Adapt or die: Finles’ savvy approach to investment management

Finles Capital Management are experts when it comes to providing successful opportunities for investors globally

 
January 15, 2014

Focused on hedge fund selection, Finles Capital Management has over three decades of experience in investment management. Established in 1977 as the financial services provider for a labour union, the company has since evolved into a sophisticated independent fund management house, where one of their funds is the Finles Lotus Fund – an Asia-focused fund.

World Finance spoke to Co-CEO and CIO Rob van Kuijk and Portfolio Manager Robert-Jan van Hoorn to discuss the Finles Lotus Fund, and how they manage this successful fund together with a local partner in Singapore headed by Cliff Go of Swaen Capital.

How is the Lotus Fund playing on the current economic environment in Asia?
van Kuijk: The Lotus Fund was set up just before the Asian crisis, in 1996. It was set up as a long only portfolio, with individual Asian stocks. After a year, the crisis hit and we lost close to 30 percent in 1997 and 13 percent in 1998.

The year after the crisis we made a 120 percent return. In 2001 we changed the investment approach into a fund of funds. The reason for doing so was that our analysis of our stock selection showed that actual stock picking skills was around average, but that we were adding significant alpha on our country selection in Asia.

We decided that it was better to select good quality country managers that have been proven to deliver consistent alpha on their stock selection and combine this with our top down country allocation. From there onwards, our total business started moving more and more towards hedge funds. What we have observed is that in Asia volatility can be aggressive, especially downward volatility.

What we observed is that in Asia you need to have a real hands-on approach as things can move rather quickly

What we observed is that in Asia you need to have a real hands-on approach as things can move rather quickly. An example would be political uncertainty. We added hedge funds to protect our left-tail risk and to improve the risk-adjusted performance of the fund. Today we have 75 percent invested in long only funds and around 25 percent in hedge funds.
van Hoorn: Most of the long-only fund managers we have selected are managing their funds with an absolute return mindset. This means that if they have a top-down view of the market that is not completely positive, they can raise their cash balances.

This fits totally with our own investment approach, as we have such an absolute return type of mindset ourselves. In the hedge fund portfolio there are currently three funds: a long-short Japan fund, and two CTAs. The main objective here is to have diversified Asian exposure, to try and capture the growth in Asia, while ensuring downside protection.

What is your current view on Japan?
van Hoorn: At the moment the Finles Lotus Fund has allocated a big share of its assets under management to Japan, at 37 percent. There are two main positive reasons relating to Japan, according to van Kuijk, the first is Abenomics.

The new government, chaired by Prime Minister Abe, has announced unconventional measures to revive the sluggish economy with “three arrows”. These are a massive fiscal stimulus, more aggressive monetary easing from the Bank of Japan, and structural reforms to boost Japan’s competiveness, turning the stagnant economy and depressed sentiment around. Finles sees this as a game-changer.

Prime Minister Abe has launched the first two arrows, but the third is the most important one in the long-term, as it will bring a lot of cultural changes to the country. We foresee that Japan will be a very good market for stocks in the coming years. The second main reason is that valuations in Japan are still cheap. Japanese companies are becoming more competitive because of the cheaper Japanese yen. We expect this will improve revenues and earnings.

Why are you not investing in hot markets like India and Indonesia?
van Kuijk: We have invested in both countries in the past. Generally we have a longer-term strategic view on markets, but we are also looking at short-term developments and take action if needed. Last spring we decided to sell our investments in India and Indonesia.
van Hoorn: Both countries are facing numerous fiscal issues. Currently both are net importers creating a deficit, which they have to fund. Inflation also remains high and their currencies have weakened considerably after the tapering discussion in the US. On a micro level, valuations are stretched. That is why for us India and Indonesia are not the places to be at the moment.

In what ways have you benefited from Japan’s currency devaluation?
van Hoorn: For our Japanese investments we hedge-out all Japanese foreign exchange risks, so there is no direct Japanese yen exposure. Our underlying investments are profiting from a weaker currency as Japanese companies are getting more competitive. That is clear. If you look at Japanese companies, such as Toyota, their revenues and earnings have improved substantially because of an increase in demand which is actually fuelled by a weaker yen. However, what we have clearly seen in the last few months is that the yen has become somewhat stronger. In the long term we do expect a weaker yen because the reflation actions.
van Kuijk: What we can see is that the policy of the Japanese government and the central bank is to have a weaker yen. However it is difficult to predict how a currency will move as there are many factors driving it. Therefore we hedge-out the direct currency exposure completely.

Do you diversify in order to temper the risk of uncertain markets?
van Kuijk: The funds in which we invest are mostly absolute return oriented funds. Next to that we have a clear value bias at the selection of the underlying managers. This creates a margin of safety.

Arcus is a well-known value investor in Japan, so when the Japanese market was selling it off earlier in the year, its fund was not losing that much money. Next to that we invest in a Japan Equity L/S Fund as well. This dampens the volatility but is increasing the risk-adjusted performance of the Finles Lotus Fund.

Apart from that, what we see in Japan right now is that Prime Minster Abe has the absolute power in politics right now, in both houses

Apart from that, what we see in Japan right now is that Prime Minster Abe has the absolute power in politics right now, in both houses. So he is now able to really take reform decisions to drive Japan forward, like the five new nuclear plants he has announced for next year.

He also promotes ‘Womenomics’, by encouraging Japanese women into the labour market, which is a huge cultural shift in Japan. There are many big cultural habits that need to be changed here.

It has been over 20 years since the big crash of the Japanese equity market, and for the first time since then we see net new inflows into Japanese equities from domestic investors again. They were only net sellers and that is a huge change.

How have you seen asset management change this past decade?
van Kuijk:
A lot has changed in the past decade. The biggest differences are coming from new legislation and compliance – at Finles three people are involved with compliance, before it used to be just one. The investment requirements of investors has also changed.
van Hoorn: Clients are looking for more individual custom-made investment solutions. Since 2009, we have clearly seen big investors move away from traditional funds and funds of funds into tailor made portfolios that fit their requirements. You have to be very flexible, and Finles is.
van Kuijk: It’s adapt or die, and we are very good at adapting.