The power of long-only investing in China
FountainCap’s flagship long-only fund, set up in April 2015, focuses on stocks that are benefiting from major trends and invests primarily in Chinese listed companies
When the thunderstorm swept through stock markets in Hong Kong and Mainland China in 2015, Vanessa Xu, co-founder and chief executive officer of FountainCap Research & Investment, however, saw as a buying opportunity.
Having experienced several economic cycles, the ex-Capital Group investment officer knew what the selloff meant to the young startup.
“When we started FountainCap, the market was in crisis mode,” recalls Xu in an interview with The Asset.
“As a start-up, naturally we were worried of the business challenges and risks during such difficult times. But we were able to overcome such adversity by remaining calm, adhering to our investment strategy and continuing to invest through the market volatility.”
Xu, together with Frank Ding, a long-time colleague at the Capital Group, established FountainCap. Ding is now FountainCap chairman and CIO.
Having identified massive investment opportunities arising from Chinese emerging corporates, Xu is now applying what she has learned and incubating her own local investment team with global practice.
According to Xu, what underpins the growth of the FountainCap is its unique bottom up approach with three major investment themes. These are productivity enhancement driven by technology, clean and sustainable economy, and an upgraded consumer sector arising from demographic changes in China.
“These themes are the basic guidelines of our investment. They help guide our team to think long, think big, and think global,” says Xu. “When these long-term trends are considered and together with strong fundamental research, we can look past short-term noises.”
FountainCap’s flagship long-only fund, set up in April 2015, primarily focuses on stocks that are benefiting from the three major trends and invests primarily in Chinese listed companies in US, Hong Kong and Mainland China. The fund experienced no redemptions even during the stock market downturn in 2015.
The steady long only investment strategy has bolstered FountainCap’s assets under management since its inception to US$449 million as of February 2018. It also brought opportunities for the firm to manage overseas pension-backed investment portfolios since 2018.
According to Xu, it is the China background combined with global investment discipline that makes FountainCap distinctive to both Chinese and global investors.
In the past, global asset owners were inclined to invest in China through a global fund or emerging market fund. Although those funds have large majority exposure only in big reputable Chinese corporates, they do not reflect the full picture of China’s economy as some industry champions were not well covered and not even included in any index.
“We have seen investors shifting from big global or emerging market funds to boutique and China-focused funds. Investors are now looking for managers with a long-term investment experience that can generate alpha through deep research and stock selection capabilities,” says Xu.
“Overseas institutional investors require managers to have a higher level of self-discipline and compliance while Chinese investors expect managers to have an understanding of Chinese culture and overseas market. We are fortunate to serve as the bridge for both types of investors given our team’s background and experiences,” says Xu.
One critical pillar in building the business is to find like-minded investors that fit into FountainCap’s long term, fundamental research-driven and long-only investment philosophy. This strategy requires FountainCap to maintain their asset allocation even amidst market turmoil that can significantly impact the mark-to-market valuation of their portfolios.
“When your business operations are under pressure and you face challenges and doubts, it is vital that you continue to stick to what you have faith in,” says Xu. “It is never easy to stay away from temptations which are often just distractions.”
“If you look at the most successful companies in their respective industries, you will find that they have one thing in common, which is the long-term commitment to what they believe is fundamental to the business,” says Xu. “This applies to FountainCap as well. Humbly speaking, we cannot time the market so what we can do is to adhere to our investment strategy with a long view.”
26 Jul 2018