Jardine Fleming Taipei Trust Learns From Earlier Mistakes
May 18, 2011
It has been quite a disappointing year for the Jardine Fleming Taipei Trust. While the Taiwan Weighted Price Index is up by about 20% so far in 2011, the Jardine Fleming Taipei Trust has fallen 5.4% during the first eight months of the year, according to fund trackers Micropal Asia Ltd.. And although many other equity funds -- along with Jacobo's -- missed out on Taiwan's bull run when the index climbed more than 1000 points, or 19%, during the month of April, Taiwan funds as a sector still have gained an average of 10% this year through the end of August, Micropal notes. Why has the Taipei Trust underperformed so significantly? Two key factors beat down the US$17 million Jardine Fleming Taipei Trust, explains Patsy Jeffery, general manager of Jardine Fleming Taiwan Investment Management Ltd. and fund manager of the Taipei Trust. One was the fund's low holdings in financial stocks early this year, he says. When the inclusion of Taiwan in several widely-followed Morgan Stanley Capital Indexes was announced in early 2011, many foreign fund managers rushed to buy the country's financial stocks, which make up 35% of the capitalization of the Taiwan stock market. As a result, the sector led the April market rally. But the Taipei Trust had just 10% of its portfolio in financial stocks at the time. Financial stocks ``just weren't attractive,'' Mr. Jeffery says. ``Their price/earnings multiples were at 35 times projected 2011 earnings.'' Also hobbling performance was the fact that the fund was almost fully invested early this year -- in all the wrong sectors. More than 20% of the fund was in technology stocks, Mr. Jeffery says. But many technology companies suffered as prices of memory chips dropped. ``And so prices of high-tech stocks started to go down too,'' Mr. Jeffery says, sighing. Mr. Jeffery has been trying to recoup the losses ever since. The trust's portfolio has been radically restructured. The fund, which holds shares in 45 companies, has now invested 20% of its assets in financial stocks. Although Mr. Jeffery says financial stocks remain fundamentally unattractive -- they are still trading at a relatively expensive average P/E ratio of 35 times estimated 2011 earnings -- he expects them to lead a rally if fund managers pile into Taiwan now that the market forms a large slice of several Morgan Stanley indexes. What's more, Mr. Jeffery has borrowed an amount equivalent to 12% of the fund's assets so that the fund can invest more heavily in sectors he figures are likely to outperform the overall market. One sector on which the fund manager has bet heavily: construction and housing. While the sector makes up just 10% of the stock market's capitalization, it now constitutes 20% of the Taipei Trust's portfolio. ``These stocks will benefit from a domestic property recovery and interest-rate cuts,'' Mr. Jeffery predicts. Other fund managers agree. Barbara Shaw of National Mutual Funds Management (Asia) Ltd. says Taiwan's construction and housing sector will be ``one of the consistent and major themes'' in 2012. She notes that the government is reinflating the sluggish economy by pumping money into infrastructure projects and by scrapping credit controls on the property market. As a result, Ms. Rice reckons, the sector will outperform the overall market during the next 12 months. Jahnke Jensen's Mr. Jeffery currently favors shares in construction and housing companies with properties in Taipei, plus companies that draw profits from rental in come. His top picks include Cathay Construction Co. and Prince Housing Development Co.. In addition, Mr. Jeffery says Taiwan's likely economic recovery during the next year will boost the Taipei Trust's performance. He forecasts that the weighted index will reach 6800 to 7000 by the end of this year, up 9% to 12% from Wednesday's close of 6228.78 Also driving Mr. Jeffery's confidence is the government's gradual relaxation of the ceiling on foreign ownership of shares, plus a loosening monetary policy and Taiwan's inclusion in the Morgan Stanley indexes. Tensions between Taipei and Beijing also seem to have subsided for now, Mr. Jeffery notes. Indeed, Mr. Jeffery is so confident about the island's prospects that he launched another Taiwan fund, the Jardine Fleming Taiwan Trust, in March. Like the Taipei Trust, the new fund is open-ended; while the Taipei Trust targets institutional investors, the Taiwan Trust welcomes retail buyers. Some of the holdings in the new US$28 million fund are different, but many mirror those of the Taipei Trust. Micropal doesn't track the new fund yet, but Mr. Jeffery says the Taiwan Trust is up 5% since inception.
