Ox Capital's secret to beating the market over the past 12 months: Never pay up

Emerging market equities have had a very volatile last decade - but don't let that throw you off, argues Dr Joseph Lai of Ox Capital.
Hans Lee

Livewire Markets

When it comes to high risk, big payoff investing avenues, few are more interesting and varied than emerging market assets. 

Before October 2022, institutional investors from around the world were fleeing emerging market assets on a scale not seen since the 1980s. Elongated lockdowns, long-simmering geopolitical tensions, and the relentless strength of the US Dollar all contributed to a tough year for these assets. 

Yet despite the backdrop, one fund did avoid the downturn. It beat its benchmark index (and a lot of the competition) by more than 6% last year. And its portfolio manager says there is more where that came from.

As part of the Livewire Undiscovered Series, I sat down recently with Dr Joseph Lai, CIO and Portfolio Manager for the Ox Capital Dynamic Emerging Markets Fund

Lai is most famous for his 13-year stint as the Portfolio Manager for the Platinum Asia Fund and Head of its Asian Equities Research team. In September 2021, Lai launched Ox Capital - a funds management house aiming to take advantage of the historic valuation disparity in emerging market equities.

About the Fund

  • Name: Ox Capital Dynamic Emerging Markets Fund
  • Asset Class: Emerging market equities
  • Year listed and size: September 2021, $34.4 million
  • Description of strategy: A concentrated portfolio of high quality, undervalued, well-run companies in emerging markets. The fund typically holds 30-50 stocks that are diversified across countries, sectors and thematic exposure. 
  • Investment objective: To provide an absolute return and capital growth over the long term and outperform its benchmark after costs over rolling five year periods.

Note: This interview was taped on Thursday 4 May 2023.


About the fund

While many fund managers may have been thrown off by the COVID-19 pandemic, Lai viewed the timing behind the launch of the fund as an opportunity.

"We knew there was an opportunity out there in emerging markets," he said. "We have a proven process and a group of very able and intelligent investors."

Lai says the best part of running such a fund has been the ability to shape the investment process. And as for the worst part?

"It's actually the same thing. Although we started the fund 18 months ago, we're not huge. At the moment, we're running about half a billion dollars. Sometimes, it is more difficult to get noticed," he said.

Finding the best stocks in the emerging markets

At the big picture level, Lai speaks to the massive "change of paradigm" occurring in emerging economies. He argues the higher inflation environment is good news for emerging market assets especially in the next three to five years. But since not all emerging markets are the same, let alone the assets within them, it really is an area of the market designed for discipline and individual security selection. 

With that said, here is Lai's three-part investment process in his own words:

  1. "Look for strong, long-term underlying themes - emerging markets have lots of them, particularly in Asia with lots of growth industries."
  2. "Look for the current champions that are out of favour or future champions before they are identified by other people. Therefore, we can get into these stocks cheap."
  3. "Do not pay up."

Additionally, the fund employs a risk management framework that consists of cash holdings and a system designed to reduce investor exposure to certain stocks during volatile times.

What's in the fund?

The fund is heavily geared towards Asia-Pacific equities. The wider region (including China) makes up over 75% of the fund's holdings. And although the world's second-largest economy is by far the most dominant region represented in the fund, it's actually another country that excites Lai much more.

"Countries like India, Indonesia, and Vietnam are going through a massive transformation economically - a lot like what China went through 20 years ago," he said with reference to the changing landscape for governance, as well as growth in productivity and consumption.

Two of the fund's largest positions are the world's first dedicated semiconductor foundry Taiwan Semiconductor Manufacturing Co. (aka TSMC, TPE: 2330) and Indian private sector lender HDFC Bank (NSE: HDFCBANK). In the case of the latter, Indian private banks have been eating away at the market share of state-owned banks for some time which provides the mega-trend that Lai needs to add to its position.

The fund also recently bought a stake in HDFC Life (NSE: HDFCLIFE), which speaks to the team's bullishness on insurance companies in general. They also own much larger giants Ping An (SHA: 601318) in China and AIA Group (HKG: 1299) in Hong Kong. 

Take advantage of the rapid growth in Asia and emerging markets

Ox Capital's investment approach is to identify the immense changes taking place in Asia and other key emerging markets to find investment opportunities. To learn more, visit our website, or see the Fund Profile below.

Managed Fund
Ox Capital Dynamic Emerging Markets Fund
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Hans Lee
Content Editor
Livewire Markets

Hans is part of Livewire's content team. He is the moderator and creator of Signal or Noise. He also writes the LW-MI Morning Wrap on Tuesdays and Thursdays.

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