China and the missing knowledge link

Philip Ehrmann says new technologies and industries will create opportunities in China. Provided to China Daily

A British fund manager says he and his colleagues cash in on widespread ignorance

Philip Ehrmann starts his day by checking his BlackBerry at 5:30 am. He reaches his office near Hyde Park, London, about 7:15 am, a couple of hours before the market closes in Shanghai.

The time difference enables Ehrmann, manager of Jupiter China Fund in London, to get an idea of what has been happening in China without being hit by any sudden, unpleasant surprises. He does not panic, he says, or if he does, he panics "in an organized way".

His mutual fund manages assets worth 153 million pounds (1.53 billion yuan; 187.8 million euros; $243.9 million) for which China is the focus.

Now is probably not the ideal time for investors to be looking at China, he says. The benchmark Shanghai Composite index fell below 2,000 points in September, almost a 12-year low; Chinese companies listed in the US are going through rough times; and economic growth in China has slowed several quarters in a row.

However, Ehrmann, 51, a fund manager for 30 years, says things are not that bad. Switching from an export-led economy to one that goes down new growth paths will not be painless, he says, but new industries and new technologies will transform how things are done in China, and this process will create great opportunities.

Ehrmann, sitting casually dressed in his London office, talks about his views of the Chinese economy and his decades of investing in the country.

His strategy is growth-oriented, "looking into the future", he says. He spends time looking at growth industries that are not reflected in the economy as they should be.

"It is possible for us to operate in a world where part of the stock market is not performing. Everything is being depressed. There are areas where things look good, but their value has not worked its way through the stock market yet."

Ehrmann says his first encounter with China came about by chance 15 years ago, when he was studying emerging markets. How much was going on in China came as a surprise, and few people outside the country knew about it, he says. He reckons it is still very much the same today.

"There is an information gap between what people know and what is happening in China, and me and my investors are looking to profit from that information gap."

For example, when Google and Facebook were monetized they gained worldwide attention, yet in China there are Internet companies with huge customer bases and ever larger turnover. "When people talk about Google, there are Chinese companies like Baidu and Sina which are quietly making progress."

Ehrmann started his career in 1982 focusing on growth companies on the US West Coast. He says he sees many similarities between the US then and China now, including industrialization, urbanization and environmental problems. People began to grapple with pollution issues and deal with air quality and waste management, he says.

"The changes happening in China now are equally dramatic, but unprecedented in terms of speed and scale."

Tencent, the Chinese Internet company, has been near the top of his portfolio since 1999 and 2000, near the end of the dotcom bubble, when he and his colleagues began to look at what the Internet would mean to China.

Tencent, which in those days was essentially a paging service, has grown into one of the country's biggest Internet companies.

Ehrmann mainly invests through Hong Kong and the US, and he does not invest in A shares, although he keeps an eye on the latter so as to keep tabs on the best companies in China in various sectors. Ehrmann says some technical issues need to be tidied up in the A-share market, such as with tax, before investors put their money into it.

Though he says ignorance about China is still on a par to what it was 15 years ago, the obvious difference is that it is not for want of information on the subject.

"You work out what is important over time," he says.

For instance, power and energy use are good indicators of growth when the economy is driven by investment, but not necessarily so during the transition period when there is greater efficiency.

He spends little time reading newspapers, he says, opting for weightier matter. He says he has read "China 2030" several times, a 468-page report published in February by the World Bank and the Development Research Center of the State Council, a government think tank. He also reads high-level government documents, such as the 12th Five-Year Plan (2011-15), and talks with the management teams of the companies he invests in. He travels to China three or four times a year.

There are two extremes in China's corporate governance, he says. Many state-owned companies that provide medical care and education for their staff still think they do not have to make a profit. Family companies, driven by entrepreneurship, are more efficient and competitive, he says, but they still think their business belongs to their family, not the public.

What Ehrmann does is to find the companies in between, companies that hire good professionals, make profits and pay dividends.

"We prefer single-focus companies (where) management have all their attention in the business they are doing."

Investing in China can be frustrating. "It is frustrating when investors do not seem to understand, and companies let you down."

He recently talked with what he regarded as a good chemical company but decided against investing because it wanted to buy property, in addition to the two private jets it has. If a company does not stay focused, he will not hesitate to sell shares and walk away, he says.

"There is no point waiting. We will just leave."

That is like life in general, he says. In solving problems you grow, so not all problems are bad. "What defines you as a person is often how you deal with them. In a transition period, that is what you do."

China continues to fascinate him, and with his long experience in investing in emerging markets he does not fear countries that are not perfect, he says, as long as they are moving in the right direction.

"What could be more fun than studying a country whose every action has a world impact, and the world knows too little about it?"

Three decades into his career as a fund manager, he says he still enjoys it. His father is an industrialist who builds factories and sells products, and he has to wait five years to see whether his decisions are right.

Ehrmann became involved in the US equity market when the British financial market was relatively closed, and he focused on mid-cap growth companies. In his job, he can build strategies and plan the future through the stocks he chooses, essentially doing what his father does, he says. But he does not have to wait for five years and sack thousands of people if he makes a mistake; he can simply dump poor shares.

Nevertheless, how the shares are doing is a daily preoccupation for him. Likewise, his father can fret about business, he says, but at least he knows that there are machines there to make things that people will buy.

Ehrmann says another good thing about his job is the opportunity it gives him to deal with interesting people. He recalls that in 1984, when he was 23, he sat in the same room with Gordon Moore, co-founder of the computer chip maker Intel. More recently he met Jack Ma, founder of Alibaba, China's biggest e-commerce platform. If such companies make it to the top in China, transforming its industry, they are going to have a key role in shaping the world, he says.

diaoying@chinadaily.com.cn

(China Daily 11/02/2012 page22)