Understanding The Fund: Aberdeen China Opportunities Fund
Nicholas Yeo, Director and Head of Equities at Aberdeen International Fund Managers Limited, explains the investment process and strategy behind the Aberdeen China Opportunities Fund.
How long have you been managing the Aberdeen China Opportunities Fund and what do you think was the biggest challenge you faced during this time?
- The team has been managing the fund for over 15 years
- Aberdeen takes a team-based approach to each and every fund management
- China is a difficult market to invest in despite the many opportunities it presents
- Gaining access to companies remain tricky
How many members are there in the investment team and where is the team based?
- 2 main teams responsible for China and Hong Kong equities are based in Hong Kong and Singapore
- 4 members in Hong Kong, including Nicholas
- 14 members based in Singapore
How does the team generate investment ideas?
- Company visits play an important role; more than 400 visits conducted in 2011
- Approximately 170 companies visited, companies held by the fund are visited at least twice a year to ensure fundamentals of these companies remain
It is stated that the fund uses the MSCI Zhong Hua Index as its benchmark. How much consideration is given to this benchmark when selecting fund holdings?
- Close to no attention is given to benchmark
- Benchmark is redundant during portfolio construction
- Fund considers benchmark backward looking as companies are in the benchmark due to their large size and not because of their quality
- Fund has about 50% of its portfolio in non-benchmark companies
- Holds some reservations to certain big names in the benchmark
Are there any market capitalisation, sector, or individual stock weighting considerations when constructing the fundâs portfolio?
- Fund has a mixture of large and small-cap holdings; currently has 30% in small-cap companies (market capitalisation of less than USD 2.5 billion), 10% in mid-caps and the remainder in large-caps
- As the fund is rather large, it is difficult to invest in penny stocks or companies that are too small
- Company has to be of reasonable size for fund to be able to invest in it, around market capitalisation of USD 300 million
- Main focus still on the quality of these companies regardless of their size
Can you briefly described the sell discipline employed by the fund (on both upside as well as downside)?
- Starting from the buy process which looks at quality first, then price of companies
- Same for sell process: looking first at quality, if there is any deterioration which may be in the form of unsustainable business model, intense competition, fraudulent accounting etc
- If valuations are getting expensive, fund may take some profits by reducing weighting in the fund gradually
Lastly, what is the maximum cash level the fund can hold?
- Maximum exposure for investors preferred
- Internal policy of 5%, but fund usually has cash levels below 3%
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