From Value Investor to Value Creator – A case of active engagement
Active ownership and shareholder engagement are ubiquitous among equity managers. Within the credit space, engagement is believed to be a less common practice. Zeroing in on Asia, a region composed of diverse economies, we suppose the markets require active managers to be twice as diligent in investment research. We thus believe fund managers’ company engagement is a way to add value, especially dealing with Asia’s varying level of transparency, corporate governance requirement and investment opportunities.
As stewards of clients’ trust, Value Partners’ Fixed Income Team, led by Gordon Ip, Chief Investment Officer – Fixed Income, prefers a partnership with bond issuers, whereby actively engaging in their businesses and thus creating additional value for our clients.
Q: Can you summarize Value Partners Fixed Income Team’s approach to investing in Asian credit?
A: We uncover “hidden gems” of this asset class. They are under-researched companies with quality fundamentals and attractive valuation (trading below their intrinsic value). We also focus on issuers rated single B and below, which are arguably less followed, less researched and ultimately, less well-known.
In our view, investment grade and household names, which commonly trade at fair value, leave not much room for us to add value through a bottom-up credit research and stringent investment process. On the contrary, the universe rated single B and below tends to see less-crowded trades. This is also where an active manager like us – who does their homework and does it right – can add true value to investors.
Q: For a bottom-up manager, Value Partners’ Fixed Income Team covers Asian credit with a higher level of active engagement than most long-only FI teams, which can also be compared to that of private equity firms or hedge funds. Explain the rationale behind.
Our team comes to work every day looking to add value to our investors’ money. In our process, we go far beyond typical bottom-up analysis. In the Asian credit space, we define ourselves as activist investors, who would proactively work with many of our investees and their management teams to improve their credit profiles.
Often, when a new issuer, who may not be very familiar with the capital market, come in with a credit rating of, for example, single B. This type of issuers may not be well-viewed by the market because of their capital structure and smaller market presence. If we decide to invest in such companies, we work with their management by educating them about the market’s best practices and providing advice on financial discipline, for instance the ways to optimize capital structure and liability management. Adopting this process over time, if the company successfully transforms to a better company, i.e. its fundamentals and the ‘perception’ by the market improve, then the issuer’s credit profile improves and in theory credit spreads tighten. In this case, we exhibit that by working directly with issuers can improve their credit profiles to create additional value to our investors ultimately.
Q: After years of practicing active engagement, does your team see new issuers in the Asian credit universe reaching out to seek such a partnership?
A: Absolutely. First-time issuers often approach us on thoughts about pricing and deal structuring. The dialogue is a two-way road where we gain valuable insights into the new issue market and the mix of companies in the pipeline. By working closely with the issuers early, we have a head start in establishing a good relationship with them, which will, in turn, help us secure sizable allocation from the primary market if the new issues pick up broad interest.
Q: Is active engagement applicable to ‘fallen angels’?
A: This approach applies to issuers across the entire credit spectrum, from “fallen angels” to “rising stars”. We believe having a constructive relationship with issuers will always have a positive impact to our portfolio – whether you are looking from the perspective of corporate access, deal performance, deal allocation or having the first look at new deals and new opportunities.
Q: What are your outlook on the size of the universe, quality of issuers and its liquidity? Will your team continue to find ‘hidden gems’ that can be engaged?
A: We are confident that the Asian credit markets will continue to grow, far beyond the current US$ 1 trillion market cap1. Arguably speaking, Asia is the most vibrant region in the world, and, naturally, its credit markets will grow along with the region’s GDP and economic activities. As a result, we believe both the depth and breadth of the market will continue to grow, with more new issuers from various industries entering the market to fulfill their funding needs.
Finding “hidden gems” is in our team’s DNA, and we do not like crowded trades. Originated from rigorous bottom-up research, our expertise has always led us to high-conviction ideas, which are typically less researched, less followed and often time ignored by the majority of market participants.
- JP Morgan Asia Credit Index, 29 April 2020
The views expressed are the views of Value Partners Limited only and are subject to change based on market and other conditions. The information provided does not constitute investment advice and it should not be relied on as such. All materials have been obtained from sources believed to be reliable, but their accuracy is not guaranteed. This material contains certain statements that may be deemed forward-looking statements. Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially from those projected.
Investors should note that investment involves risk. The price of units may go down as well as up and past performance is not indicative of future results. Investors should read the explanatory memorandum for details and risk factors in particular those associated with investment in emerging markets. Investors should seek advice from a financial adviser before making any investment. In the event that you choose not to do so, you should consider whether the investment selected is suitable for you.
This article has not been reviewed by the Securities and Futures Commission. Issuer: Value Partners Limited.
For Singapore investors: This commentary has not been reviewed by Monetary Authority of Singapore. Value Partners Asset Management Singapore Pte Ltd, Singapore Company Registration No. 200808225G.