January 22, 2025 • 26 mins
Investing in Asia after its financial crisis of 1997, or in the US following the dot-com bubble or the GFC, would have delivered good performance over the following decade, says Daniel Rupp, CIO and founder of Parkway Capital. Daniel joins John Lee on the Asia Centric podcast to discuss why he launched an Asia-focused long-only fund at the beginning of 2024 – at the height of investor pessimism toward China. He also sees vast stock picking opportunities across the region and discusses why active rather than passive management might make more sense in Asia than the US.
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Speaker 1 (00:02):
You're listening to Asia Centric from Bloomberg Intelligence, the podcast
that explores the big ideas and trends moving money across
the Asia Pacific region.
Speaker 2 (00:11):
I'm John Lee in Hong Kong.
Speaker 1 (00:13):
My usual co host, Katya Dmitriyeva will not be joining
for this episode, so I'll be flying solo today.
Speaker 2 (00:19):
We have an interesting guest.
Speaker 1 (00:21):
He founded a long only actively managed fund focused on
the Asia Pacific region at the beginning of twenty twenty four. Now,
this was at a time when investor pessimism towards China
was probably at its peak. Some analysts were even saying
that Chinese equities were uninvestable. His name is Daniel Rupp,
founder and CEO of Parkway Capital.
Speaker 2 (00:41):
Daniel, Welcome to the show.
Speaker 3 (00:43):
Thanks John, it's great to be here. Dan.
Speaker 1 (00:45):
I have to ask what made you decide to start
at Asia focused long only fund last year?
Speaker 3 (00:52):
Well, just a bit of background to answer that question.
I spent seventeen years at a fun card Overlook and
vas Bans. It's a wonderful fun great returns, three decade
plus track record, and I was fortunate enough to have
a fantastic mentor in Richard Lawrence, one of Asia's legendary investors.
So I learned the art of investing largely thanks to
(01:13):
Richard and the team there. And when I saw the
words uninvestable with China got me thinking that, you know,
as a contrarian and an optimist, I didn't take that side.
I thought that Asia has a lot to offer investors.
I've always been entrepreneurial. I've always wanted to start something,
some sort of business, and so I thought that the
timing was right, the stars were aligned, and it was
(01:34):
a good time to start a business. And as a
value investor, when I see great companies trading at low valuations,
I'm naturally excited and.
Speaker 1 (01:44):
Dan in hindsight it sounds lucky. It was actually an
opportune time to start. Now, you know, Asia and especially
China did have a bit of a ramp up. That's
Chinese stocks really did jump up in the third quarter
last year.
Speaker 2 (01:56):
You know, tell us about your performance.
Speaker 3 (01:58):
So the first year before rents, we were up double digits,
just over ten percent, which may not sound great to
us listeners who are along the S and P five hundred,
but in Asia, that's out performance over our benchmark by
almost two hundred basis points. And that's net a fees.
Another issue with the performance is this isn't US dollars.
As you may know, the US dollar was very strong
(02:21):
these the Asian currencies last year, so we estimate that
we probably gave back at least five hundred basis points
from a strong dollar. Typically, you know the strong dollar,
it happens periodically, but I think there are also periods
where dollar weekends. With a long only fund, where you
don't hedge currencies, you can benefit from a weekening dollar
(02:42):
just as you suffer from a strengthening dollar. So when
I think about the year in total, to have build
a team, have six great professional employees, and to build
an institutional product in the first year that's now you know,
beyond break even and have put up benchmark beating numbers.
I'm pretty happy with how the first year.
Speaker 1 (03:00):
It out, okay, And what's so attractive about investing in
Asian and Chinese equities in your words?
Speaker 3 (03:08):
Yeah, so there's a few points to that. First off, Fundamentally,
I think Asia is a region that people should want
to own in some size. It's a dynamic region. There's
good demographics, there's a young population, billions of consumers, many
aspiring to enter the middle class and to purchase goods
and whatnot that signifies that middle class. So there's a
(03:28):
lot to like with the fundamentals. In terms of the companies,
there are a lot of competitive companies out here. Increasingly,
they're winning in the global marketplace and they're taking share
from European and US companies in some sectors and in
others they're actually creating new markets. So I think that
you have to give credit to some of these industry
leading companies globally. And finally, if you're looking at trying
(03:50):
to build a long term investing track record, when you
can start this sort of product after a crisis or
after a period of difficulty, that generally leads to good outcomes. So,
for example, if you were to come to Asia after
ninety seven ninety eight and start investing in a select
portfolio of companies, or if you would have invested in
the US after the dot com bubble or the GFC,
(04:13):
the next decade of performance or decade plus would look
quite good. So I hope that twenty twenty four January
to start a track in Asia should lead to a
good long term performance.
Speaker 1 (04:23):
And you also alluded to the fact that American equities
and let's be honest, they've been on fire. Some commentators
are talking about this US or American exceptionalism, this idea
that you don't need to invest outside the US when
the S and P five hundred is going up twenty
five percent per annum. Now, what do you say about that?
Being an American looking into Asia.
Speaker 3 (04:44):
Yeah, you know, US does a lot of things really well.
There are a lot of fantastic companies in the US,
and I'm not a specialist there, so I shouldn't talk
too much about American companies. But I do think that
if you were to start a fund in the US
today in New York trying to outperform the S and P, well,
first off, it's a tough time to start. You've had
back to back years of almost twenty five percent performance.
(05:06):
I look at Walmart as an example of the US,
and obviously Walmart's doing a lot of things right. Walmart
was up I think over eighty percent last year, almost doubling,
and the earnings were up I think less than ten percent.
So that to me, while it's a great company, the
price you pay matters, and buying Walmart on forty times
earnings I think carries some risk. So when I look
(05:28):
at Asia, I think you have to look at the valuations,
and you have to understand there's a lot of optimism
price into the US markets and that's why you have
to pay a high valuation to enter there. But conversely,
there's a lot of pessimism priced into the Asian markets,
and so once you evaluation adjusts the opportunity. I actually
feel like there's less risk investing in Asia today than
(05:48):
there would be investing in certain segments of the US economy.
So I think you have to look at the valuations.
You can't just look at the quality of companies in
the US.
Speaker 1 (05:56):
Asia Centric is produced by Bloomberg Intelligence, where more than
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(06:17):
what you hear, don't forget to subscribe and chirm. Now,
what's your investment style? I think you mentioned that you're
a value investor. Can you explain a bit on how
you analyze these stocks in such a diverse places Asia.
Speaker 3 (06:31):
Let me start by setting the stage for how I
see the global markets. And if we do a simple
Bloomberg screen, you can look at say one hundred million
dollar market cap minimum with a million dollars of daily
trading volume. In the US, you'd have twenty eight hundred companies,
and Europe you'd have about eleven hundred. In in Asia
you'd have nine thousand companies that fit. There's two parameters. Now,
(06:53):
if you added a second layer, looking for or asking
the question, what percent of those companies have more than
five analysts covering them. In the US, it's seventy six percent,
in Europe it's eighty nine percent, and in Asia it's
only forty eight percent. What that means is that you
have a larger universe of companies in Asia, and you
(07:13):
have less sell side coverage of these companies. Another just
general observation is that if you look at the US
in Europe in terms of trading volume and participation, it's
largely an institutional market, whereas in Asia it's largely a
retail market. So you put all that together and as
a stock picker, there probably are more inefficiencies out here
in Asia, and so I think that makes it a
(07:35):
more attractive place for stock pickers. So our goal is
what we call the ten plus three framework. And so
this ten plus three is we're trying to get an
earning's growth for the portfolio of ten percent, and the
three is we want to get a three dividend yield
on the portfolio. If we can buy into companies at
fair values, are cheaply and hold them on average for
(07:58):
three years. The portfolio, if it can deliver us ten
percent earnings growth. If our entry and exit multiples for
these companies holds steady, we should make the arnience growth
plus our dividend field. So that's the overall framework. The
key driver for our long term returns should be can
we achieve that ten percent earnings growth? So that's where
we start, and to deliver that ten of earnings growth,
(08:21):
we separate companies into one of three types. But the
most important type is what we call it compounders. So compounders,
which are currently seventy eight percent of the portfolio. Compounders
give us the earnings growth and that's the number one
reason for buying these companies. Now. Secondarily, we also have
some defensive companies. Defensive companies, the main goal of these
(08:43):
is to give us some dividend yield, and we look
for companies that have low BEATA. So in a period
of correction in Asia or downside, these companies should outperform
a because they've got some high yield and b because
of the nature of the business maybe it's a utility
less growth but more stable holders. And so that combination
is what leads to this ten plus three. So effectively
(09:05):
our return target is thirteen percent.
Speaker 2 (09:07):
So let's go down.
Speaker 1 (09:08):
Is there any particular countries or sectors that fit into
your investment staff that you like.
Speaker 3 (09:14):
So we're agnostic in terms of the industries that we
look for. Last year we saw two hundred and fifty
odd companies. This year we'll see three hundred plus. So
we don't try to look at the Asian benchmark and
try to match those sorts of industries. The key thing
for whatever we invest in is is it in our
circle of competence. So, for example, if there is some
(09:36):
Korea and life insurance company with a six hundred page
in a report, I'm probably just not interested. It's probably
too complex, too difficult, and so we air on the
side of simplicity. We want to be able to explain
our investments to you and your average fifteen year old
on the street in five minutes or less and have
him or her understand exactly what we're doing. In terms
(09:56):
of the geographic mandate, we can be in eleven countries.
I don't currently have any holdings in say Thailand or Malaysia.
Those are in our universe, so we have a broad universe.
But what we like are if it's a compounder, somebody
that can give us ten percent earnings growth, or if
it's defensive, something with significant dividend yield. And as I
look at the portfolio today, we are trading on ten
(10:18):
times forward earnings with fourteen percent earnings growth, so we
should have better than ten percent earnings growth and our
dividend yield net of withholding taxes over four and a
half percent for twenty twenty five. So while we're looking
for this ten plus three, what we're getting today is
kind of fourteen plus four and a half, which suggests
to me that it's a pretty good time be looking
at Asia. So yeah, yesked about which countries or industries
(10:41):
we like, And it may be just to give you
an example of a holding that we own that we
have a lot of conviction, and there's a company called
Higher Haier. It's our largest holding. It's a Chinese white
goods company. And so just to kind of give you
the quick thesis on Higher why goods. These are home appliances.
Think of your refrigerators, your launder machines, decumidifiers, et cetera.
(11:04):
Hire mikes about one hundred million units per year. They've
got over forty billion US dollars of revenues. And it's
not a single brand. They've gone global. They own mini
brands globally, including the Ge Appliance brand, Candy Fisher and Paykel, Aqua, Casarte,
et cetera. So, for example, with Ge Appliance, Americans who
(11:24):
go in to their Walmart to buy refrigerator, they're buying Ge.
They're buying an iconic American brand. They may not even know,
and in fact they probably don't know it's owned by
the Chinese. And when they bought this, this was pre
Trump one point zero, This was twenty fifteen or sixteen.
But they bought the brand, they kept the manufacturing in Kentucky.
So this kind of scirts around the teriff risks, and
(11:46):
the US now generates about a third of sales for
hire the industry in general of white goods. It was
very competitive if you go back fifteen twenty years ago,
there were a lot of companies in the space. But
gradually there's been consolidation in the industry and now there's
really three major players in China that's Higher may D
and Greed, and then globally you could throw in Whirlpool
(12:08):
and Electrolux. But as we compare higher to these international peers,
Higher spends over a billion dollars US a year in
R and D, they spend over a billion dollars a
year in capex. They've got a strong balance sheet. Net
cash is four billion dollars. Meanwhile, Electrolux, in Whirlpool, they're
spending more money on buybacks than they are on their
own investment in R and D or capex, and so
(12:29):
there's a different mindset. And so I think the lead
that Hire has in this space will only continue to grow.
And as the market's consolidated, these guys have gone from
a three four percent OPM or operating profit margin now
up to around seven eight percent, so they've increased margins.
I think inflation in the West benefits companies like these
who are producing high quality goods efficiently and can then
(12:52):
reprice their product. So anyway, this company is our largest
holding now. The reason we really like it though, is
because they've got three share classes. They've got shares at
trade in Shanghai, Hong Kong, and also a small sliver
of shares at trade in Germany. The German shares trade
at a fifty five oho percent discount. So to put
it simply, if you buy the shares in Shanghai, you'll
(13:13):
pay thirteen times earnings and get a Ford dividen yield,
and this is on twenty twenty five earnings, and on
our numbers, if you buy them in Germany you'll pay
about six and a half times earnings and dividen yield
is eight percent. So there we have a case of
if you can access a less liquid security for the
exact same company, same dividend, same voting rights, you can
(13:34):
get a much better deal.
Speaker 1 (13:35):
And for those listening, this is not an investment advice,
by the way, correct, But also, is Hong Kong China
your biggest exposure in the fund?
Speaker 2 (13:43):
Yeah?
Speaker 3 (13:44):
Right now we're at about forty five percent Hong Kong China.
But I will say that we only have one stock
in China. It's a b share. We also own one
adr so American Depository sept. The rest of the companies
trade in Hong Kong, but predominantly these Hong Kong companies
are high yield, defensive names, and some of them do
have some exposure to China, but I wouldn't say that
(14:05):
we have forty five percent of our money directly in China.
Speaker 2 (14:08):
Now.
Speaker 1 (14:09):
Has been most of your fundraising efforts? Has it been
in the US? Has it been in the traditional sort
of like say university endowments, the pension funds?
Speaker 3 (14:17):
Yeah? So fundraising we started January twenty twenty four. At
the time of launch, I was the biggest investor. That
is no longer the case, which is which is great news.
We've had inflows every month since launch, and the current
makeup or as of February first, twenty five will have
over forty investors by number. Most of them are high
(14:37):
net worth private individuals. We also have some family offices
and a couple institutions. But because I've chosen to limit
the size of the fund of three hundred million dollars,
that precludes certain very large investors. Right, so an endowment
of fifty billion dollars probably thinks on the order of
magnitude of one percent checks that's five hundred million dollars.
(14:58):
That's bigger than the total amount of fund that we
intend to raise. So therefore, I think our sweet spot
is going to be smaller endowments, people who have a
long term view, who see the world like we do.
That Asia is not a zero. Asia is a great
place with fantastic companies, something that you want to own. Now,
I should make the point that historically, when people look
(15:18):
at public equity markets, the question is do you want
to go active or passive? And here it's quite interesting that,
you know, Warren Buffett has given the advice that you
should just go passive. And I think what he's talking
about relates to the US experience because in the US,
going passive effectually means buying the s ME five hundred,
which has been a wonderful index for you know, for
three plus decades. But there is no passive alternative in
(15:42):
Asia like that. The passive indexes, whether you're buying an
MSCI Asia or something like that, historically haven't done very well.
And we're talking about a twenty plus year track here.
So I think that the reality that passive indexes have
failed the investors in Asia, and I think that opens
the door for more active management to deliver better outcomes
(16:02):
to the investor. OK.
Speaker 2 (16:04):
That's quite interesting.
Speaker 1 (16:05):
So you're basically saying that there's more stock picking opportunities
in Asia rather than the US.
Speaker 3 (16:11):
Yeah, you know, I don't want to kick around the
passives too much, but I've done some work on this,
and I think the problem is, let's go back to
that earnings growth framework for returns, and this is true
for indexes or for single stocks. If you look at
the arnens growth over the last twenty years for the
S and P, I think it's six to seven percent,
you know, pretty good. And then you look at Asia
(16:33):
over the same time period, I believe it was around
four or five percent earnings growth. So it's not that
Asia is growing that much worse in the US. The
issue is there's a lot more volatility in the earnings.
So if you look at the standard deviation of the
earnings growth in the US, it's quite small. So let's
say you have a seven percent average earnings growth, but
(16:54):
the standard deviation is around sixteen percent over these last
twenty years, whereas in Asia you're going to have about
double standardation. So in a bad earnings year in Asia,
the earnings really fall off, and that could be explained
by maybe there's more cyclical companies in Asia, or there's
you know, some of the companies at the top of
the index have some debt or have some leverage. I'm
(17:14):
not sure exactly why that is, but I think there's
some lessons here, and that is that as we develop
our portfolio in Asia, we want to look a bit
more like the SMP in a bit less like Asia.
Speaker 1 (17:25):
You also made some interesting comments regarding active versus passive. Now,
when you speak to asset allocators, they always talk about
this Barbel approach, you know, like they like to go
passive inequities. On the other side, they like to invest
in private assets like private equity, and supposedly actively managed
equities are supposed to be stuck in the middle. But
you think there is opportunities there.
Speaker 3 (17:47):
Well. In my experience, which is limited to one wonderful firm,
but in my experience, one can both make good absolute
returns and make good relative returns actively managing a portfolio.
And I think that the style with which one manages
that does vary. If you think about what is a
passive portfolio and that is really momentum driven. It's buying
(18:08):
companies that graduate into say the top five hundred socks
in America. Right, So, what you're betting on is that
big companies get bigger in America, and perhaps one explanation
for that is that you've had, you know, slightly more
monopolistic traits to the market in the US, so large
tech companies become not only American leaders, but global leaders.
But conversely, out here in Asia, historically companies that have
(18:31):
gotten bigger haven't always graduated to become global leaders. And
if you go back three or four years ago, actually
China was holding back some of it's bigger companies and
so therefore if you bought the large caps in Asia,
they didn't get larger because perhaps China had some issues
with those companies. And so anyway, I think there's a
different makeup. I don't know if you necessarily want to
own the largest companies in Asia. We're focusing across the
(18:53):
market cap spectrum. We've got highyolding small caps, We've got
preferred shares in Korea, we've got some B shares in China.
We're definitely attacking the market with an eye on value
and trying to get the best companies we can get
for the best prices that we can achieve.
Speaker 1 (19:08):
And what was your experience trying to raise money for
this fund last year like an Asia Focus fund.
Speaker 3 (19:15):
Well, it's certain if you're looking at if you're speaking
to say high net worth, a few meetings can generally
perhaps get an investorcross the line. Whereas we're talking to
a large institution, the process it takes longer. Typically they
look for you know, a two or three year track record,
and so we have ongoing discussions with some of these investors.
But yeah, they're interested. Certainly there's a curiosity about Asia.
(19:39):
People are looking into the region. They're aware of the
evaluation discrepancies, and so there is some interest. I think
that the interest we've had is really global. So we
have investors from you know, several here in Hong Kong buyside,
sales side. We also have some Singapore based investors. We've
got some in Switzerland and UK in the US, so
it's really a global investor base.
Speaker 1 (20:00):
How was your experience versus say, your expectations when you
decide to start this business.
Speaker 3 (20:06):
You know, I'm really pleased with how the year turned out,
the fact that we could get a team together, a
really high quality, institutional grade team, retain the talent. We
took the majority of the performance fee from last year
and that goes in February one and all my team
become investors in the fund. I think the experience has
been you have to meet a lot of people. You
(20:28):
have to be public. I spoke at the SOWN conference
in May, I was in Dallas for an event. In November.
I spoke in Charlotte for another event. So you have
to do things. I mean, I'm naturally an extrovert. I'm
happy to get on stage and talk about stocks. But
I think that if you're look or thinking do this yourself,
you have to understand your personality and know that most
(20:50):
people you talk to are not interested. So there's quite
a few nos that come along with that. But I'm
confident that if we can execute our model, we can
deliver thirteen percent through cycle. I think that the money
will find us.
Speaker 2 (21:02):
Now, Dan, how long you've been in Asia for? Has
it been twenty.
Speaker 3 (21:05):
Years or twenty three years? So I spent three years
in Japan before business school and now twenty in Hong Kong.
Speaker 1 (21:11):
And you grew up, did you say in Virginia in
the US.
Speaker 3 (21:13):
And in North Carolina. North Carolina close to the Virginian border.
So I'm from a place called boon Up in the mountains.
It's close to Tennessee and Virginia.
Speaker 1 (21:21):
Okay, Now, what would you say, like you've met a
lot of global investors, especially recently, what's one thing they
get wrong about investing in Asia?
Speaker 3 (21:31):
Well, generally, I think the comment you made before about
the pessimism surrounding Asia is true. I think that people
who go on Bloomberg or CNBC or other shows, if
they haven't been to China in the last five years,
I'm not sure why they're talking about China. So Ye
had Stephen Roachel on your show recently, great interview. He's
a guy who comes to Asia, Hong Kong and China
(21:52):
quite a bit, and so I really respect his opinion.
I think that what I want to hear more are
people who've been on the ground and who are seeing
what's happened. But my general view form my time in
Hong Kong and China is that the reality on the
ground is much better than the perception in the West
about this region. So I think that just it's a misperception.
Speaker 1 (22:11):
Yeah, and I totally agree. If you do travel to
Shanghai especially, I think a lot of people are surprised
at how efficient, how clean the areas, how modern the
city is.
Speaker 3 (22:22):
Yeah, it's a great place to live. And one general
question I ask people when they think about investing in
Asia is is the crisis in Asia? Is it ahead
of us or is it behind us? And only you
can answer that question. But if you think that there's
a crisis coming to Asia, well of course you should
not invest in a long, lonely product. But for me,
having lived through the last five years in Hong Kong,
(22:44):
starting with the protests and going on to COVID and
the first in the COVID, the last out of COVID,
and the hotel quarantines, there was a lot of bad
news here in Hong Kong and that depressed equity markets,
and that led to Hangsang Index down four years in
a row. But Asia is not a zero at Hong
Kong's not a zero. So the recovery is coming. Now.
(23:04):
Can we sustain the recovery? Can businesses start growing their
earnings quicker?
Speaker 2 (23:08):
You know?
Speaker 3 (23:09):
Can these retail facing businesses here in Hong Kong, can
they recover to what degree compared to say, twenty eighteen nineteen.
That's the main question. But there's recovery coming around, and
I believe that the crisis is behind us in Asia.
Therefore the next decade plus should be good returns.
Speaker 1 (23:24):
Okay, Dan, Before we let you go, I have to
address the elephant in the room, Trump two point zero.
What's the outlook for Asia going forward?
Speaker 3 (23:33):
That's a tough one. We're about twelve hours before inauguration,
so who knows what's going to happen tomorrow or this
week or this month. But you know, as I look
at Trump two point zero, first let's look at Trump
one point zero. And if you look at the last
really big year in Asia, at least for my benchmark
index was twenty seventeen when Asia X India made over
(23:53):
thirty percent in usd that was during Trump one point zero.
Twenty nineteen twenty Asia made more than fifteen percent in
So really three out of four years during the Trump's
first administration, Asia did quite well. Also, I think a
large driver of Asia doing well or not is how
strong the US dollar is. We're coming from a pretty
high base currently under Trump one point zero. The dollar weekend,
(24:16):
if that were to happen this Louis Gavitt Gavcal has
said there may be something like a Mara Lago accord
where Trump meets with She and they realized that a
weeker dollar is in the best interest of both countries,
and so if something like that were to happen, that'd
be wonderful. And the last thing I'll say on the outlook,
without making any bold predictions, is that China said back
(24:38):
in April that they put out a nine point plan
where they wanted to encourage companies to pay more dividends
and do more buybacks, and they're doing that. Last year
was a record year for both buybacks and dividends in China,
and the stimulus was speculated back in September, but the
follow through wasn't good enough for the markets and there
was some disappointment. But there will be further meetings out
(24:58):
of China. I think the next big one is in March.
The market expects something out of China. I think that
China takes a bit longer to actually iron off the details,
but I wouldn't be surprised if there is some sort
of further stimulus that looks after the Chinese consumer and
tries to stimulate consumption in China. I think that would
be good for China and for the wider region. So
(25:20):
I'm not going to make a prediction. I will say
that I think the worst is behind us. Last year,
Hanksang was up over twenty percent US dollar terms, and
Asia was also up last year. So yeah, I think
that better days light ahead, and the ability for China
and Asia to put up a big year is really there.
Speaker 1 (25:38):
Well, Dan, that's a great way to end the program.
We always like to end on a positive note.
Speaker 3 (25:43):
Thanks for having me. I really enjoyed it.
Speaker 2 (25:45):
Thanks Dan for joining in.
Speaker 1 (25:46):
We really hope all the best for you in New fund.
Thanks John, you've been listening to Asia Centric from Bloomberg Intelligence.
Now we'll be taking a break next week as it's
Lunar New Year or Chinese New Year, depending on where
you live in Asia, and we'll be back in the
first week of February. I'm John Lee. You can follow
me on LinkedIn and this podcast was produced and edited
(26:08):
by Clara Chan
You're listening to Asia Centric from Bloomberg Intelligence, the podcast
that explores the big ideas and trends moving money across
the Asia Pacific region.
Speaker 2 (00:11):
I'm John Lee in Hong Kong.
Speaker 1 (00:13):
My usual co host, Katya Dmitriyeva will not be joining
for this episode, so I'll be flying solo today.
Speaker 2 (00:19):
We have an interesting guest.
Speaker 1 (00:21):
He founded a long only actively managed fund focused on
the Asia Pacific region at the beginning of twenty twenty four. Now,
this was at a time when investor pessimism towards China
was probably at its peak. Some analysts were even saying
that Chinese equities were uninvestable. His name is Daniel Rupp,
founder and CEO of Parkway Capital.
Speaker 2 (00:41):
Daniel, Welcome to the show.
Speaker 3 (00:43):
Thanks John, it's great to be here. Dan.
Speaker 1 (00:45):
I have to ask what made you decide to start
at Asia focused long only fund last year?
Speaker 3 (00:52):
Well, just a bit of background to answer that question.
I spent seventeen years at a fun card Overlook and
vas Bans. It's a wonderful fun great returns, three decade
plus track record, and I was fortunate enough to have
a fantastic mentor in Richard Lawrence, one of Asia's legendary investors.
So I learned the art of investing largely thanks to
(01:13):
Richard and the team there. And when I saw the
words uninvestable with China got me thinking that, you know,
as a contrarian and an optimist, I didn't take that side.
I thought that Asia has a lot to offer investors.
I've always been entrepreneurial. I've always wanted to start something,
some sort of business, and so I thought that the
timing was right, the stars were aligned, and it was
(01:34):
a good time to start a business. And as a
value investor, when I see great companies trading at low valuations,
I'm naturally excited and.
Speaker 1 (01:44):
Dan in hindsight it sounds lucky. It was actually an
opportune time to start. Now, you know, Asia and especially
China did have a bit of a ramp up. That's
Chinese stocks really did jump up in the third quarter
last year.
Speaker 2 (01:56):
You know, tell us about your performance.
Speaker 3 (01:58):
So the first year before rents, we were up double digits,
just over ten percent, which may not sound great to
us listeners who are along the S and P five hundred,
but in Asia, that's out performance over our benchmark by
almost two hundred basis points. And that's net a fees.
Another issue with the performance is this isn't US dollars.
As you may know, the US dollar was very strong
(02:21):
these the Asian currencies last year, so we estimate that
we probably gave back at least five hundred basis points
from a strong dollar. Typically, you know the strong dollar,
it happens periodically, but I think there are also periods
where dollar weekends. With a long only fund, where you
don't hedge currencies, you can benefit from a weekening dollar
(02:42):
just as you suffer from a strengthening dollar. So when
I think about the year in total, to have build
a team, have six great professional employees, and to build
an institutional product in the first year that's now you know,
beyond break even and have put up benchmark beating numbers.
I'm pretty happy with how the first year.
Speaker 1 (03:00):
It out, okay, And what's so attractive about investing in
Asian and Chinese equities in your words?
Speaker 3 (03:08):
Yeah, so there's a few points to that. First off, Fundamentally,
I think Asia is a region that people should want
to own in some size. It's a dynamic region. There's
good demographics, there's a young population, billions of consumers, many
aspiring to enter the middle class and to purchase goods
and whatnot that signifies that middle class. So there's a
(03:28):
lot to like with the fundamentals. In terms of the companies,
there are a lot of competitive companies out here. Increasingly,
they're winning in the global marketplace and they're taking share
from European and US companies in some sectors and in
others they're actually creating new markets. So I think that
you have to give credit to some of these industry
leading companies globally. And finally, if you're looking at trying
(03:50):
to build a long term investing track record, when you
can start this sort of product after a crisis or
after a period of difficulty, that generally leads to good outcomes. So,
for example, if you were to come to Asia after
ninety seven ninety eight and start investing in a select
portfolio of companies, or if you would have invested in
the US after the dot com bubble or the GFC,
(04:13):
the next decade of performance or decade plus would look
quite good. So I hope that twenty twenty four January
to start a track in Asia should lead to a
good long term performance.
Speaker 1 (04:23):
And you also alluded to the fact that American equities
and let's be honest, they've been on fire. Some commentators
are talking about this US or American exceptionalism, this idea
that you don't need to invest outside the US when
the S and P five hundred is going up twenty
five percent per annum. Now, what do you say about that?
Being an American looking into Asia.
Speaker 3 (04:44):
Yeah, you know, US does a lot of things really well.
There are a lot of fantastic companies in the US,
and I'm not a specialist there, so I shouldn't talk
too much about American companies. But I do think that
if you were to start a fund in the US
today in New York trying to outperform the S and P, well,
first off, it's a tough time to start. You've had
back to back years of almost twenty five percent performance.
(05:06):
I look at Walmart as an example of the US,
and obviously Walmart's doing a lot of things right. Walmart
was up I think over eighty percent last year, almost doubling,
and the earnings were up I think less than ten percent.
So that to me, while it's a great company, the
price you pay matters, and buying Walmart on forty times
earnings I think carries some risk. So when I look
(05:28):
at Asia, I think you have to look at the valuations,
and you have to understand there's a lot of optimism
price into the US markets and that's why you have
to pay a high valuation to enter there. But conversely,
there's a lot of pessimism priced into the Asian markets,
and so once you evaluation adjusts the opportunity. I actually
feel like there's less risk investing in Asia today than
(05:48):
there would be investing in certain segments of the US economy.
So I think you have to look at the valuations.
You can't just look at the quality of companies in
the US.
Speaker 1 (05:56):
Asia Centric is produced by Bloomberg Intelligence, where more than
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(06:17):
what you hear, don't forget to subscribe and chirm. Now,
what's your investment style? I think you mentioned that you're
a value investor. Can you explain a bit on how
you analyze these stocks in such a diverse places Asia.
Speaker 3 (06:31):
Let me start by setting the stage for how I
see the global markets. And if we do a simple
Bloomberg screen, you can look at say one hundred million
dollar market cap minimum with a million dollars of daily
trading volume. In the US, you'd have twenty eight hundred companies,
and Europe you'd have about eleven hundred. In in Asia
you'd have nine thousand companies that fit. There's two parameters. Now,
(06:53):
if you added a second layer, looking for or asking
the question, what percent of those companies have more than
five analysts covering them. In the US, it's seventy six percent,
in Europe it's eighty nine percent, and in Asia it's
only forty eight percent. What that means is that you
have a larger universe of companies in Asia, and you
(07:13):
have less sell side coverage of these companies. Another just
general observation is that if you look at the US
in Europe in terms of trading volume and participation, it's
largely an institutional market, whereas in Asia it's largely a
retail market. So you put all that together and as
a stock picker, there probably are more inefficiencies out here
in Asia, and so I think that makes it a
(07:35):
more attractive place for stock pickers. So our goal is
what we call the ten plus three framework. And so
this ten plus three is we're trying to get an
earning's growth for the portfolio of ten percent, and the
three is we want to get a three dividend yield
on the portfolio. If we can buy into companies at
fair values, are cheaply and hold them on average for
(07:58):
three years. The portfolio, if it can deliver us ten
percent earnings growth. If our entry and exit multiples for
these companies holds steady, we should make the arnience growth
plus our dividend field. So that's the overall framework. The
key driver for our long term returns should be can
we achieve that ten percent earnings growth? So that's where
we start, and to deliver that ten of earnings growth,
(08:21):
we separate companies into one of three types. But the
most important type is what we call it compounders. So compounders,
which are currently seventy eight percent of the portfolio. Compounders
give us the earnings growth and that's the number one
reason for buying these companies. Now. Secondarily, we also have
some defensive companies. Defensive companies, the main goal of these
(08:43):
is to give us some dividend yield, and we look
for companies that have low BEATA. So in a period
of correction in Asia or downside, these companies should outperform
a because they've got some high yield and b because
of the nature of the business maybe it's a utility
less growth but more stable holders. And so that combination
is what leads to this ten plus three. So effectively
(09:05):
our return target is thirteen percent.
Speaker 2 (09:07):
So let's go down.
Speaker 1 (09:08):
Is there any particular countries or sectors that fit into
your investment staff that you like.
Speaker 3 (09:14):
So we're agnostic in terms of the industries that we
look for. Last year we saw two hundred and fifty
odd companies. This year we'll see three hundred plus. So
we don't try to look at the Asian benchmark and
try to match those sorts of industries. The key thing
for whatever we invest in is is it in our
circle of competence. So, for example, if there is some
(09:36):
Korea and life insurance company with a six hundred page
in a report, I'm probably just not interested. It's probably
too complex, too difficult, and so we air on the
side of simplicity. We want to be able to explain
our investments to you and your average fifteen year old
on the street in five minutes or less and have
him or her understand exactly what we're doing. In terms
(09:56):
of the geographic mandate, we can be in eleven countries.
I don't currently have any holdings in say Thailand or Malaysia.
Those are in our universe, so we have a broad universe.
But what we like are if it's a compounder, somebody
that can give us ten percent earnings growth, or if
it's defensive, something with significant dividend yield. And as I
look at the portfolio today, we are trading on ten
(10:18):
times forward earnings with fourteen percent earnings growth, so we
should have better than ten percent earnings growth and our
dividend yield net of withholding taxes over four and a
half percent for twenty twenty five. So while we're looking
for this ten plus three, what we're getting today is
kind of fourteen plus four and a half, which suggests
to me that it's a pretty good time be looking
at Asia. So yeah, yesked about which countries or industries
(10:41):
we like, And it may be just to give you
an example of a holding that we own that we
have a lot of conviction, and there's a company called
Higher Haier. It's our largest holding. It's a Chinese white
goods company. And so just to kind of give you
the quick thesis on Higher why goods. These are home appliances.
Think of your refrigerators, your launder machines, decumidifiers, et cetera.
(11:04):
Hire mikes about one hundred million units per year. They've
got over forty billion US dollars of revenues. And it's
not a single brand. They've gone global. They own mini
brands globally, including the Ge Appliance brand, Candy Fisher and Paykel, Aqua, Casarte,
et cetera. So, for example, with Ge Appliance, Americans who
(11:24):
go in to their Walmart to buy refrigerator, they're buying Ge.
They're buying an iconic American brand. They may not even know,
and in fact they probably don't know it's owned by
the Chinese. And when they bought this, this was pre
Trump one point zero, This was twenty fifteen or sixteen.
But they bought the brand, they kept the manufacturing in Kentucky.
So this kind of scirts around the teriff risks, and
(11:46):
the US now generates about a third of sales for
hire the industry in general of white goods. It was
very competitive if you go back fifteen twenty years ago,
there were a lot of companies in the space. But
gradually there's been consolidation in the industry and now there's
really three major players in China that's Higher may D
and Greed, and then globally you could throw in Whirlpool
(12:08):
and Electrolux. But as we compare higher to these international peers,
Higher spends over a billion dollars US a year in
R and D, they spend over a billion dollars a
year in capex. They've got a strong balance sheet. Net
cash is four billion dollars. Meanwhile, Electrolux, in Whirlpool, they're
spending more money on buybacks than they are on their
own investment in R and D or capex, and so
(12:29):
there's a different mindset. And so I think the lead
that Hire has in this space will only continue to grow.
And as the market's consolidated, these guys have gone from
a three four percent OPM or operating profit margin now
up to around seven eight percent, so they've increased margins.
I think inflation in the West benefits companies like these
who are producing high quality goods efficiently and can then
(12:52):
reprice their product. So anyway, this company is our largest
holding now. The reason we really like it though, is
because they've got three share classes. They've got shares at
trade in Shanghai, Hong Kong, and also a small sliver
of shares at trade in Germany. The German shares trade
at a fifty five oho percent discount. So to put
it simply, if you buy the shares in Shanghai, you'll
(13:13):
pay thirteen times earnings and get a Ford dividen yield,
and this is on twenty twenty five earnings, and on
our numbers, if you buy them in Germany you'll pay
about six and a half times earnings and dividen yield
is eight percent. So there we have a case of
if you can access a less liquid security for the
exact same company, same dividend, same voting rights, you can
(13:34):
get a much better deal.
Speaker 1 (13:35):
And for those listening, this is not an investment advice,
by the way, correct, But also, is Hong Kong China
your biggest exposure in the fund?
Speaker 2 (13:43):
Yeah?
Speaker 3 (13:44):
Right now we're at about forty five percent Hong Kong China.
But I will say that we only have one stock
in China. It's a b share. We also own one
adr so American Depository sept. The rest of the companies
trade in Hong Kong, but predominantly these Hong Kong companies
are high yield, defensive names, and some of them do
have some exposure to China, but I wouldn't say that
(14:05):
we have forty five percent of our money directly in China.
Speaker 2 (14:08):
Now.
Speaker 1 (14:09):
Has been most of your fundraising efforts? Has it been
in the US? Has it been in the traditional sort
of like say university endowments, the pension funds?
Speaker 3 (14:17):
Yeah? So fundraising we started January twenty twenty four. At
the time of launch, I was the biggest investor. That
is no longer the case, which is which is great news.
We've had inflows every month since launch, and the current
makeup or as of February first, twenty five will have
over forty investors by number. Most of them are high
(14:37):
net worth private individuals. We also have some family offices
and a couple institutions. But because I've chosen to limit
the size of the fund of three hundred million dollars,
that precludes certain very large investors. Right, so an endowment
of fifty billion dollars probably thinks on the order of
magnitude of one percent checks that's five hundred million dollars.
(14:58):
That's bigger than the total amount of fund that we
intend to raise. So therefore, I think our sweet spot
is going to be smaller endowments, people who have a
long term view, who see the world like we do.
That Asia is not a zero. Asia is a great
place with fantastic companies, something that you want to own. Now,
I should make the point that historically, when people look
(15:18):
at public equity markets, the question is do you want
to go active or passive? And here it's quite interesting that,
you know, Warren Buffett has given the advice that you
should just go passive. And I think what he's talking
about relates to the US experience because in the US,
going passive effectually means buying the s ME five hundred,
which has been a wonderful index for you know, for
three plus decades. But there is no passive alternative in
(15:42):
Asia like that. The passive indexes, whether you're buying an
MSCI Asia or something like that, historically haven't done very well.
And we're talking about a twenty plus year track here.
So I think that the reality that passive indexes have
failed the investors in Asia, and I think that opens
the door for more active management to deliver better outcomes
(16:02):
to the investor. OK.
Speaker 2 (16:04):
That's quite interesting.
Speaker 1 (16:05):
So you're basically saying that there's more stock picking opportunities
in Asia rather than the US.
Speaker 3 (16:11):
Yeah, you know, I don't want to kick around the
passives too much, but I've done some work on this,
and I think the problem is, let's go back to
that earnings growth framework for returns, and this is true
for indexes or for single stocks. If you look at
the arnens growth over the last twenty years for the
S and P, I think it's six to seven percent,
you know, pretty good. And then you look at Asia
(16:33):
over the same time period, I believe it was around
four or five percent earnings growth. So it's not that
Asia is growing that much worse in the US. The
issue is there's a lot more volatility in the earnings.
So if you look at the standard deviation of the
earnings growth in the US, it's quite small. So let's
say you have a seven percent average earnings growth, but
(16:54):
the standard deviation is around sixteen percent over these last
twenty years, whereas in Asia you're going to have about
double standardation. So in a bad earnings year in Asia,
the earnings really fall off, and that could be explained
by maybe there's more cyclical companies in Asia, or there's
you know, some of the companies at the top of
the index have some debt or have some leverage. I'm
(17:14):
not sure exactly why that is, but I think there's
some lessons here, and that is that as we develop
our portfolio in Asia, we want to look a bit
more like the SMP in a bit less like Asia.
Speaker 1 (17:25):
You also made some interesting comments regarding active versus passive. Now,
when you speak to asset allocators, they always talk about
this Barbel approach, you know, like they like to go
passive inequities. On the other side, they like to invest
in private assets like private equity, and supposedly actively managed
equities are supposed to be stuck in the middle. But
you think there is opportunities there.
Speaker 3 (17:47):
Well. In my experience, which is limited to one wonderful firm,
but in my experience, one can both make good absolute
returns and make good relative returns actively managing a portfolio.
And I think that the style with which one manages
that does vary. If you think about what is a
passive portfolio and that is really momentum driven. It's buying
(18:08):
companies that graduate into say the top five hundred socks
in America. Right, So, what you're betting on is that
big companies get bigger in America, and perhaps one explanation
for that is that you've had, you know, slightly more
monopolistic traits to the market in the US, so large
tech companies become not only American leaders, but global leaders.
But conversely, out here in Asia, historically companies that have
(18:31):
gotten bigger haven't always graduated to become global leaders. And
if you go back three or four years ago, actually
China was holding back some of it's bigger companies and
so therefore if you bought the large caps in Asia,
they didn't get larger because perhaps China had some issues
with those companies. And so anyway, I think there's a
different makeup. I don't know if you necessarily want to
own the largest companies in Asia. We're focusing across the
(18:53):
market cap spectrum. We've got highyolding small caps, We've got
preferred shares in Korea, we've got some B shares in China.
We're definitely attacking the market with an eye on value
and trying to get the best companies we can get
for the best prices that we can achieve.
Speaker 1 (19:08):
And what was your experience trying to raise money for
this fund last year like an Asia Focus fund.
Speaker 3 (19:15):
Well, it's certain if you're looking at if you're speaking
to say high net worth, a few meetings can generally
perhaps get an investorcross the line. Whereas we're talking to
a large institution, the process it takes longer. Typically they
look for you know, a two or three year track record,
and so we have ongoing discussions with some of these investors.
But yeah, they're interested. Certainly there's a curiosity about Asia.
(19:39):
People are looking into the region. They're aware of the
evaluation discrepancies, and so there is some interest. I think
that the interest we've had is really global. So we
have investors from you know, several here in Hong Kong buyside,
sales side. We also have some Singapore based investors. We've
got some in Switzerland and UK in the US, so
it's really a global investor base.
Speaker 1 (20:00):
How was your experience versus say, your expectations when you
decide to start this business.
Speaker 3 (20:06):
You know, I'm really pleased with how the year turned out,
the fact that we could get a team together, a
really high quality, institutional grade team, retain the talent. We
took the majority of the performance fee from last year
and that goes in February one and all my team
become investors in the fund. I think the experience has
been you have to meet a lot of people. You
(20:28):
have to be public. I spoke at the SOWN conference
in May, I was in Dallas for an event. In November.
I spoke in Charlotte for another event. So you have
to do things. I mean, I'm naturally an extrovert. I'm
happy to get on stage and talk about stocks. But
I think that if you're look or thinking do this yourself,
you have to understand your personality and know that most
(20:50):
people you talk to are not interested. So there's quite
a few nos that come along with that. But I'm
confident that if we can execute our model, we can
deliver thirteen percent through cycle. I think that the money
will find us.
Speaker 2 (21:02):
Now, Dan, how long you've been in Asia for? Has
it been twenty.
Speaker 3 (21:05):
Years or twenty three years? So I spent three years
in Japan before business school and now twenty in Hong Kong.
Speaker 1 (21:11):
And you grew up, did you say in Virginia in
the US.
Speaker 3 (21:13):
And in North Carolina. North Carolina close to the Virginian border.
So I'm from a place called boon Up in the mountains.
It's close to Tennessee and Virginia.
Speaker 1 (21:21):
Okay, Now, what would you say, like you've met a
lot of global investors, especially recently, what's one thing they
get wrong about investing in Asia?
Speaker 3 (21:31):
Well, generally, I think the comment you made before about
the pessimism surrounding Asia is true. I think that people
who go on Bloomberg or CNBC or other shows, if
they haven't been to China in the last five years,
I'm not sure why they're talking about China. So Ye
had Stephen Roachel on your show recently, great interview. He's
a guy who comes to Asia, Hong Kong and China
(21:52):
quite a bit, and so I really respect his opinion.
I think that what I want to hear more are
people who've been on the ground and who are seeing
what's happened. But my general view form my time in
Hong Kong and China is that the reality on the
ground is much better than the perception in the West
about this region. So I think that just it's a misperception.
Speaker 1 (22:11):
Yeah, and I totally agree. If you do travel to
Shanghai especially, I think a lot of people are surprised
at how efficient, how clean the areas, how modern the
city is.
Speaker 3 (22:22):
Yeah, it's a great place to live. And one general
question I ask people when they think about investing in
Asia is is the crisis in Asia? Is it ahead
of us or is it behind us? And only you
can answer that question. But if you think that there's
a crisis coming to Asia, well of course you should
not invest in a long, lonely product. But for me,
having lived through the last five years in Hong Kong,
(22:44):
starting with the protests and going on to COVID and
the first in the COVID, the last out of COVID,
and the hotel quarantines, there was a lot of bad
news here in Hong Kong and that depressed equity markets,
and that led to Hangsang Index down four years in
a row. But Asia is not a zero at Hong
Kong's not a zero. So the recovery is coming. Now.
(23:04):
Can we sustain the recovery? Can businesses start growing their
earnings quicker?
Speaker 2 (23:08):
You know?
Speaker 3 (23:09):
Can these retail facing businesses here in Hong Kong, can
they recover to what degree compared to say, twenty eighteen nineteen.
That's the main question. But there's recovery coming around, and
I believe that the crisis is behind us in Asia.
Therefore the next decade plus should be good returns.
Speaker 1 (23:24):
Okay, Dan, Before we let you go, I have to
address the elephant in the room, Trump two point zero.
What's the outlook for Asia going forward?
Speaker 3 (23:33):
That's a tough one. We're about twelve hours before inauguration,
so who knows what's going to happen tomorrow or this
week or this month. But you know, as I look
at Trump two point zero, first let's look at Trump
one point zero. And if you look at the last
really big year in Asia, at least for my benchmark
index was twenty seventeen when Asia X India made over
(23:53):
thirty percent in usd that was during Trump one point zero.
Twenty nineteen twenty Asia made more than fifteen percent in
So really three out of four years during the Trump's
first administration, Asia did quite well. Also, I think a
large driver of Asia doing well or not is how
strong the US dollar is. We're coming from a pretty
high base currently under Trump one point zero. The dollar weekend,
(24:16):
if that were to happen this Louis Gavitt Gavcal has
said there may be something like a Mara Lago accord
where Trump meets with She and they realized that a
weeker dollar is in the best interest of both countries,
and so if something like that were to happen, that'd
be wonderful. And the last thing I'll say on the outlook,
without making any bold predictions, is that China said back
(24:38):
in April that they put out a nine point plan
where they wanted to encourage companies to pay more dividends
and do more buybacks, and they're doing that. Last year
was a record year for both buybacks and dividends in China,
and the stimulus was speculated back in September, but the
follow through wasn't good enough for the markets and there
was some disappointment. But there will be further meetings out
(24:58):
of China. I think the next big one is in March.
The market expects something out of China. I think that
China takes a bit longer to actually iron off the details,
but I wouldn't be surprised if there is some sort
of further stimulus that looks after the Chinese consumer and
tries to stimulate consumption in China. I think that would
be good for China and for the wider region. So
(25:20):
I'm not going to make a prediction. I will say
that I think the worst is behind us. Last year,
Hanksang was up over twenty percent US dollar terms, and
Asia was also up last year. So yeah, I think
that better days light ahead, and the ability for China
and Asia to put up a big year is really there.
Speaker 1 (25:38):
Well, Dan, that's a great way to end the program.
We always like to end on a positive note.
Speaker 3 (25:43):
Thanks for having me. I really enjoyed it.
Speaker 2 (25:45):
Thanks Dan for joining in.
Speaker 1 (25:46):
We really hope all the best for you in New fund.
Thanks John, you've been listening to Asia Centric from Bloomberg Intelligence.
Now we'll be taking a break next week as it's
Lunar New Year or Chinese New Year, depending on where
you live in Asia, and we'll be back in the
first week of February. I'm John Lee. You can follow
me on LinkedIn and this podcast was produced and edited
(26:08):
by Clara Chan
Hosts And Creators
John Lee
Tom Corbett
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On Purpose with Jay Shetty
I’m Jay Shetty host of On Purpose the worlds #1 Mental Health podcast and I’m so grateful you found us. I started this podcast 5 years ago to invite you into conversations and workshops that are designed to help make you happier, healthier and more healed. I believe that when you (yes you) feel seen, heard and understood you’re able to deal with relationship struggles, work challenges and life’s ups and downs with more ease and grace. I interview experts, celebrities, thought leaders and athletes so that we can grow our mindset, build better habits and uncover a side of them we’ve never seen before. New episodes every Monday and Friday. Your support means the world to me and I don’t take it for granted — click the follow button and leave a review to help us spread the love with On Purpose. I can’t wait for you to listen to your first or 500th episode!