After a soft start to the year the fund gained 7.1% in February, driven by strong performance from South Korea, Taiwan and China.
As mentioned last month, Korea has suddenly come to life through the ‘Value-Up’ reforms which now appear to have gained traction. Whilst starting as a political move ahead of the elections, it’s proved popular with retail investors but has now also received the backing of the National Pension Service which is the third largest pension fund globally.
Similar to the moves in Japan, the plan is to construct indexes and commit funds to appropriately ‘enlightened’ companies, so these reforms are likely to persist whatever the outcome of the election. Amongst our holdings there’s certainly support from the management teams we’ve spoken to, and are actively engaged with investors over the most appropriate ways to realise value and enhance returns to shareholders.
In that context, the two top performers this month were Hyundai Preference shares and Hana Financial. The discount on the Pref share has closed to around 35% from 50%, outperforming the ordinary which rallied 30% last month, but we believe there’s still further to go. On the banking stocks however we’re less optimistic and have been selling into strength. Last quarter most banks took additional provisions for real estate exposure, there’s limited excess capital and Korean households are the most leveraged in our coverage. As a result, we’ve been recycling our exposure into insurance where we see better longer-term prospects.
We recently met with one such company that’s accumulated significant excess capital, and which continues to grow. Recent changes to accounting standards helped increase headline earnings but more importantly also encouraged a focus on profitability over volume which is positive for the entire sector. The company has a number of ways to both increase earnings and cash returns to shareholders. We own the preference share which being at a 20% discount enhances yield and has the further possibility of being converted to ordinary shares.
We’ve also been enjoying the rally in Taiwan with further gains in ‘AI’ exposed names such as MediaTek. However, the more significant driver this year has been the emergence of local ETFs focused on higher yielding equities in a near ‘copy-paste’ of our investment approach. Recently these have attracted billions of dollars from retail investors and are driving some valuations beyond fair value. The impact of AI has triggered a supply squeeze in certain areas of the supply chain and earnings will follow suit, but we’re actively selling into strength to recycle capital where we see price moves being more technical than fundamental.
One such new position is JNBY, a mid to high-end fashion designer, manufacturer and retailer catering to the style and quality conscious consumer in China. This is a remarkable company that’s majority owned by the founders – a husband and wife team. It has a growing brand and strong customer loyalty which we were able to corroborate through one of our other holdings. It’s paid dividends every year since IPO in 2017 (including over Covid) and currently has a 75% payout producing a double-digit yield. It’s highly cash generative, has an ROE of 40% (even with net cash) and trades on single digit earnings. Their recent earnings beat estimates by a considerable margin, management announced a special dividend and gave a positive outlook resulting in a strong price reaction.
This is one of the better illustrations of the view we’ve maintained on China, that it’s not all gloom and doom. There are still individual companies that are discounted by the broader malaise, but are still able to navigate challenging waters whilst growing the business and paying dividends to shareholders.
