China Investing: Local or Foreign Manager?

Chidem Kurdas

Although China, the world’s growth engine in recent years, has slowed, it is still among the fastest growing economies. The World Bank expects Chinese growth of 7.6% this year.

Investing in Chinese companies, however, raises questions well beyond the performance of the underlying economy.

Thus there’s a line of thought that says local money managers understand businesses and the political-economic environment far better than managers based in New York or London. Not everybody subscribes to this view. “That’s just folklore,” says an American emerging markets expert who travels extensively to investigate potential investments.

Nevertheless, the spectacular performance of some Hong Kong hedge funds is hard to match. A notable example: LBN China+ Opportunity Fund, managed by Lilian Co, a former head of HK China Equities at Baring Asset Management.

Since its inception in 2007 through April 2014, LBN China+ Opportunity Fund gained 177%, compared to a 44% decline in the benchmark MSCI China Index, according a report from the firm.

The long/short strategy is to pick industries and companies with secular growth prospects but also play the contrarian against crowded sectors and seek opportunities among unloved stocks.

In 2013 the return was more than 40%. But there was a loss in first quarter 2014. All in all, the performance has attracted clients to LBN China+ Opportunity.

By comparison, New York-headquartered Och-Ziff counts as a long-distance Asia investor. The Och-Ziff Asia fund lost 8.52% year-to-date through May. It appears to be recovering, with a small (0.2%) profit in May.

But on the basis of this year’s experience you would’ve done better investing in an index. For instance, iShares Asia 50 exchange-traded-fund is up 3.21% year-to-date.

Local-manager advocates argue that to make truly informed choices in Asian countries you have to be on the ground full force and intensively study businesses and conditions. They say visiting or having a branch office in a financial hub is not enough.

The same goes for other regions where a Western manager may not have a great deal of experience. A joint venture in Africa that Och-Ziff negotiated in 2007-2008 landed the NYSE-listed firm in an investigation by the U.S. Department of Justice and the Securities and Exchange Commission for violation of the Foreign Corrupt Practices Act.

The deal involved the Libya sovereign wealth under now-dead dictator Muammar Gaddafi. His family may have used Och-Ziff funds as a way to smuggle or launder money. Click for details

The bottom line: Unless you find a manager that closely follows local geopolitics and firms, you may as well go for passive investing in an index.

This issue will likely increasingly influence investment decisions as China, Asia and more broadly emerging markets become big portfolio mainstays.

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