Livewire Markets joins International Women's Day in celebrating the social, economic, cultural and political achievements of women. As part of our coverage, we're bringing you exclusive interviews with some of Australia's leading women in fund's management, including, Mary Manning (below) Natalie Tam and more.

As an alumnus of George Soros and Howard Marks, Mary Manning has learned her trade from some of the best in the business. Starting the Asian Growth Fund at Ellerston Capital is, she says, her greatest achievement and she has managed the fund for more than five years. After 20 years of experience investing in Asia, Manning is an authoritative voice on the market. 

In the Q&A below Manning provides her outlook on markets, explains the crowded trades she's avoiding and reveals a theme that excites her for the year ahead. 

What is your current outlook on markets - are you feeling bullish or bearish?

In the short term, I am cautious on markets for three main reasons: 

1. Valuations are extended and a lot of the good news about vaccines and re-opening is already priced in; 
2. The probability of a policy mistake is high as developed markets taper, exit QE and a return to a more normalized level of fiscal support. As we saw in 2013 (and had a preview of in late February), a taper tantrum can do a lot of damage to portfolios in a short period of time; and 
3. There is a lot of frothy behaviour across asset classes be that the rise of SPACs, a frenzied IPO schedule, price movements and volatility in cryptocurrencies, Reddit/Robinhood action, to name a few. Given the above, I expect a market correction at some point in 2021. March and April could be volatile months as this is when the base effect for inflation will be the most pronounced and all eyes will be on the yield curve and the Fed’s reaction function.

In the long term, however, I remain very bullish on Emerging Market equities. All the building blocks of the EM structural growth story remain strong post-COVID: demographics, urbanization, a rising middle class, infrastructure build, technological leapfrogging, liberalization of capital markets, etc. 

It is also important to note that EM, particularly emerging markets in Asia, has significantly more policy optionality than developed markets like the US, Europe and Japan which are already at the lower bound on interest rates and have very little fiscal room for additional stimulus. 

COVID has accelerated the Japanification of developed markets, which has increased my bullish outlook for EM in the long term.

What are your current top three holdings in your portfolio and why?

The top three holdings in the Ellerston Asia portfolio right now in percentage terms are TSMC (10%), Tencent (7%) and Samsung Electronics (7%). 

TSMC has been a core holding for many years now but we increased the position size last year because TMSC is emerging as a key enabler of emerging technologies such as 5G, IoT, HPC and EVs, which will drive structurally higher growth. In the last few months, we increased our position size even further given potential pricing upside from the global chip shortage. It is now the largest position in the Fund.

Tencent is a top position for a number of reasons: 

• Its core gaming business continues to show strong momentum in a post COVID world due to structural behavioural shift in users
• China macro recovery in 2021 has provided growth visibility in Tencent’s advertising business
• The company is also well-positioned in industrial internet which will be a key growth driver in the long run. Valuation is reasonably attractive at 36x forward PE with 25-30% earnings CAGR for the next 3 years.

Samsung Electronics has multiple drivers of near term growth including new memory upcycle (~30% of sales, 60% of earnings) and better than expected smartphone sales (Galaxy S21 up 30% yoy on Galaxy S20). Like TSMC, Samsung is a beneficiary of the global chip shortage through memory and foundry. Samsung’s fortress balance sheet, free cash flow generation, dividend yield and inexpensive valuation (1.9x PB and 15x P/E) provide a high level conviction in the stock.

Note that TSMC, Tencent and Samsung Electronics are all mega-cap stocks with high benchmark weights.

So while these are the largest positions in the Ellerston Asia Fund in absolute terms, they are not also the largest overweights. The largest overweight positions are Ping An Insurance followed by the 3 Singapore banks, DBS, OCBC and UOB. This positioning is to take advantage of a rising US 10 year bond yield and rotation into more cyclical stocks. To sum up, sector-wise, the largest positions are all technology stocks and the largest overweights are all financials.

Are there any crowded trades within the market that you think investors should be avoiding?

I am concerned about the rise in unprofitable technology stocks. 

Goldman Sachs has complied a GS Non-Profitable Tech basket comprised of US tech stocks that have yet to break even. First, the fact that such an index even exists should give investors cause for concern!

 Secondly, this index has gone up over 4x since its lows in March 2020. A similar dynamic has happened in Asia with a flurry of unprofitable technology IPOs and rapid price increases in technology stocks that don’t have any earnings. 

You can get significant valuation upside for some of these stocks primarily because the monetization of their business models is still in infancy, but in the current environment, it is also important to focus on the potential downside.

A few weeks ago I went through every stock in our portfolio and looked at downside support both valuation-wise and technically. Stocks with unattractive upside/downside ratios have been trimmed or removed from the portfolio. I think unprofitable tech is a crowded trade that will get unwound quickly with any taper or tightening. When stocks have no E (earnings) it is hard to find a PE at which you would feel comfortable stepping in to buy. 

Ellerston Asia, therefore, has a strong preference for Asian technology stocks that have strong earnings support including: 

• TSMC,
• Samsung,
• SK Hynix,
• Mediatek,
• UMC,
• Infosys
• Alibaba
• Tencent.

What is one theme or sector that excites you for the year ahead and why?

China Net Zero refers to China’s commitment to be carbon neutral by 2060. In order to achieve this goal, China needs to have peak emissions by 2030 which will necessitate a significant shift in the energy mix in the coming decade. Ellerston Asia puts the opportunities arising from China Net Zero into 3 buckets: (1) Renewables; (2) Electric Vehicles (EVs); and (3) EV supply chain. 

The development of the EV supply chain in Asia has similarities to the emergence of the technology supply chain in Asia in the 1990s and the Apple supply chain in Asia after the first iPhone was released in the 2007. Investing in this development in the early stages can pay handsome rewards to investors.

What is the greatest advice a mentor has given to you? How has this advice shaped your career?

I think that promoters are much more important than mentors. I’ve never really had a mentor per se, but I’ve had a number of promoters who have actually done tangible things to advance my career - promotions, references, international opportunities, internal and external visibility, to name a few.

What are you most proud of in your career thus far? Are there any pivotal moments that come to mind?

I am proud that I pitched the idea for the Ellerston Asia Fund and got the green light to go ahead and raise the capital. There are a lot of PMs who inherit funds and/or FUM which is much easier, but launching a Fund from scratch and managing it is very rewarding.

International Women's Day 2021

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