The PCM Asia Pioneer fund was launched just over a year after the company was founded in November 2007. Then, unusually for a new company operating in the hedge fund universe, only six months later the company was ready to launch another hedge fund – the Green Power Fund, also focused on Asia.
In a company statement released at the time, PCM Capital chief investment officer Norman Chan said: “We are launching this product in response to the compelling investment opportunities emerging in the environmental sectors, particularly in Asia. In addition, there is increasing demand from institutional investors for exposure to environmental related investment.”
We spoke to Norman Chan and started by asking him to explain the background of the company?
A: “It is a very simple local-based asset management firm. We focus on fund of funds management and have seven full-time employees – four of them in the investment team, and three of them on the operations side.”
Q: What was the motivation behind creating specifically a fund of funds rather than any other type of funds?
A: “One of the founding major shareholders was trying to set up an investment firm for a long time. They had been active in the hedge fund marketing area and thought that this was a very promising business in the long term, especially in Asia. I had been looking at hedge funds analysis for the past ten years. When they talked to me about the idea of setting up the company I said yes straight away.
“I started the firm in October 2006. We started to recruit people and apply for the license and we started our first fund in November 2007 - the Asia Pioneer fund."
Q: What was the thinking behind setting up the Asia Pioneer fund?
A: “From October 2006 when we first set up the company we were focused on local expertise, and also on a fund of funds basis we did not think we should go for a global strategy. So the question became whether we should focus on Asia or just China. At that time Asia was still a very good market and so was China, but we thought that China was more concentrated and that there was also less choices for a fund of funds to choose from at that time, especially approaching our fund launch.
“I think China is becoming more and more expensive and if we had launched a China fund then we would have had limited space to hide. So we decided to go for Asian multi-strategy, multi-manager fund of funds. At that time we thought that the market was more mature than it had been five years before.
“We thought then that the Asian hedge fund universe would grow rapidly. Now of course we are in a different market cycle where it is not so favourable for hedge funds to start so the number has not increased as fast as we thought it would, but we are still seeing a lot of fund launches.
“The Asian market also shares some characteristics with the hedge fund market. First of all the market is growing and there is very strong macro growth background – we have some of the strongest growing economies such as China and India. Many Asian markets have grown from relatively immature market such as Taiwan. The options market in Taiwan has grown from nothing in 2002 to a very active trading market in 2007 and 2008.
“There is a lot of expertise migrating from the long only world as well as from proprietary desks to hedge funds as well. So the supply of talent is also increasing. We think it is a very promising region in the long run to launch hedge funds.
“In the short term the Asian market has taken a hit along with other global markets but in the long term we still believe in the Asia story and we still think that many of the strategies are becoming available in Asia.”
Q: And what was the thinking behind setting up the Green Power fund?
A: “We did not plan to have a second fund so soon. We launched the Green Power fund in April 2008, which was only six months after the first one was launched. During our preparation process for the Asian fund we came across a few environmental hedge funds, even in the space of Asia. That was the first time I was exposed to environmental hedge funds as they are a very new kind of hedge fund strategy.
“We have done some intensive research into the area to see if this is a good theme going forward. In the process we made reference to other global environmental hedge funds which also have a limited track record, because most of them have only been launched at most for five years. But when we contacted various hedge managers in Asia or out of Asia many of them were very positive. As we researched into environmental hedge funds too we became more and more confident and optimistic about the investment theme.
"Although environmental is the theme we think it is a very structural theme, which is going to stay for at least the next five or ten years. Although it is a little bit early, there is a market to build a fund of funds on this case and that is why we launched the fund in a relatively short time.”
Q: What types of funds are you accessing?
“The Asian Pioneer fund is still very young and it will look very different one year later. At the moment it is mostly equity long/short or long only funds. We have only 20% in trading funds. All our investments are underlying hedge funds or long only funds. And for the Green Power fund most of them are long/short equity hedge funds.
“In the case of water, for example, we have looked into one private equity fund but we have not invested in it yet. We have one water dedicated fund, which is a US equity based long/short fund and they have been mostly doing proper equity around the world.
“At the moment our feed through geographical allocation is around 58% Asian and North America accounts for about 25%. We have three Asian specific managers and one European based manager.”
Q: What types of investors are you attracting for the Green Power fund?
A: “Our fund is mostly marketed to Taiwan, Singapore, and Hong Kong financial intermediaries. Most of the end clients are high net worth individuals in Asia who have started to become attracted to the environmental concept.”
Q: And for the Pioneer fund?
A: “For the Pioneer fund it is also a similar client base plus a couple of institutions including some entrance firms.”
Q: Do you think the reputation built up from the original fund helped you attract new investors?
A: “I would like to think so but the Asian fund started at very unfavourable timing around November. Although the fact we already had one fund launched has been able to smooth some investor concerns because we are a very new investment fund house. It is still new, and I don’t think the Asian fund has been too helpful for the Green fund, especially as the two mandates are quite different as well. In our case the first fund probably helped a bit but limited help on the marketing side of the second fund.”
Q: What is your investment strategy?
A: “The two funds have very different strategies. The environmental fund is a theme based fund and we have a limited top-down view on that. We have to invest into environmentally related hedge funds. The Asian fund is probably more top-down than bottom-up. We try to position the funds for the Asian fund of fund for the long term gain. We think Asia is still a growth story and therefore with hindsight we probably have too much beta in it, and we have too much equity based hedge funds. We hope that in the long run that will pay off but in the medium term we are affected. I think that we will have to stay around 9 or 10% because of our equity exposures.
“For the environmental fund it is a different case. Although we have to invest into environmentally-related investment funds we still have a few different asset classes to play with. For example, beside equity long short funds we also want to diversify our funds with carbon trading funds as well as carbon project funds. At the moment we only have one trading fund to diversify our equity exposures which is a partially carbon and partially power trading fund in Australia.
“Three weeks ago we made our second trip to the western world to look at environmental hedge funds. In the next three months we will start to make our first investment into the private equity-based carbon project funds. Hopefully in the next six months we can have as much as 40% of our portfolio in carbon-related strategies, such as carbon trading funds and carbon project funds.
“For example, we are also looking at one of the Canadian-based water funds, which have private equity investment in the water space and also we have talked to local based private equity funds. But the problem is that as a fund of funds we have a limited quota on private equity funds because of their liquid nature. But I would say that we have seen, especially in the environmental area, a lot of good supply of private equity funds probably because of the nature of the industry. We try to do more bottom-up research analysis on the environmental funds because they are a limited number of funds for us to choose from so we do not rule out private equity funds as easily as we do with Asian funds. That is why are relatively safe so we can have a more open mind to private equity funds in the green fund.”
Norman Chan, PCM Capital chief investment officer
Q: Are there any strategies that you are avoiding?
A: “On the green fund probably not. On the Asian fund I have not wanted to invest in trade-financed funds. I have known these strategies since 2002 and I think operating an Asian trade finance funds is difficult as the Asian banks have been quite competitive in this area, and of course there is a limited number of funds you can choose from. I only know one Asian trade finance fund.
“Besides that we shy away from China distressed security funds mainly because we need more time to estimate performance capabilities. I have known China distressed security funds for almost a year now. The problem for me and most of my analysts is that the funds performance outlook really depends on the legal expertise of the fund managers. Although the fund managers have a very strong background in that aspect as we do not have that expertise we cannot give a fair assessment on the fund managers. So the only thing we can resort to is to look at performance numbers.
“The fund has at the moment around twenty months track record and because of the difficulty of assessing the fund managers’ expertise we have to rely on a more long term track record. We shy away from investment into those funds until we have reached a twenty four month track record. Usually we can invest into fund as early as twelve or even six months if we understand the strategies. For example with long/short funds, if we have more knowledge about equity long/short then we can make a decision earlier but for debt distressed funds because it depends on the legal issue – especially with the China market – we shy away from that area.”
Q: Do you target any particular sectors?
A: “For the green fund we target the environmental sector. For the Asian fund we don’t target any particular sector although we try to invest in property funds but we have not been able to do that because of the limited choices we have in Asia. We do not have a lot of sector hedge funds in Asia, except environmental funds. We do have a couple of environmental funds in our Asian portfolio but they are Asian environmental funds.”
Q: What have been the key drivers of asset growth?
A: “Asset growth so far has been very slow. The market has to be a little bit less chaotic. We had a very chaotic first half. Many investors that have expressed interest in a niche product like the green power fund have been waiting for clear signs to see whether they should start to commit their money. And I think that has affected everybody.
“I have just spoken with some Australian managers this morning and they have been market neutral since day one and have a three-year market record. I thought they would have had better luck with capital raising but they have had very limited AUM growth so far this year. On our side we are very young and new so we have not had many redemptions. Many investors have only invested with us for a few months already, and they do not plan to leave us soon but I would say that we have not been able to attract a lot of new investors in such a market environment.”
Q: “What are the latest performances for the funds?
A: “For June the estimated numbers are that the Asia fund is down 4.39% for the A class and the Green Power fund is down 3.7%.”
Q: What would you predict for the rest of the year?
A: “The rest of the year is very difficult to tell. I would say that especially for the green fund we are in the process of adding more long equity based funds. If we have been able to transform the green fund into the desired allocations there is a chance we would be able to generate near our target return of 20% per annum. For the Asian fund because of our high equity exposure it will really depend on the Asian market. If the market continues to struggle say in July our MSCI excluding Japan benchmark is down by around 2% and we still have around -0.7% gross performance.
“For the Asian fund for the second half of this year we still hope that we would be able to outperform the Asian Pacific index, If the market continues to drop hopefully we will be able to preserve capital, and we will be able to manage the drawdown to half of the index. If the index is able to rebound then hopefully we will be able to capture most of the rebound.”
Q: What have you done differently from other similar fund of funds?
A: “I have not been paying too much attention to other competitors. One clear difference is that we have higher equity exposures. At the moment we have still around 50% of our fund in equity-based managers and that affects our performance. Hopefully if the market stabilises and there is a turnaround then we would be able to capture better the upside of the market.”
Q: Do you have a particular investment philosophy?
A: “As a fund of funds even before our fund started we had the idea that we should try and identify talent at an early stage. One of our marketing niches is to invest in rising stars. We do not have a minimum asset size requirement – we try and identify talented managers at the early stage. In Asia this is particularly important because Asia after all is quite a small market.
“One of the managers we first met with had assets of around $70m, and when our fund was about to launch they already had assets of around $250m because of a very successful track record. At the moment, although they have also been affected by the slump in the financial market, they have around $450m and have soft closed already. After a year of marketing they have grown from around $100m to at the peak $500m and I think the capacity is around that area. If you wait until a three-year track record to invest into a fund in the Asian space it will be too late already.
“So many of our managers are rising star managers, although not the whole portfolio – they account for around half. We have high flexibility – we are small. Our Asian fund is only around $12m and the total assets under management for the company is around $15m.
Q: What is your value proposition to investors?
A: "Our Asian fund has a good combination of rising star managers. At the moment they are also affected by the market environment especially as some of the funds have a small AUM and they are also suffering from redemptions as well. We have seventeen managers in our Asian fund and in the past nine months we have reviewed them on an individual basis. So far we have only found one or two that are not performing as per our expectations. We are either redeeming or are about to redeem those. I am discussing finalising the decision to redeem from one of the funds.
"The past nine months has really been the acid test of many hedge fund managers. Although the performance overall has been down we still think many of the managers have delivered what they are supposed to do. When the market stabilises I think we will have very good upside potential.
“Our funds are a lot more high growth and high risk funds than many of our competitors. And when the Asian market rebounds we should be best positioned to capture the rebound. On the green fund, I am more aware of the competitors because there are very few. We have been able to identify not only long/short funds but we have also researched and identified very good carbon related funds as well.
"Although the carbon related strategy is currently a very minor slice of the overall hedge fund universe if the carbon programme develops as we expect, then the carbon strategy could become a very sizeable one on its own. At the moment it is at a very early stage. It is a buyer market, although not as attractive as a year ago, and the risk reward is very asymmetric. There is limited risk but there is very high potential reward in carbon related strategies. As a fund of funds we can invest into different strategies and we would have good exposures to carbon tradings as well as carbon projects."
Q: Do you have any predictions looking ahead with the market and your funds?
A: “When I first started looking at hedge funds back in 1998 we saw a very bad sell off on a global basis. It was even worse than this time. Some people even questioned whether the hedge fund industry was going to survive but hedge funds actually rebounded very nicely. They suffered from a huge squeeze themselves and some of the funds are being forced to sell their positions. Many positions were being sold at a ridiculous price and then they rebound very strongly in the twelve to eighteen months later.
"I would say that in the current Asian environment we have seen a similar situation. Some small cap stocks are saying that their holdings have similar numbers on dividend yield and price earnings ratios, say for example a 6% yield stocks have a forward p/e of around four to six times. Some convertible arbitrage managers are saying that the convertible bonds have suffered such an overshoot on downside to a level that the equity part is not worth anything – so they are like free options already.
"I would say that on a fundamental basis those kind of prices are not sustainable. They have to rebound but it is just a question of waiting for the right market sentiment. And of course if you have more bad news in the US the Asian market will still remain very weak. But once the global situation stabilises I think the Asian market will be able to outperform the global market again.”