Forbes.com


Classic Hedge, Asian Flavor
Justin Doebele, 06.11.01

Scobie Ward is one of Asia's best investors. Like many stars of the fund world, he's now running his own show.

We don't normally get excited about newly launched funds that don't have much of a record, but in the case of the WF Asia Fund, we'll make an exception. Why? That's because the "W" of WF is Scobie Ward. Until November last year he was the chief investment officer of the respected Lloyd George Management fund house in Hong Kong (FORBES GLOBAL, Dec. 13, 1999).

In a tricky investment landscape, the 35-year-old Ward stands out as one of Asia's savviest investors. Between June 1992 and June 2000, Ward managed Lloyd George's Smaller Companies Fund, which compounded at the rate of 21% a year, the best performance of any Asia ex-Japan equity fund over five years, according to Standard & Poor's Fund Services. (Over the same period, MSCI's ac Far East ex-Japan index compounded at 3%.)

In November 2000, Ward decided to become his own boss, so he cofounded Ward Ferry Management with Peter Ferry, the former chief marketing officer of Lloyd George. Based in Hong Kong, the company is owned 50-50 by Ward and Ferry.

Several others from their old company joined them: Lloyd George's chief representative in India, B.N. Manjunath, who has 15 years of portfolio management experience in India, and William Kerr, its former finance director. The stock-picking team includes Ward; Ferry; Manjunath; and Edgar Fok, a newly minted M.B.A. formerly at Chase.

Unlike most funds offered by Lloyd George, the WF Asia Fund--so far its only fund--is a hedge fund, registered in the Cayman Islands. Ward Ferry's fund charges a management fee of 1.5% and takes 15% of profits as a performance fee-a typical fee structure for a hedge-fund. WF Asia is a long/short hedge fund in the original sense of the term, as developed by Alfred W. Jones in the 1950s.

Currently the WF Asian fund is 43% net long, and although it hasn't been around for long, the hedge seems to be working. Ward's portfolio has risen 1.7% against the benchmark MSCI Asia Pacific Free ex-Japan index, which has fallen 13.3% since February. "This is a conservative fund that should outperform in both bull and bear markets," says Ward.

But, wait: Doesn't Ward specialize in small companies? What does he know about running a long/short hedge fund? Plenty, it turns out. While running Lloyd George's small-companies fund, Ward also managed its Asian Plus Fund, a long/short Asian equity fund, from July 1998 to June 2000. Over that period the fund returned a cumulative 135%; the benchmark MSCI Asia Pacific Free ex-Japan index gained only 73%.

Ward and Ferry have no lack of long picks in today's bombed-out markets; they even have a few shorts, now that many Asian markets allow short selling.

For long picks, the Ward Ferry team puts a lot of emphasis on such classic numbers as return on equity, free cash flow, dividend yields and price-to-book ratios. Take PetroChina, one of China's leading oil companies.

"PetroChina has three times the earnings of China Mobile, yet sells at a third the market capitalization," Ward says. But aren't growth prospects better for China Mobile? Ward argues that PetroChina will have plenty of growth as a result of China's booming economy, and with its plan to cut 50,000 of its work force of 440,000 in the next two years, it has room to boost margins.

Ward is also bullish on Siam Panich Leasing, Thailand's largest car-leasing company. The once-crowded leasing field has seen 80% of companies go out of business, leaving Siam Panich able to improve its margins with little competition.

Among the criteria for shorting: companies whose earnings have deteriorated or whose cost of capital exceeds its return on investments.

According to these criteria, Vtech, an electronics maker in Hong Kong (FORBES GLOBAL, May 28), and Chartered Semiconductor, a leading semiconductor maker in Singapore, are on the endangered list (see table).

With only $21 million in assets under management, Ward Ferry's fund is a shrimp, but that's an important part of the plan. In order to keep the fund nimble, they want to limit assets to $200 million. So that they can stay on top of each investment, they vow to have no more than a total of 40 long and short positions.

HEDGING, WF STYLE
Here are three long and two short picks from Ward Ferry Management
 
Company/ Investment thesis
country
LONGS
PETROCHINA
China		 Stock sells at P/E of seven, just above book value with a 9% dividend yield. Company to cut over 10% of work force in two years.
SIAM PANICH
LEASING
Thailand		 Country's largest car leasing company sells at a discount to book value and will have a 15% dividend yield in 2002.
TAKEFUJI
Japan		 Leading consumer finance company has 18% ROE, a P/E of 12 and sells at twice book value.
SHORTS
VTECH
Hong Kong		 Electronics maker over-expanded and will report first loss in over five years. Profit recovery uncertain.
CHARTERED
SEMI-
CONDUCTOR
Singapore		 Stock fell 78% last year; gross margins under pressure. Stock has more to fall since it still trades at 30 times earnings.
Source: Ward Ferry Management.
As he did at Lloyd George, Ward has an exhaustive research policy. "Our goal is 250 company visits per person per year," says Ward, who has himself done more than 70 company visits since February. That sort of hard work means that Ward Ferry can pick from a wide range of stocks that other funds and analysts don't bother with. By keeping the fund small, Ward and his colleagues can invest in companies with market capitalizations of as little as $50 million, where many an undervalued, undiscovered gem can be found.

Taking a big-picture view, Ward and Ferry argue that now is a good time to invest in Asia rather than betting on a rebound in the U.S. market. "In Asia, we see many stocks that are cheap, and they are improving their businesses. In the U.S., there isn't much more fat to be cut out of companies," says Ward. "Asian stocks now trade at a 40% discount of price to book value over U.S. stocks."

Time will tell, but we're betting that WF Asia's shareholders will be pretty happy five years hence. With a minimum investment of $50,000, Ward Ferry is a rare example of an affordable hedge fund that's still open to new money. Take a look now before word gets around.