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AA rated manager: how I invest in AI technology

AA rated manager: how I invest in AI technology

There’s no looking back when Elizabeth Soon is around. The Citywire AA-rated PineBridge Investments portfolio manager wants the companies she picks to keep an eye on the future, with a strong research and development element.

It’s one of the hottest themes in her PineBridge Global Funds – Asia ex Japan Small Cap Equity portfolio.

The portfolio, with $262.7 million in assets under management, returned 109.43% over the past five years to August 2017, compared with the sector average manager’s total return of 58.44% over the
same period.

For the past two years, Hong Kong-based Soon has been focusing on companies supported by a strong technological advantage. ‘Whether you are talking about smartphones or equipment manufacturers in China, we have seen that high tech remains a very strong trend going forward,’ she says.

Soon recently saw profit-taking on Apple’s supply chain, and explains that this is because high valuations are linked to expectations of increased iPhone sales.

But there’s more to the story, she adds. ‘What really matters is the technology owned by the complementary tech players in Apple’s ecosystem,’ she says.

Soon warns that because there are a lot of mass manufacturers on the component side, one firm’s competitive edge can be wiped out by a rival replicating its innovation.

‘You need to be very careful because margins may be destroyed easily,’ she says. ‘Investors should be careful about the component players and the valuations placed on them.’

However, she is still ‘selectively positive’ in this area, focusing on firms with strong research and development (R&D) capabilities, as this helps to preserve a competitive advantage.

‘We are interested in another component area that is backed by sound R&D, and may consider a holding these stocks for the long term,’ she says.

Intelligent investing

Another important trend in Asia is the rise of artificial intelligence (AI) investing, particularly in China. AI technology has become the driving force for a wide range of industries in the country, including finance, healthcare, medical and automotive.

The State Council of China recently announced plans to create a domestic AI industry worth one trillion yuan ($148 billion) by 2030.

‘Obviously, China is very keen on becoming a superpower in AI,’ Soon says. ‘The AI-related investment universe is very broad, and our buying opportunities would be the beneficiaries of AI technology.
They are incorporated in the component makers, such as robotics.’

Soon notes that many AI-related companies are not making money yet, as they are spending a lot of capital on R&D in the expectation that their cash flows will turn healthy in a few years’ time.

But it’s worth it though, as Soon believes that AI investing is here for the long term. ‘You are not buying for today, but for tomorrow,’ she says.

More importantly, she explains, AI should generally make companies more efficient, bringing costs down in the long term.

Cyclical consolidation

Soon turned more positive on China at the end of last year, boosted by cyclicals, which she believes the market has overlooked.

‘The market is very much focused on the Tencent and Alibaba, while the cyclical sector is in consolidation mode,’ she says. ‘We are observing consolidation within some important sectors in China, such as cement, steel and paper, which will rebalance commodity pricing over the next few years.’

An opportunity appeared in the fourth quarter of last year, when valuations dipped below the ten-year historical valuation averages. ‘We decided to invest in one of the very efficient cement manufacturers in China at a lower point of the cycle,’ Soon says.

‘We think that, going forward, companies that are undergoing a consolidation phase, and that are cost-efficient and well-managed tend to gain market share over time. These companies would be able to generate good returns on a long-term basis.’

It’s a philosophy she has used successfully before. About six years ago, Soon invested in paper during a period of consolidation that involved ‘weeding out significant players in the process’.

Earnings revision

Data points in China are improving on the consumption front too. Investors have become more positive since January because earnings have been much better than expected. ‘A lot of analysts are revising their earnings,’ she says. ‘The market was very driven by upwards earnings revisions in the first half of this year.’

Soon is currently seeing profit-taking in China, with the Hang Seng index up 25% year-to-date. ‘The market has certainly rallied quite a lot on a year-todate basis. In fact, it is one of the best-performing foreign markets.’

‘China is very interesting and investors should be looking forward to potential opportunities in any corrections,’ she says.

Eyeing Asean

Beyond China, Soon is positive on the outlook for the entire Asean region. However, with valuations at the higher end, the manager is still adopting a cautious approach.

Both Thailand and Indonesia are facing pressure, and although the political noise in Thailand has quietened down, the market is still trying to recover. Meanwhile, in Indonesia, consumption is still fairly weak.

‘We think certain stocks look interesting, such as infrastructure,’ Soon says. ‘But we remain very selective in the opportunities pursued.’

The Asean markets have been one of the hottest globally, and even outperformed China two years ago.

However, Soon predicts a reversal. ‘The China and North Asia markets will potentially outperform the Asean markets, given that earnings are likely to be revised upwards,’ she says.

Soon identifies Vietnam as one particularly interesting Asean market. ‘We visited a couple of companies and felt comfortable with some growth opportunities there,’ she says.

She believes the country is about 20 years behind China, with ground still to make up in infrastructure, economics and the development of the stock market. ‘We have to be careful about the companies that we pick, because we think that regulations and overall development need some time to catch up with developed markets.

‘However, we are certainly looking at some very interesting opportunities and have invested in infrastructure companies in Vietnam.’

As an emerging market with all the hallmark risks, Vietnam does not occupy a very big proportion of Soon’s portfolio, but she remains
optimistic for growth in consumption and retailin the country.

‘We are looking for quality companies at the right valuations, so while the market is interesting, the question is how much we should pay for opportunities. That’s the main issue,’ she says.

Fundamental approach

Soon uses a bottom-up investment approach, and has stuck to that basic philosophy over the past twenty years. She likes to look at a company’s tenyear horizon, which allows her to be fundamental in
her approach and long-term in her analysis.

Preferring to value her investments at the right point of the cycle, she does not position her portfolio to be purely value or growth.

Other aspects of a company’s track record are important for Soon too. ‘The main factor is the execution ability of the management, and analysing their past performance and long-term vision is very important.’

Some of the small-cap stocks in Soon’s portfolio may appear unexciting, but they actually provide investors with highly sustainable earnings.

‘Sustainable, long-term earnings are the key for this specific strategy, rather than owning an exceptional growth company that does not deliver,’ she says.

This article was originally published on the Citywire Asia October issue magazine.

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