One way to generate alpha is to dip into three investment buckets that use different strategies.
So says Kenrick Leung, director of investment for Greater China Equities at Amundi in Hong Kong. He manages the Renaissance China Plus Fund.
First, tap into a group of large-cap, blue chip stocks. Over time, take a fundamental, bottom-up approach by overweighting or underweighting specific sectors and stocks to try to generate alpha.
He puts between 50% and 70% of his fund into this bucket.
Next, pick stocks that have the potential to go from being mid-cap to large-cap holdings. This process involves “pure stock picking on a bottom-up basis,” says Leung, who notes the meat of alpha generation comes from identifying these stocks successfully.
He puts between 20% and 30% of his fund into this bucket.
His final strategy is to invest the remaining portion of the fund in cyclicals, which means “taking a fundamental, bottom-up view on cyclical sectors, such as petrochemicals or technology, to try to [hit] inflection points in the cycle in order to generate alpha.”
Identifying top stocks
When investing in emerging markets, such as China and Taiwan, it’s best to consult various industry specialists. This is especially helpful, says Leung, when analyzing foreign markets that are regulated differently than those in North America. This can include financial and housing markets.
If sectors are more global in nature, they may be driven more by outside forces, such as global technology or shipping developments, he adds. And, as such, general sector analysts can be used.
When he and his team find an interesting stock, they determine whether to invest by measuring that company’s growth potential, and by gathering information on how it’s run.
It’s key to pose questions about the credibility of management and about accounting practices of companies, says Leung. To get the full picture, try speaking with vendors and customers that deal with the businesses you’re analyzing.
As well, cross-check data points and compare as many companies as possible within sectors.