19 May 2020
Few investment professionals have followed China’s economic ascension over past decades as closely as GAM Investments’ Rob Mumford. In an interview conducted prior to the outbreak of Covid-19, Rob discussed his career, investment approach and the long-term outlook for China.
Born, and having spent most of his life living and working, in Hong Kong, Rob has had a front row seat to witness China’s transformation from one of the world’s poorest countries to its second largest economy. “Investors often ask me ‘What’s the biggest change you’ve seen?’. I always say the region across the border from Hong Kong including Shenzhen. With the opening up of China under Deng Xiaoping, tours were encouraged and I made a couple of trips in the mid-80s into South China. While the designated destinations, including white washed villages and developing economic zones, were impressive it was clear much of the region was desperately poor. Fast forward thirty-odd years and dusty roads and barefoot children have been replaced by million dollar apartments and the GDP of Shenzhen alone now exceeds Hong Kong’s.”
Shenzhen’s rise has been meteoric and is symbolic of China’s growth as a whole. South China or the so called Greater Bay area now has a population not far off Germany’s and given the focus on innovation, integration and development in the region, there is strong growth predicted for many years to come. Now more than ever Rob believes experience counts if one is to take advantage of China’s market opportunities and successfully navigate its risks.
“When it comes to China, you’ve got to have context on how companies and sectors have evolved. You need to be aware of the policy backdrop, sector dynamics and the vagaries of company specific factors to take advantage and avoid the pitfalls.”
Compared to his early days as a sell-side equity analyst, Rob feels that while much has changed, much has also stayed the same. In the 1990s the concept of private ownership in China was still quite nascent and so it was incredibly important to understand the capital structure and, if in private hands, the risks involved. What has accelerated in recent years is the quality of auditing and accounting. A key driver is the upcoming shift of China from a surplus to a debtor nation which Rob describes as a tectonic shift. Capital market inclusion in various benchmark indices has occurred on condition of improved quality of operations, reporting and disclosure.
Improving quality is a theme that comes up a lot in discussion with Rob not just for China but also broader emerging markets (EM). “The perception of China and EMs continues to be investment-led economies constantly going through boom and bust cycles. The reality is that the dominant growth driver in a number of economies is increasingly consumption; with China a good example as consumption now accounts for 60% of GDP. The ghosts of the Asian crisis and the bitter medicine handed out by the International Monetary Fund still dominates the psyche of senior policy makers and as a result you have a situation where eight of the top ten EMs are investment grade compared to four when I started in the 1990s.”
After university in the UK, Rob returned to Hong Kong in the early 1990s to live with his parents and seek a job in finance. The next seven years were spent at a broker acquired by Banque Paribas and while Rob finished at the firm as an equity analyst covering Hong Kong and China stocks, his time at Banque Paribas included a stint in Thailand in the mid-90s. This put him at the epicentre of what was to become the origins of the Asian financial crisis. “Our joint venture broker partner in Thailand was one of the finance houses that succumbed in the early days of the crisis revealing financial frailties, the ingredients of which led to a negative domino effect around Asia, eventually reaching Hong Kong. It was a frightening period but gave me priceless experience regarding macro-economic risk and risk management and influenced the structure of my investment approach which combines traditional bottom-up analysis with strong top-down awareness.”
One of the positive aspects of a Thailand posting was the easy and affordable access to a multitude of top golf courses in the Bangkok region. Rob took full advantage of this while there. He had played golf from a young age and Thailand’s passion for the sport proved to be an excellent way to meet locals from a range of different fields. Asked if he still plays he says yes with a smile. “It’s such a good stress buster so I try to get out at least two or three times a month. Spending four hours trying to hit a little white ball is a fantastic way to decompress.” He has a young family and while teaching his children to play golf is not so stress free he is looking forward to the day where they can play family four-ball.
An early mentor
The merger of Banque Paribas with BNP led Rob to move in the early 2000s to Societe Generale in an equity analyst role before becoming head of Hong Kong and China research. Societe Generale had bought Crosby Securities a few years before, which had one of the leading HK and China research franchises including an award winning mid- and small-cap team. It was the former head of this unit, Lindsay Cooper, who had left in 1996 to become a founding partner of a boutique fund management company that had the most significant impact on Rob’s investment approach.
“We helped Lindsay quite actively with company interactions which enabled me to spend a bit of time with him. Seeing him bring companies to life by revealing their merits or demerits was a revelation. From how to engage management in company visits to the investment framework, his approach was always thorough and systematic, yet not weighed down by overcomplicated modelling. At its core was a focus on the long term franchise opportunity, management quality with governance structure as a key driver of the final investment decision.”
Following the dot-com bust in 2001 and the SARS virus outbreak in 2003 (which shut down the Societe Generale equity research unit) Rob managed to achieve a long-term goal to move to the buy-side with Credit Suisse in 2006 in Hong Kong and then Millennium capital in London heading into the global financial crisis (GFC) of 2008. “We were running significant capital under quite tight risk conditions so needed to draw on all our historical top-down and risk management / portfolio construction tools to survive the storm. Tim Love (the Investment Director responsible for GAM's EM equity strategies) was head of EM strategy at Societe Generale when I was there and having formed a close working relationship there we kept in close contact. Coincidentally, Tim was working down the road during the GFC also on the buy-side. Regular contact led to us eventually working together formally again from 2010 at CQS in a similar role to today running both global emerging and Asia strategies.”
A broader and deeper understanding
Going from a sell-side research analyst and strategist to portfolio manager was natural career evolution for Rob. By the time he arrived at alternative investment firm Silver Tree in 2013 back in Hong Kong, Rob had incorporated input from a range of other asset classes and styles into his investment approach. He feels it was destiny to re-join Tim and the team at GAM. “I had just been posted back to Hong Kong with CQS when Tim and Joaquim started at GAM so it wasn’t possible to keep the team together then. But we kept in touch and looked for the right opportunity to regroup which happened in 2018 and on a platform like GAM was ideal.”
Returning to Hong Kong six years ago was also the right move for Rob on a personal level. He has enjoyed watching his young family grow up quickly there ever since. “Most people just think of Hong Kong as a dense city. I live out in a rural village of Hong Kong, a remote area near country parks and the sea. There’s a beautiful coastline and we take advantage of this at the weekends with hiking trips, paddle boards, snorkelling and swimming in clean and clear water. My children are also active in the local junior rugby scene and we all enjoy going to games, including the famous Hong Kong rugby sevens.”
It’s been a busy time for Rob since joining GAM in Q4 2018 (still in Hong Kong) and becoming, as he describes it, the EM equity unit’s ‘China and Asia point-man’. “While there is a focus on top-down this only takes 20% to 30% of our time with most of the energy spent kicking tyres in terms of meeting companies or analysts. The team conducts around 300 company meetings a year and likes to focus on briefings around results which keep everyone busy. It is a joy to be back with Tim (head of GAM global emerging markets) and to become the lead manager of the China and Asia strategies in Q2 2019. We have an integrated team, process and a suite of products across global EM, Asia and China.”
“GAM has such a wide range of experienced motivated fund managers across the asset spectrum open to information sharing. We have developed a range of models which help filter our focus across both top-down allocation and stock selection. However at the end of the day we stress test these outcomes with active analysis and both the broader GAM top-down input (from the local EM bond team, for example) and alternative bottom-up views and perspectives (from the technology team for example) is invaluable input. We incorporate a combined top-down and bottom-up methodology which aims to be consistent and repeatable. While our methodology aims to be repeatable, it should definitely not be called systematic and we would prefer to describe it as a mix of science and artistry.”
A focus on quality
An improving quality theme runs across the team’s investment outlook for global EM equities including China. The key thrust in China is premium growth, conventional policy firepower to sustain that growth and an improving quality of growth with an equity market at attractive valuations. The broader thesis is that emerging markets are the last remaining investment grade laggard which offers attraction to all of growth, value and yield investors. With an outlook of slower growth for longer for developed economies, Rob believes the attractiveness of EM has gotten stronger if anything.
“It feels like China and EM are a coiled spring waiting for the negative pressure of various drivers to ease, mostly notably the US dollar / rates and geopolitical tensions. When this occurs, I believe the EM catch-up could be fast and significant.”
The information in this document is given for information purposes only and does not qualify as investment advice. Opinions and assessments contained in this document may change and reflect the point of view of GAM in the current economic environment. No liability shall be accepted for the accuracy and completeness of the information. Past performance is no indicator for the current or future development. Reference to a security is not a recommendation to buy or sell that security.