Market-Beating China Fund Manager Favors Scooters and Spicy Sauce Over Tech

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Despite years of outperformance, Michelle Leung of Xingtai Capital says she’s still asked about who is in charge

HONG KONG—Michelle Leung is used to standing out, as a China-focused stock picker who doesn’t follow the crowd and as a top female professional in the male-dominated fund-management industry.

She is the founder of Xingtai Capital Management Ltd., a firm with offices in Hong Kong and Shanghai that oversees around $600 million in assets and counts institutions from the U.S., Europe and Asia as investors.

As of May, the firm’s flagship Xingtai China Fund generated an annualized 33.9% return in the past five years, net of fees. That is more than double the 14.5% return on its benchmark, MSCI Inc.’s China index.

The performance gap is even wider this year. For the first five months of 2021, the fund’s return was 16.3%, compared with MSCI China’s 1.7%.

Ms. Leung has a somewhat unconventional approach to stock selection. Xingtai avoids companies that have yet to turn a profit, putting swaths of China’s popular technology sector off-limits. The fund also doesn’t hold stocks of the country’s internet giants, including Alibaba Group Holding Ltd. and Tencent Holdings Ltd.

Instead, it looks for stocks of companies with a solid earnings record, fast prospective growth and modest valuations. “We like stories of a niche leader, a first mover, or a competitive dynamic where the business model is defensive,” Ms. Leung said.

In practice, that often means discovering stocks not on the radar of large investors and that cater to China’s vast and increasingly prosperous middle class. “We love domestic Chinese brands,” Ms. Leung said.

Last year, for example, a bet on e-scooter maker Yadea Group Holdings Ltd. paid off handsomely. The stock rose more than sevenfold after China tightened regulations on the sector, squeezing out smaller players.

Other hits include Yihai International Holding Ltd. , a maker of spicy sauces for hot pot. Many other investors initially shunned the company for fear that it was too reliant on sister company Haidilao International Holding Ltd. , a restaurant chain widely popular among Chinese diners. Xingtai was also quick to see the potential in the property-management companies that have been listed by many of China’s big real-estate developers

Despite her fund’s consistent outperformance, Ms. Leung said it has sometimes been an uphill battle, with some prospective clients asking who is really in charge.

“Our industry has evolved in such a way that most of the founders are male. So it’s so unusual to see a female that the counterparties are just not believing it, not comfortable with it or not expecting it,” she said in an interview at her offices in Hong Kong’s downtown Central district.

“I’ve faced a lot of going into a room or getting on a call and the other side’s being very dismissive: ‘So who actually runs this place? Not you, is it?’”

Ms. Leung, the daughter of two academics, grew up in Hong Kong speaking Cantonese and English, while her Chinese father and European mother spoke German at home. She said that being raised multilingual and bicultural helped her operate in both Western and Chinese contexts. Ms. Leung is now a parent to four school-age children.

She achieved some conventional financial-industry milestones—including a stint at Goldman Sachs Group Inc. and a Harvard MBA. Ms. Leung was also a United Nations staffer at the start of her career and served on missions in Cambodia and South Africa. “I’ve had a very diverse experience, which I think helps in many ways to prepare yourself for the challenges of starting a business,” she said.

Ms. Leung said Xingtai’s stance was informed by investing gurus such as Benjamin Graham and by her own experience of doing deals in China. In the early 2000s, she served as the chief operating officer of Tom Group Ltd. , an internet portal business backed by tycoon Li Ka-shing’s Hutchison Whampoa. She later worked in the buyout industry.

As a result, Xingtai applies a more hands-on, private-equity style approach to investing in listed companies, checking in with management regularly and conducting on-the-ground channel checks with suppliers and customers, to run the slide rule over potential investments.

“A more cynical, questioning mind-set—not just following the herd, not just piling in—sometimes in the long run gets you better returns,” she said.

Ms. Leung said that Xingtai isn’t contrarian but that it does want to be early in identifying good companies. It aims to increase assets under management to $1 billion by the end of this year.

The fund started in 2014, when a lot of hedge-fund managers were using what are known as long-short strategies in an attempt to make money by picking Chinese stocks no matter what happened to the wider market. Xingtai’s fund is long only, meaning it doesn’t go short, or bet that stocks will fall in value.

Not long after Xingtai raised $30 million of seed capital, China’s domestic A-share market for stocks trading in Shanghai and Shenzhen crashed. The meltdown extended into a two-year rout where authorities banned the trading of index futures and new stock listings were suspended.

Although Xingtai weathered the downturn and outperformed the market, some of its initial investors were put off by the volatility intrinsic in Chinese stocks and redeemed their investments after markets recovered.

Coming out of the storm in 2017, Xingtai stuck to its strategy. Meanwhile, big global index compilers such as MSCI started to increase the China exposure of their benchmarks. Now a long-only, China-concentrated strategy is no longer unorthodox, but popular.

Despite more investment firms adopting the same approach, Ms. Leung said Xingtai retains advantages that are hard to replicate. The firm scouts for Chinese stock bargains around the world, be it firms listed in Hong Kong, mainland China or the U.S. It tries to beat what is often a momentum-driven market by spotting unloved securities and by looking at least three years out.

Xingtai’s management team and investing teams are predominantly female, apart from a few exceptions including Shanghai-based Chief Investment Officer Bingchao Cao. Such an outcome was achieved purely by merit, according to Ms. Leung. Going forward, she plans to do more to help redress the industry’s gender imbalance, such as engaging more asset allocators with programs for female founders.

“There’s not a lot of support for female fund managers,” Ms. Leung said. “You have more to prove as a woman. And that gives you more determination to succeed.”

Courtesy : WSJ

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