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Friday, January 12, 2018, 13:00
Riding a 'once-in-a-lifetime' boom
By Duan Ting
Friday, January 12, 2018, 13:00 By Duan Ting

Fund manager Vanessa Xu is confident the golden era for asset managers in China will continue for another 20 years. She tells Duan Ting the boom is being fueled by the nation’s swelling middle-class group.

Vanessa Xu, co-founder and chief executive officer of FountainCap Research & Investment Co, believes the China market really has good prospects for asset management. (PARKER ZHENG / CHINA DAILY)

To investment captain Vanessa Xu, the golden times for asset managers are here to stay.

And, the opportunities up for grabs will be “once in a lifetime”, she says. “The past and coming 20 years have been and will still be the golden period for asset management in China … we believe active management investing in the China market will shine.”

Xu is co-founder and chief executive officer of FountainCap Research & Investment Co — a long-only equity fund managing house which focuses on global long-term opportunities that benefit from China’s fundamental transformation.

With a larger economic volume and faster growth speed, she thinks the mainland market is now very much like that of the US from the 1950s to the 1990s when globalization led by American companies was gaining steam, and the middle-class rose amid post-industrialism and urbanization, driving infrastructure construction and consumption.

We believe that active management will shine for China equity investments in the coming decades

Vanessa Xu, co-founder and chief executive officer of FountainCap Research & Investment Co

“The US stock market rallied more than 100 times during the 1950-2007 consumption boom,” recalls Xu. “Great long term equity investment firms like Capital Group where I worked at before and several others grew amid the boom in the capital market.”

The mainland stands to benefit from continuous and further fundamental transformation, including industrialization and urbanization.

According to global management consultancy McKinsey & Company, the mainland, at present, has 800 million people living in below third-tier cities, and there’ll be more than 550 million in the middle class — 76 percent of the country’s urban population — by 2022, which would make China home to half of the world’s middle-class group.

The expansion of China’s middle class has the potential to create the world’s largest consumption bonanza since the post-war period in the 1950s in the US and Europe. Chinese consumption is expected to grow 9 percent annually through 2020, says Boston Consulting Group.

Xu says the wealth accumulated in the past three decades on the mainland has been going thorough transition, and succession brings opportunities as well.

The nation is also undergoing an innovation and technology revolution with two leading and fast growing technology innovation clusters — the Guangdong-Hong Kong-Macao Bay Area powered by the Hong Kong and Shenzhen capital markets, and the Shanghai-Hangzhou Bay Area powered by the Shanghai stock, bond, currency and commodity exchanges.

Best bourse performers 

“Technology innovation and revolution not only boost the emergence of budding tech companies but more importantly, improve productivity or even transform many traditional sectors such as manufacturing industries,” says Xu.

As the economy undergoes a massive transformation and new economic growth engines emerge on the mainland, Xu emphasizes that the Hong Kong and mainland stock markets may become the world’s best-performing bourses in the next decade, and there are “many, large and high-quality” investment opportunities for the asset management business.

FountainCap is positive about the performance of sectors like consumption, technology, manufacturing, the bio-pharmaceutical industry, including cell engineering, the clean economy covering natural gas, air and water, and healthcare.

The mainland’s stock market, Xu recalls, emerged in the early 1990s and has been fueled by the Hong Kong bourse in the past decades. What were mostly included in the Hang Seng Index were local real-estate and banking stocks in the 1980s but, at present, private enterprises such as Tencent are also listed on the gauge, reflecting the rapid transformation of the  mainland economy.

More world-class companies are expected to emerge from China’s private sector and more excellent private enterprises are due to go public overseas and be included in the index.

“China’s private sector is larger and stronger than ever, creating more than half of the national GDP, underpinning higher quality and more sustainable growth in the coming 10 years,” she notes.

The most significant event for investors last year was when MSCI — the global gauge of stock-market activity — announced in June that 222 “A” stocks — would be included in MSCI global indices from June 2018. Xu says the inclusion suggests that Beijing’s financial reform efforts over the past few decades have been increasingly recognized by international investors and greater direct participation by global investors in the mainland’s equity market is likely. This would encourage the government to undertake further deregulation and promote capital account.

According to a research report by FountainCap, China is the most important marginal variable at present, and the only direction for global investors is to increase the asset allocation percentage of Hong Kong, Taiwan, Macao and mainland shares under the country’s continuous transformation and opening-up of its capital market.

Stock selection

“We believe that active management will shine for China equity investments in the coming decades. Given the structural inefficiencies in the Chinese  capital markets, we believe active managers with long-term focus, thorough fundamental research, low fee structure and superior stock selection capabilities, stand a good chance to outperform index funds over the long term,” says Xu.

FountainCap’s investment strategy is to focus on selective stocks based on the long term, and the company’s solid research on fundamentals rather than short-term volatility, which is inefficient and costly.

The average holding period of the company’s investments is three to five years and investment professionals are compensated primarily on rolling three- and six-year periods to underpin a long-term mentality, Xu says.

“It’s important to understand the Chinese variables for making sound investments not only in China but globally. Before, we had helped global asset owners to invest in China, and now at FountainCap, we stand at a perfect joint to help both global and Chinese asset owners to benefit from China’s growth by applying our intimate understanding of China’s complexity and the global capital markets experience gained in the past 20 years.”

However, in the asset management business, there’s a huge shortage of creative products with low cost but intrinsic value and stable returns amid the slow recovery of the global economy and under the low yield environment.

FountainCap aims to provide professional and boutique products and are not charging performance fees so far.

Their investors are mostly institutional and professional investors from both China and overseas.

On a mission with no room for regret

“It’s the sense of a mission to help asset owners grow their wealth along with the golden times for asset management that drove me to co-found this company with my partner,” recalls Vanessa Xu, co-founder and chief executive officer of FountainCap Research & Investment.

Xu and Frank Ding, both ex-Capital Group investment professionals, founded the company in 2014. “Our team has combined investment experiences through six global market cycles over the past 25 years,” says Xu.

Xu has more than 16 years’ experience in the global capital market. Prior to founding FountainCap, she was with Capital International under Capital Group responsible for direct investments in Asia with an emphasis on China and primarily focusing on the internet, consumer, retail and healthcare sectors. Before joining Capital Group, she was an investment banker at JP Morgan Securities, Credit Suisse and Citigroup. She had also worked as a management consultant with Monitor Group’s Beijing office before taking up investment banking.

Talking about giving up being an investment banking professional to running an enterprise herself, Xu says: “We feel like it’s a once-in-a-lifetime opportunity and if we don’t seize it, we would regret facing the historical tide.”

But starting an enterprise is totally different from working in a large company. “You need to strike a balance fast or slow, as when you do research and investment which is a slow variable. We aim to be the fund manager who faces cycles but, in terms of pitching clients and finding assets, it’s about being fast.”

“Investment is a tough job which needs independent thinking, discipline and patience,” she says.

“We prefer intellectual honesty and equality in our operation so we encourage our colleagues to be more open, raise their views and share their insights.”  

Xu’s advice to youths is that in developing their careers, they should be independent thinkers with faith and passion in what they do and stick to it. They should ignore external interference, such as how much money they could earn in the short term, but pay attention to five to 10 years’ training of professional skills.

Contact the writer at tingduan@chinadailyhk.com

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