HT Capital was established in 1997 and is owned by Ophelia Tong and Karl Hurst. Tong is the fund manager and has been running it since January 1999. The HT Asian Catalyst Fund is the only fund that HT Capital runs.
HT Asian Catalyst Fund is an Asia excluding Japan, long/short equity hedge fund. Stock selection is described as based on fundamental valuation grounds with technicals being used for market timing. Company visits are extensive and important. The Fund currently has USD34.7 million in assets and is +0.42% ytd as of May 01 2003.
Interview with Ophelia Tong
- The Fund was not a major participant in the Korean rally during April. What are your current views regarding South Korea and did you make money there during May?
Korea had a strong rally early in April, fell sharply and then had a strong bounce again towards the end of the month. I missed this move altogether but I did not want to chase as the fundamentals still have not improved. Admittedly the market is driven by liquidity at the moment so it would be dangerous to short. We only made small additions in selective counters in May as we are wary of a short term correction given that the N Korean issue remains unresolved and recent economic figures still point to a slowing economy.
- You are very open in using cash (ie keeping gross exposure less than 100%) as a hedging tool. Why do you find this as an effective tool?
In Asia, there are not many good hedging tools due to the lack of depth and breadth of most markets. Cash is an effective hedging tool because it is cost effective and quick to implement. Shorting is also expensive in Korea and Taiwan so we tend to be very careful with our shorts there. In situations whereby we believe fundamentals are not improving but valuations are attractive, we prefer to use cash as an effective hedge, such as Korea at the moment.
What is your current view on the deterioration of Hong Kong's economy and fiscal budget. Is there a realistic chance that the government will de-peg the Hong Kong dollar in the next 12 months?
We are very concerned about the Hong Kong economy and the ballooning fiscal budget deficit. The government does not seem to have an effective policy to tackle this problem and the SARS outbreak has added to the woes of the local economy. Nevertheless, Hong Kong has a sound financial and economic infrastructure , which should help it weather the storm but the structural economic problem can only be solved by an effective government policy which is still lacking. We do not believe the Hong Kong dollar link will be removed in the next 12 months although we have a hedge against the Hong Kong dollar in the Fund as a prudent measure since the cost of hedging is low.
- In the April monthly report you stated that the preference remains to invest in Hong Kong/China shares instead of Taiwanese stocks to capture the China growth story. Has this view changed at all with the recent rally in the Taiwanese market?
This view has not changed as the HK/Chinese H share valuation is far more attractive to capture the growth in China. However, some of the technology counters in Taiwan are cheap outsourcing plays to the global technology sector recovery. At the present time, we are not paying any premium for this growth if the recovery materializes.
- What themes for both the long and short books do you find interesting in China at the moment?
On the long side, we continue to like the power & toll road sectors but the valuations are a bit full at present after the recent bounce. Energy sector still remains attractive as China's long term demand for energy is without doubt and the valuation for this sector still remains cheap despite the recent rally. At the same time, they pay attractive dividend yields! On the short side, some of the consumer stocks are still overpriced but finding available stocks could be tricky. In general, there are not that many good shorts in China stocks especially if the much anticipated QDII ( Qualified Domestic Institutional Investor) scheme gets implemented.
- Have you resumed company visits in Hong Kong, China and Taiwan during May? What is the general feeling are you getting from management? What effect has Sars had on earnings?
We have resumed company visits in Hong Kong but not China and Taiwan during May as the latter two countries are still trying to keep SARS under control. However, we have been able to get update on companies in China and Taiwan through conference calls and virtual forum. Most companies are sounding caution regarding SARS impact and in some cases, the impact is still being felt in May and earnings are going to be impacted adversely.
- Many brokers in Asia have mentioned that Spring 2003 may have represented the cyclical bottom for markets in Hong Kong, Taiwan (April) and Korea (March). Would you concur?
On a near term basis we probably have seen the bottom but the overall economic picture is not a rosy one so one needs to be careful with stock selection beyond the current liquidity driven rally.
- If so, will you employ any derivative products to leverage the fund's performance in a general market rally?
Over my 22+ years of investment career, I have not used gearing to leverage the fund's performance. Our philosophy is that leverage can work both ways and our job is to add value at each stage of our investment process ie top down/bottom up so that if we get each stage of our decision making process right at the country, sector and stock levels, the Fund will perform well without using leverage. However, we do look at warrants if it is cheaper way to invest in the underlying equity in a general market rally.
- For your research driven, fundamental approach to stock selection, is it necessary to run a small fund in order to remain flexible? In the current environment, how big will you let the fund grow?
Our Fund is invested in both big cap and small cap stocks and we normally invest about 70% of the Fund in big cap stocks to provide liquidity. This approach dovetails with our active investment strategy and allows the Fund to grow without compromising on performance. We know small caps are the flavour of the month in the current investment climate but the risk/return profile is very different and when the tide turns, the window for exit is very small for small caps. Our target is to grow the Fund to circa USD 200-250m as this size will allow us to invest in both big cap and small cap stocks on an active basis. In reality we would close the Fund to new subscribers when it reaches the USD100m mark.
- Where are you currently situating the fund to make profits over the summer months?
The Fund has built good core positions in recent market correction. The Fund's net long exposure has increased from the low 20% earlier this year to over 50% at present. We would continue to identify companies which will provide good earnings growth potential whilst trading at reasonable valuations in a slow growth environment. We are mindful of a near term correction and the traditional market corrections over the Summer months, hence we are cautious towards getting more fully invested at the present time. Our investment theme remains largely unchanged going into the summer months, ie focus on value stocks ( low p/e, high yield stocks), global outsourcing beneficiaries and domestic consumption plays.
- How have corporate earnings announcements in Japan during May affected the companies you hold?
This is not relevant as our Fund is an Asia ex-Japan fund. We include a commentary on Japan provided to us by our associate based in Tokyo. As Japan becomes more interesting or when there is sufficient demand for us to include Japan, we would then include Japan in our investment universe.
HT Capital International Ltd
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