Chuk Wong's hunt for stock-market gems

The U.S. is increasingly alluring for this global value manager.

Sonita Horvitch 27 June, 2012 | 6:00PM
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 Chuk Wong, vice-president and portfolio manager at GCIC Ltd, says that from a global perspective the United States is becoming increasingly attractive. "The U.S. economy is gradually recovering and stock valuations are more compelling," says Wong, who is a value manager. "There is also a big universe of U.S. stocks to choose from."

Wong has been steadily raising the U.S. exposure in the global portfolio for which he is responsible. One focus is U.S. retailers. "I am investing in those companies with strong franchises that stand to benefit from a rebound in U.S. consumption." He has funded the U.S. stock purchases "by selling down holdings in European stocks and modestly reducing exposure to Asia."

Although a bottom-up stock picker, Wong does pay considerable attention to the global macroeconomic picture. Of Europe, he says it is tough to become enthusiastic about this region given the considerable uncertainties surrounding the financial health of key countries and the outlook for the euro. But, he adds, there are some companies that warrant attention. "These are global or regional leaders with strong fundamentals and good balance sheets."

Turning to Asia, Wong, an expert on China, notes that the country embarked on a more accommodative monetary policy earlier this year. More recently, China started to lower interest rates for the first time since 2008. "China has the tools and capacity to engineer a soft economic landing, over time."

This is important for global growth, says Wong, but it has not grabbed the headlines. "Media attention is focused on Europe's financial challenges and also, to a lesser extent, on the fiscal policy issues in the United States."

Yet China is in the midst of "a most important economic transformation." He says it has taken the country three decades to emerge from poverty to its present strength, thanks to industrialization and investment. "Now, domestic consumption is gaining more traction."

 
Chuk Wong

China's exports are no longer a key growth driver, says Wong. "The country has become a significant importer." Also, the Chinese currency has appreciated by 30% versus the U.S. dollar since 2005, when it ceased to be pegged to the U.S. dollar. "While this should have pleased the Americans, it has not attracted much media coverage."

Finally, he notes, the evolution of Chinese manufacturing to value-added goods has important implications for commodity-producing countries like Australia, Brazil and Canada. "The resource boom of the last decade, which has helped to propel these economies, has peaked."

At GCIC Ltd., Wong has been a member of the global equities team for 16 years. His current mandates include Dynamic Global ValueDynamic Far East Value and Dynamic EAFE Value Class.

Dynamic Global Value, with assets of $650 million, has 37% in Asia, 24% in the United States, "which is higher than it has been for some time," and 23% in Western Europe. Elsewhere, the portfolio has 6% in Eastern Europe, the Middle East and North Africa, 4% in Latin America and 3% in Canada. Of the Asian exposure, 14% is in China and 5% in Indonesia.

The largest sector weightings are industrials at 25%, financials also at 25% and consumer discretionary stocks at 19%. The portfolio has little exposure to energy and materials. Of the financials, only 3% is in Western Europe. Here, Wong has one holding, BNP Paribas S.A. "I recently visited with this bank in Paris. It is in decidedly better shape than its European rivals, but it is being tarred with the same brush."

In the consumer-discretionary sector, a top 10 holding in Dynamic Global Value is Signet Jewelers Ltd. SIG, which Wong describes as a "hidden gem." This recent addition to the fund "is the largest specialty jeweller in the United States and the UK."

At the end of April, Signet had 1,851 stores, of which 1,320 were in the United States and 531 in the UK. In the United States its biggest chain is Kays, which operates mainly in malls.

High-margin diamond jewellery represents some 75% of Signet's sales in the United States and "35% and rising" in the UK. Wong says the company "has a strong balance sheet, which includes cash of US$500 million." The stock trades at 10 times earnings-per-share estimates for 2012.

A U.S.-based company "that was one of the early movers in China" -- and that Wong considers offers value -- is Agilent Technologies Inc. A. This global company provides measurement and testing equipment used in the pharmaceutical, life-sciences and electronics industries. "Agilent is conservatively managed and has no debt," he says. The stock trades at 12 times earnings-per-share estimates for 2012.

Agilent Technologies Inc. Signet Jewelers Ltd.
June 26 close $38.45 $41.51
52-week high/low $52.62-$28.67 $51.44-$30.93
Market cap $13.4 billion $3.5 billion
Total % return 1Y* -21.5% -4.7%
Total % return 3Y* 23.2% 26.4%
Total % return 5Y* -0.2% 0.0%
*As of June. 26, 2012. All figures $US
Source: Morningstar

Based in Europe, a "champion of champions in its field" and a top 10 holding in the fund is Koninklijke Vopak N.V. This Dutch company operates 84 tank terminals in 31 countries. Services include the storage and handling of liquid oil products, liquefied natural gas, chemicals and vegetable oils.

"Vopak is well positioned to benefit from the secular growth in the liquid-bulk-storage market," Wong says. There is "limited cyclicality," since the company's revenue depends more on volume than on the commodity price. A further plus, he says, is that contracts with customers tend to be long term.

Also in Europe, Wong has sold his holding in GEA Group AG, an industrial-process engineering company based in Germany. "It is a global leader in providing dairy equipment, for example," he says. "This was a restructuring story, when I invested in it." The company has since focused more on its higher-margin operations and has expanded those margins. "The story played out. The stock has risen to reflect this rationalization."

Turning to China, one of Wong's largest holdings in Dynamic Global Value is AAC Technologies Holdings Inc. Founded in 1993, AAC is a leading manufacturer of miniature acoustics components, with a variety of uses including mobile phones, consumer electronics, home appliances and medical applications. More than 60% of its sales are "generated by smart phone-related business." The company is also diversifying into components for tablets.

AAC's customers include Apple, Nokia and Research in Motion. "The company is an excellent example of value-added manufacturing in China," says Wong. "AAC's stock is a good proxy for growth in the smart-device market, without betting on a single brand, where the competition is fierce."

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Sonita Horvitch

Sonita Horvitch  

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