As part of DarcMatter’s “DM Manager Series,” we took the opportunity to interview Ted Kunz from Chinus Asset Management, LLC about the background of the firm and their strategy.
What is the history and background of your company, principals and funds?
Chinus Asset Management, LLC is a Seattle-based fund-of-hedge-funds management company founded in 2008 to provide efficient access to the inefficient markets of emerging Asia. In early 2009, Chinus launched the Chinus Fund employing managers based locally in China; in 2010 launched the Indus Fund using managers based locally in India, and in 2013 launched the Asius Fund, which employs the same approach across the wider emerging Asia region. Chinus Asset Management is currently run by four Principals, including co-founders Charles Mautz and Pete Nickerson, with support from Kristi Lord, CFA, CPA, and Ted Kunz, CFA. Complete biographies are available upon request.
How is your fund differentiated from other alternative strategies?
To the best of our knowledge, no other investment manager has constructed a portfolio of locally-based hedge fund managers in emerging Asia. For clients and prospects who seek to gain from the rapid long-term growth in Asia, who also see the value in the inefficient market opportunities for producing index-beating returns, the Chinus Funds are a vehicle for efficiently capturing both attributes. Chinus unlocks a region that is little understood by Western investors, providing turnkey, expert-administrated access.
Please explain the investment process for the strategy.
The two Chinus founders together have nearly 60 years’ experience doing business in emerging Asia, and with that comes a sincere enjoyment of the culture and understanding of its complexity. Through their ongoing presence in the region, combined with their naturally keen interest in Asia investment markets, they have developed a network of investment managers from which they have built complementary portfolios of funds which meet our own rigorous operational standards. Once the ideal portfolio of sub-managers is constructed, the Chinus investment team maintains and reviews the sub-managers’ portfolios on a weekly and monthly basis. Simultaneously, we continually identify and monitor potentially new managers for inclusion in the Asius, Chinus, and Indus Funds, while tactically allocating new investor money among the managers based on our macro view of countries, regions, and each underlying managers’ portfolio strategy. In times when we are bullish on a country or region, we might allocate new money to our managers who have more of a long bias; in times when we seek to be more defensive, we may allocate more to those managers with greater exposure on the short side.
How does your fund complement an investment portfolio?
An active allocation to Asia accomplishes not only the obvious portfolio Beta diversification elements, but it presents an opportunity to capture the excess return in what we call an “Alpha-rich environment.” While developed markets have become hyper-efficient, with little or no Alpha sustainable over time (hence the trend toward indexing), emerging Asia markets remain highly inefficient, with inadequate institutional analyst coverage. In India, for example, a universe of around 7,000 listed companies is available, with perhaps 300 of those companies under any institutional analyst coverage. From this environment, a research-driven, “boots on the ground” active manager with proper diligence can identify and profit, on both the long and short side.
Are you looking at any particularly attractive opportunities right now?
Mid and small caps have now underperformed large caps for multi-year periods in several emerging Asian markets, resulting in dramatic cumulative declines. Indonesian and Malaysian midcaps are down approximately 40% from their most recent highs in 2013 and 2014 respectively, while onshore Chinese midcaps are down almost 27% in the past 18 months. After such steep, indiscriminate declines, certain mid and small cap companies offer major opportunities to generate outsized returns over the next 18-36 months. The conditions are similar to those in India back in the summer of 2013. At the time, Indian small caps had declined by 58% from the beginning of 2011 through August 2013. Our Indian managers report they are finding fantastic opportunities to invest in high-growth companies at large discounts to their intrinsic value. We added to our investment with an Indian small cap manager right as the small cap market bottomed out in August 2013. Since then, our investment with that manager has gained almost 200% compared to a 57.5% gain for the MSCI India index. We believe that mid and small cap companies in China and SE Asia now offer similar upside potential. We are actively directing investments to build mid and small cap exposure in those markets.
How do you view the overarching investment environment for the remainder of 2017?
For emerging Asia, we believe investors will start focusing more on company fundamentals in the second half of the year, rewarding those companies that outperform expectations. This environment should favor active strategies with strong stock picking skills.