JOHCM's Mehta: Don't blame Bolton for missing accountancy fraud

JO Hambro Capital Management's new Asian fund manager has said high profile fund managers caught out by accountancy fraud by some of China's smaller companies were not to blame as the problems can be so difficult to spot.

Samir Mehta, manager of the recently-launched JOHCM Asia All Cap fund, was referring to US-listed Chinese companies which were subject to fraud accusations earlier this year, hitting the performance of Fidelity's China Special Situations trust, run by Anthony Bolton.

"It is something that is very difficult to find out and some of the best investors do get burnt," Mehta said.

Bolton admitted his £483m trust had suffered losses due to investments in two companies accused of fraud, and he had liquidated other US-listed Chinese holdings at a loss earlier this year.

One of the two firms in question, China Integrated Energy, lost 90% of its value in the first half of the year following accusations of fraud and the resignation of its auditor KPMG, though it denies the allegations. Bolton did not name the other company.

"You learn from your mistakes and move on", Bolton said at the time.

However, to avoid the possibility of this happening in the JOHCM Asia All Cap and Asia Small Cap fund, run by Cho-Yu Kooi, Mehta said the funds only invest in companies which have a track record of disclosing results for at least a year.

"We buy companies that have been around for awhile. We do not go near new listings or IPOs. It has to be a company that has been tested as the risks can be quite severe. Also, one of our main focuses is free cash flow so this helps us [in avoiding those which may have accounting problems]."

The funds, launched on 3 October, are almost fully invested with around 4%-5% left in cash with the view to buying when valuations reach certain levels.

A quarter of each portfolio is invested in what are deemed as "long-term holdings" with the aim of holding them over three to five years.

"These should do well over the economic cycle and the underlying business should be resilient during downturns. I have worked in Asia for 21 years, I have seen its worst, and one of the lessons I have learned is a good business gets better after a crisis," said Mehta.

The balance of the portfolio is invested in cyclical stocks to express the managers' view on the current stage of the economic cycle.

"Now, valuations are extremely cheap. We have taken exposure in South Korea and Thailand where the cyclicality is and bought a bank in China. A lot of negativity has now been priced in and banks are trading one standard deviation less than price to book."

In terms of sectors, they are favouring infrastructure and consumers with particular exposure to Indonesian petro-chemical and cement companies.

The pair are also underweight financials, with only 9% exposure on the All Cap fund, compared to the index weighting of just under 30%.

"Credit growth has been very strong in financials over the past two and a half years which leads us to be cautious. Also, property is classified under financials and in Hong Kong, China and Singapore we have seen governments implementing policies to try to reduce appreciation."