance with China.
“It may become increasingly challenging for the rest of the world to consume more while allowing China to manufacture more,” Chen said. “As a result, China’s manufacturing capacity has likely reached a peak and will need to downsize over the next few years. This has profound implications to loan growth, consumption power and the global supply chain.”
Holding Japanese companies accountable
On the other hand, Fischer focused on Japan, where he still sees “so much latent potential in Japanese companies.” The many corporate-governance improvements he’s been seeing there should help unlock more of that potential. Fischer noted that it wasn’t that long ago that Japan had all-internal boards with no independent directors to hold management accountable.
“Companies were ‘protected’ through a moat of corporate cross-shareholders, and very few shareholders were willing to vote against management,” Fischer said. “Today, we see boards improving dramatically, with higher standards for the number of independent directors on boards, as well as a real focus on adding women and foreigners on boards, which we love to see. In addition, all types of shareholders are now willing and do readily submit proxy proposals and vote against management, all leading to greater accountability for corporate management teams.”
He added that now one-third of company boards in Japan are made up of independent directors and other changes like robust guidance on what constitutes a fair process for M&A are going into effect. However, Fischer also said it’s up to company boards in Japan to hold management accountable for their underperformance and poor governance.
“Now that we have the form, we need the substance,” he clarified. “I think shareholders will be holding boards accountable if they fail to hold management accountable.
Off the beaten path… and outside Asia
While Chen and Fischer both highlighted opportunities in Asia, Stern is also looking elsewhere. He noted that his approach of looking off the beaten path for opportunities takes him to Latin America and continental Europe — both areas with attractive opportunities in distressed credit. “We are finding plenty of compelling debt opportunities in Europe, Latin America and Canada,” Stern said. “Companies with under $1 billion in debt and a near term overhang like a debt maturity, especially those outside of the U.S., tend to be off the radar screen for many market participants, presenting attractive opportunities for us due to the depressed prices of these securities”
At a previous Sohn conference, Stern spoke about opportunities in El Salvador’s sovereign bonds after the company adopted bitcoin. “The securities dropped dramatically, allowing investors to buy the sovereign debt of a performing sovereign issuer at attractive prices,” he said. “The bonds were 40/ 50 cents on the dollar and have since doubled in price.” Stern plans to present another distressed opportunity in Latin America at this year’s conference.
Stern plans to present another distressed opportunity in Latin America at this year’s conference.
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