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Morgan Stanley’s top-performing fund buys undervalued stocks

The Asia Opportunity Fund has outperformed twice as much as a benchmark gauge in the past year.
Pedestrians pass monitors displaying Morgan Stanley signage outside of their global headquarters in New York. Image: Michael Nagle/Bloomberg

A top-performing Morgan Stanley fund is betting on cash-rich consumption-focused stocks in Asia, especially China, to manage risks in market cycles this year.

The Wall Street firm’s Asia Opportunity Fund, which focuses on equities in the region excluding Japan, returned 44% in the past year, beating 99% of its peers, according to data compiled by Bloomberg. The portfolio focuses on undervalued companies with low debt or net cash on their balance sheets, many of which are found in consumer sectors, said Kristian Heugh, who has been co-managing the fund since its inception in 2016.

“We seek to protect investors’ capital by focusing on high quality companies with sustainable competitive advantages and purchasing them at a discount to our estimate of intrinsic value,” Heugh said. “We remain vigilant in selling names approaching our estimate of their intrinsic value and redeploying that capital in what we believe are the next big ideas.”

China is the $1.5 billion fund’s largest-weighted country, accounting for 57.7% of assets as of end-December. Heugh said the world’s second-largest economy will remain a key focus this year despite its slower growth in 2019.

Asian consumer stocks provide “high returns on capital, low leverage and quality growth prospects,” Hong Kong-based Heugh said. The region offers “the highest ratio” of high-quality companies that have generated both 15% return on invested capital and 15% revenue growth over the past three years, he added. The MSCI Asia ex Japan Index has gained 3.4% so far this year.

With more than 800 million people emerging from poverty since market reforms began in 1978, China is an especially attractive hunting ground for consumption names, Heugh said. Key themes he’s looking at include better quality food and drink as well as access to Internet services, health care and better education opportunities for children.

As a result, the Asia Opportunity Fund’s largest positions in China focus on the education, food, beverages, restaurants and travel sectors. Food-delivery giant Meituan Dianping, distiller Kweichow Moutai and soy sauce maker Foshan Haitian Flavouring & Food Co. were among the top contributors to the fund’s peer-beating performance last year.

Asia Opportunity Fund’s top performers 2019 return
Meituan Dianping 132%
Hangzhou Tigermed Consulting Co. 122
Kweichow Moutai Co. 101
TAL Education Group 81
Foshan Haitian Flavouring & Food Co. 56
Source: Bloomberg  

The top five performers are trading at an average valuation of more than 50 times earnings estimates for 2020, compared with about 14 times for the MSCI Asia excluding-Japan Index. All have net cash on their balance sheets.

While only about 1% of the portfolio is allocated to Southeast Asia due to expensive valuations, its Asean revenue exposure is higher thanks to investments in key regional Internet stocks Alibaba Group, Tencent and Naver.

“Alibaba owns Southeast Asia’s largest e-commerce platform Lazada, Tencent is the largest gaming company in this region, and Naver owns Line which is popular among Southeast Asian mobile Internet users,” Heugh said.

© 2020 Bloomberg L.P.
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But this cannot be! We all know by now that it’s impossible for any actively managed fund to beat an index…we’ve been told this repeatedly by the general commentariat and of course Warren Buffet once mentioned something about this too. Must be an error or nasty Fake News.

End of comments.

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