FEG Insight Bridge Podcast with Pleiad Investment Advisors

Chapters

00:00:00 Intro

00:00:30 Episode overview

00:01:16 Brief introduction

00:02:50 Making the co-CIO model work

00:04:30 Breaking down the Asian markets

00:06:13 Perception of short sellers in Asia

00:08:13 Managing an Asia-focused investment firm through COVID

00:12:25 Is China investable? 

00:15:27 Gleaning China’s priorities through the Party Congress

00:19:28 China’s gradual reopening

00:24:01 Is this the time for Japan?

00:27:59 Shifting supply chains in Japan and China

00:34:43 Post-COVID Hong Kong

00:37:16 Lightning round 

 

Greg Dowling (00:06):
Welcome to the FEG Insight Bridge. This is Greg Dowling, head of research and CIO at FEG. This show spans global markets and institutional investments through conversations with some of the world's leading investments, economic, and philanthropic minds, to provide insight on how institutional investors can survive and even thrive in the world of markets and finance.

(00:30):
Today's FEG Insight Bridge will be focused on Asia. As I get ready for my first trip back to Asia in almost three years, I brought in some experts to get me prepared. Joining the Insight Bridge podcast are the co-CIOs of Pleiad investment advisors, a Hong Kong-based Pan-Asian investment manager. So much has changed in Asia since COVID shut down economies worldwide. Some of these changes have been more economical, such as moving supply chains closer to home due to fear of disruption. Some have been political, like the banning of certain technology transfers. Regardless of how or why they occurred, they have combined to impact the overall investment environment. Hear us tackle these topics and much more, like where to get the best dim sum in Hong Kong. Mike and Ken, welcome to the FEG Insight Bridge. Would you briefly introduce yourselves and Pleiad?

Michael Yoshino (01:22):
Sure. Happy to do so. Thanks for having us, Greg. My name is Michael Yoshino. I am a co-CIO of Pleiad Investment Advisors. I am Japanese-Canadian. I grew up in Canada, went to college and business school in the US, and have been investing in Asia and Japan now since 2001. So close to 22 years. I've been fortunate enough to work at and learn from investors at some of the best investment firms globally, TBG, Riverside Company, Heiger, Soros fund management, prior to starting Pleiad with Kenny.

Greg Dowling (01:51):
Well that's great. That's that's pretty good. Kenny, what do you got?

Kenneth Lee (01:53):
As Mike mentioned, we've worked together for the better part of 20 years now, so the background's going to be pretty similar. So my name's Kenneth Lee. I'm, I'm one of the co-CIOs of Pleiad. Chinese-American, grew up in the United States, college and business school in the US. Been investing in Asia since 2003 when Mike and I were working together at TBG, then together at Tiger, then Sequoia Capital, and then together again, at Soros. Been a good long 20 years together. Been a really great opportunity to keep refining our process and eventually building Pleiad.

Greg Dowling (02:24):
So what is Pleiad?

Michael Yoshino (02:24):
We left Soros in 2014 to launch Pleiad. Pleiad is a Hong Kong-based asset management firm focused on public market investing in North Asia. So that's primarily China and Japan.

Kenneth Lee (02:34):
We run a very fundamental bottom up investment style, which I think is rare in Asia, and we do run a fairly concentrated portfolio of high conviction names, which we tend to hold for years rather than months.

Greg Dowling (02:50):
There's definitely been some overlap. You guys have worked together for a while and that's probably part of the answer, but the co-CIO model, a lot of times it just doesn't work. How have you been able to make this work?

Kenneth Lee (03:01):
Mike and I have worked together for the better part of 20 years now, and over several firms as we mentioned. And we really felt that throughout that time we've seen so many different cycles together, good times and bad times, and I think throughout that period of time you have to build a lot of mutual respect for each other. And being able to not only have someone that you trust in another set of eyes, kind of look through a lot of the work and making sure that we don't have issues of thesis drift, or as we kind of say, falling in love with your own thesis.

(03:27):
Always having someone that's a sounding board and kind of keeping you honest has always been really essential. So for us, we've found a lot of strength in the co-CIO structure and on top of it, the fact that we have very distinct geographies that we're focused on, myself and China, and Mike and Japan, we find that being able to go really deep in those geographies, but then be able to come together, and really pick out the key insights, and figure out where we can really best leverage our insights in our work, and express it in the geographies, that's kind of really going to give us the best asymmetry. Has consistently kind of been one of our longstanding edges as a firm and that really works because of the co-CIO model.

(03:58):
So for us, we see it as a very big asset for us.

Michael Yoshino (04:03):
And I think at the end of the day, Greg, Kenny and I have the same values and goals for both ourselves, and for the firm. As we mentioned, we are fortunate to work at some fantastic firms over the course of our careers, and I think we wanted to take some of the best practices from those firms, but also there are areas where I think we felt that we could improve on. And so we set out from day one to build the right collaborative team and culture that I think really permeates through the firm.

Greg Dowling (04:26):
You guys run a long short strategy with a fairly tight net exposure. For those listeners that maybe aren't as familiar with shorting in Asia, would love just to have you guys talk a little bit about how easy it is to get borrow, how stable, what's the cost, how's that differ from, maybe the US?

Michael Yoshino (04:41):
For markets like Japan, it is a very deep market, where it is relatively easy to get fairly cheap and stable borrow at GC or already basis points. When there are hard to borrow names, the cost can be higher, probably closer to the high single digits on the top names. But, I think one thing for us, we also tend to be quite contrarian in nature, and so oftentimes we will be early on shorts, and we will often take down and lock in borrow before it becomes expensive or scarce. And by doing that we can lock in, borrow at much cheaper rates and secure them with pay to hold and borrow.

Greg Dowling (05:11):
Ken, what's it like in China?

Kenneth Lee (05:13):
China, in terms of shorting, it's pretty robust in a lot of the offshore markets, whether it's Hong Kong, Taiwan, ADRs, but I think where the big opportunity set is, and where a lot of the focus is, is really onshore on in the share market. And that's where historically our inventory hasn't been as robust and borrow costs could be high, but it's actually been improving steadily each year. Liquidity in the market's phenomenal, in fact deeper than that of Japan. As the borrow inventory situation improves, as short ability improves, it's going to make for a phenomenal long short market.

(05:43):
We've seen more and more, a lot of brokers really deepen the supply. It's really improving the quality of borrow in terms of where they're sourcing a lot of the borrow from, and we're seeing a lot more long-term investors in ashares now, and that really helps with concerns about recall risks and things like that. We're starting to see borrow costs come down a lot, so a lot of ashare borrows can be anywhere between 3 to 5% in terms of cost, and some of the really big names, we've seen them. GC as well. So we're quite excited about that opportunity set, and we think that's really going to make the long shot opportunity in greater China extremely robust.

Greg Dowling (06:13):
Are short sellers viewed in Asia, good, bad, and different short.

Michael Yoshino (06:17):
Short sellers generally are viewed less favorably, for us at least. Companies and management teams don't tend to know if we're short them or their stocks. We don't publicly disclose our positions. And for us, at least given the reputation that we feel that we've built over the years, we always try to maintain strong positive relationships with management teams. Whether we are long or short, their stock.

Kenneth Lee (06:37):
Short selling in all markets, obviously, is one where we have to be quite sensitive about how we approach the situation. I don't think China's any different from that standpoint, but one pretty fruitful area in the past is obviously, unfortunately, been frauds and the short opportunity there, but I think a lot of companies have become quite good about detection and how to cover up those situations. So I think as a short seller, particularly in China, you're still very much focused on fundamental opportunities, really understanding big shifts and market dynamics. The short opportunities, in terms of frauds, are still available at times, it's few and far between the way we generally view it. As Mike mentioned, we want to be very constructive with management teams, but we still need to ask the hard questions that are relevant for us to really discern the negative thesis in those situations. We'll be working very internally to figure out if we think it's the right short.

Greg Dowling (07:23):
Based on your previous response, we're going to do a jargon check on China. So what is A-H-A-D-R? What are the differences?

Kenneth Lee (07:32):
Ashares are the onshore shares, so those are stocks that trade in the Shanghai Exchange, Shin zen and Xenex, which is more the high growth index. Those are the onshore markets. H, or Hong Kong, shares that trade in Hong Kong, and ADRs are those depository receipts of Chinese stocks that trade in the US. So that's generally how we break down. Then obviously, Taiwan is included in greater China, and those are stocks that trade in Taiwan, so that's kind of generally how we think about the broader opportunity set in China.

Greg Dowling (08:00):
Want to give a little bit to practice management, and then we're going to talk a lot about North Asia and how things have changed pre during post COVID. But I wanted to ask a real serious question, 'cause I think it's probably was very difficult for everybody, but what was it like to manage an investment firm during the lockdowns in Hong Kong?

Michael Yoshino (08:18):
Great question. At the initial outbreak of COVID in 2020, there certainly was a period there where we all kind of scattered for a few months to figure out what to do, and then I think everyone regrouped very quickly together again in Hong Kong, as back then it seemed like one of the safest places in 2020. And then obviously subsequent to that, there were a significant outbreak and significant lockdowns. But I think for us, we've always had to, and we've always been used to working remotely even since pre COVID, because everyone is traveling on the ground, doing due diligence on the ground in the local countries, whether it be China, Japan, Taiwan and Korea. Certainly, even prior to COVID, we were used to working remotely, and even now that things are back to normal, we're back to the way we were prior to COVID. And so as such a transition for us was fairly seamless.

Greg Dowling (09:04):
What was it like on the research side? You're a fundamental investor, and you can't do the onsite visits sitting across the table for management. How did you get the proper read?

Kenneth Lee (09:14):
One of the things that we actually found, which was surprising in a lot of ways, was that because of COVID and the inability to meet with management teams face-to-face, doing Zoom calls and connecting with companies telephonically, or through video conference just became habitual. And in a lot of ways the management teams were very willing to connect, and the frequency of contact was actually even greater than when we were traveling and during pre COVID. And we spent a lot of that time, internally, as a team. We said, "Since we have that greater level of connectivity, the management teams, let's really try to nurture these relationships." So we spent a lot of time reaching out to our management teams, particularly for our corn concentrated positions and thinking through their business. I would say for a lot of companies, let's say in China, they were very disconnected with the rest of the world, and they actually saw having those calls with us as ways to glean more information of what's happening with the rest of the world, how are they dealing with COVID, how are they seeing China, and what our view was.

(10:02):
So they actually, one, enjoyed the conversations, because it was very symbiotic from that standpoint, but then we'd also spend a lot of time trying to see how we can be helpful to the businesses, where we're seeing shifts in certain industries and other markets, and how we can be thinking about that, or how some Chinese companies or Japanese companies could work with other companies around the world to potentially strengthen their business. And we find the interactions to be very different when the inbound calls to the companies are to provide them with some insights, or provide them with help, as opposed to as we call it, being very transactional. We're just trying to extract information from management teams.

(10:31):
So actually now in the last couple months, when we're kind of fully open again, in the pavement and meeting companies, the interactions have been great. Companies were just dying for us to go out there. They've got a new facility built that they want us to see, or headquarters. It's almost like old friends seeing each other. We've spent so much time seeing each other on video, and now that we're able to visit, that connection has actually been stronger. So it's actually been pretty good for us.

Greg Dowling (10:51):
How did you handle the human side, your employees during this?

Kenneth Lee (10:53):
That's a really critical part of it. I think one thing that people don't put enough value in, we think particularly in this region in Asia, a culture of the firm. And a lot of it stemmed from the connectivity and always staying in touch, and sharing insights, and a lot of the cross-geographic work we do, because a lot of the work is sourced from different geographies, and we talk about it, and we may express another geography. A lot of that buy-in for physicians come as a team as a whole. So that's always been one of our strengths.

(11:18):
And I think, as Mike mentioned, we're still able to stay connected even in the environment of COVID. And the key is really is to continue to have those calls, to stay connected, and people talking through how they're thinking about their positions or what they're seeing developing in their industry. So in that sense, the connectivity was still quite strong, and we were able to I think, continue to have our weekly portfolio meetings. Mike and I would practically be on calls every day with the team, doing our individual geographic team calls, and then be ready to really share insights on our Friday portfolio meeting. I think we did a pretty good job trying to maintain the situation and all the normal protocols throughout COVID.

Greg Dowling (11:54):
Yeah. Anything else you you'd add, Mike?

Michael Yoshino (11:56):
Yeah, I think we've been fortunate, as Kenny mentioned, to really focus on team culture. And it is very different than a lot of firms in Asia. I think we're proud of the fact that we've had very low turnover since the nine years that we've been in business. And it's something that if people do need to work from home or we need to be flexible along those lines, we're happy to do so.

Greg Dowling (12:14):
All right. It is tough question time. And the next group, I'm going to put towards Ken, but Mike, if you have other comments, chime in, and then we'll flip it, and it'll be a little bit more Japan. But the tough question that I always get from clients, and I'd be interested to hear your perspective, is China investible, is it still investible? Ken?

Kenneth Lee (12:35):
This is always a fun one. It's a very topical question and it's one of the key questions for the region. I think the issue about the investability of China is really intensified last year, and sentiment hit a low in October last year immediately following the party congress. Key concerns centered around whether China is still focused on the economy, or were greater issues such as common prosperity, or anti-monopolistic agendas were taking priority. And the selection of Li Qiang as Premiere also surprised many, because he's seen more... I guess he's painted more as a loyalist [inaudible 00:13:05] and not someone that would necessarily help drive the economy forward. That's actually, probably in our minds, one of the biggest misperceptions of the market right now. Not to bore you with all the details, but Li Qiang has a very commercial background. In fact, he's been instrumental in helping to drive a lot of the FDI in China in the past few years, including the Tesla Shanghai factory that was approved and built in record time during COVID.

(13:26):
Li Qiang has been a big supporter of Pran Enterprise, and one of the strongest voices pushing for the pretty sudden and abrupt pivot in November for the reopening. And I think most important is the incremental clarity we've seen in the last few months, since reopening in November, is how focused the government has been on getting the economy back on track. And it's clear that leadership in China understands that any long-term goals they have for the country really hinges on a strong economy. And I think the other key concern weighing on China is the geopolitical risk. And to be clear, we certainly aren't harboring any naive notions that US-China relations will improve anytime soon, but we do think China is becoming increasingly aware of the cost of becoming further isolated from the rest of the world, and that they understand the absolute binary nature of certain geopolitical decisions.

(14:08):
So from that standpoint, we do think the risk there, as time passes certainly, we think are manageable, and we're starting to see China do a lot in terms of trying to reach out to the rest of the world. We've seen just even recently last week, a large group of corporates from Brazil come visit China. Macron is scheduled to go to China. I think it's tomorrow, actually, in early April. And China's at least trying to, for obviously economic reasons reach out and have a more favorable attitudes towards other countries. So we do think that cooling a bit in terms of some of the geopolitical issues, but as it pertains to some investors that may have technical mandates that won't let them invest in China, that's only understandable. But, we think that for the rest of the investors who can take calculated risk in China, the focus really shouldn't be whether China's investible, but rather more on how to invest in China.

(14:56):
And we think during this time of uncertainty, we actually think investing in managers that are more regionally-focused, such as ourselves, is probably the best approach in the sense that we take a lot of the cross-geographic work we do, and we try to express it in the best way possible to get the best risk-adjusted returns. So we might glean certain insights from China, but find that expressing it in Japan and Korean might be the best way to actually leverage that work. And being able to invest from a Pan-Asia standpoint we think, really gives us the best approach to attack the region.

Greg Dowling (15:27):
The skeptic in a lot of people says that the economy was very weak after the Draconian lockdowns you saw both in Hong Kong, and in mainland China. And that because of the concerns of the economy, they reversed a lot of the crackdowns that they've had, whether it be on real estate developers, for-profit education, big tech. Once things get going again and they're at a better spot, will they go back to that? And then how do you figure out what sectors industries are in the crosshairs?

Kenneth Lee (16:01):
That really is a great question. Let's take a step back here. I do understand the concern that, is this sort of a temporary reprieve where there's a refocus on the economy simply because they have to, and then once we're on better footing, is there fears that we go back to the period where, or people are concerned that there's kind of these greater philosophical agendas that are really priorities for the leadership? I think it's important because you brought up some really important sectors that we saw the crackdown.

(16:29):
So particularly as it pertains to real estate and education, our thought process there is, if you really take a look at why they went after those two industries, things really didn't come out of the blue. It's really a very targeted and swift move against two industries that they felt were two the main reasons why people were unwilling to have children in China, and therefore causing this huge demographic issue in China, that China believes is one of the most pressing issues. And that's inequity in terms of access to education, and the high cost of real estate, and how difficult it is for people to be able to buy apartments and think about the cost that their children will have to bear on that front.

(17:04):
So they really went after those two sectors. And real estate is obviously a much harder issue to tackle, because of how large of a part of the economy it is. So you really saw education take the brunt of it. And the education sector obviously collapsed when they levied a lot of the restrictions that they did. But as heavy-handed it was, it wasn't nonsensical nor did it come out of the blue. It's something that they've talked about for some time, in terms of at least the demographic issue being something they want to address. Big tech still fits largely within a reasonable framework of why they went after the big internet platforms. And again, that was something that was in a lot of ways telegraphed in the prior five-year party congress, where the issue there is a lot of these big internet platforms had grown to these very large influential companies, and in a lot of ways helped exacerbate some of that income disparity and wealth divide. Where haves became very, very rich and Have-nots issue became huge.

(17:58):
And whether it's companies like Mei Twan, the way they felt that the gig economy workers weren't getting full-time benefits, or the e-commerce companies levying these exclusivity terms, where if you work with one e-commerce platform you can't work with another. That really came at the expense of small medium enterprise. And these small merchants, they wanted to address that. But on top of it, there's a bigger issue that a lot of these internet companies also, they sucked up a lot of the key engineering talent that China felt would be better used in terms of areas of social media, but more importantly, in areas of hard technology where China really wants to improve the tech supply chain, and localization of tech hardware. But then a lot of the talent was being sucked up by the internet platforms. So the focus on these sectors, as hard as the regulation looked from a top-down basis, it was very clear in terms of what they were trying to solve for.

(18:44):
And one of the key ways to kind of understand the priorities of the government is to really dig into what they've laid out as their priorities during the party congress. So in the most recent party Congress, the government has highlighted areas of cybersecurity, tech globalization, the health of private enterprises as some of the key areas that they're focused on. So we actually think that following these key areas, and understanding it, provides for extremely powerful and relevant trends that you can focus on for the next five years before the next party Congress. And typically, each one of the party congresses, they come, they lay out a shift in priorities. The last one just happened in March. A lot of the markets digesting that. We've been reading through a lot of the speeches as well, but we do think those provide very important cues to kind of understand the direction of the country.

Greg Dowling (19:28):
So I wanted to ask, is this reopening boom, is it real? Does it have legs and who does it benefit? Does it benefit the exporters, or domestically focused companies? 

Kenneth Lee (19:39):
Yeah, this sudden pivot from zero COVID in November, I think really took everyone by surprise. And I think most were all assuming that March of this year after the party congress was the more likely timing. Because the decision was abrupt and sudden, the first couple months following November was extremely chaotic, and there was a large COVID outbreak in December and January, and that really hindered the initial recovery process. Because you know basically have a country where it's been in lockdown or some form of lockdown for nearly three years. And the government was really aggressive in terms of medical stance of really explaining to people the dangers of COVID so that they'd accept the lockdown. And now you suddenly reopened and people's mindsets need to change. So emerging out of that, initially, the first couple months people actually stayed in even more because they're hearing about all these cases of COVID and this huge outbreak.

(20:23):
So the upswing economy's been a bit slower. I think the team's been on numerous trips the last couple months in China. And just to give you a sense from just the visual evidence, foot traffic and malls have been really through the roof, tons of traffic on the roads, queues at restaurants, there's high demand for domestic travel and hotels and that's become quite obvious. I think the areas that they're still lagging is, although you see a lot of people out and about, it's really kind of more on the services side, purchasing and buying things. We're still seeing... While it's been lower than pre COVID levels, giving you a rough sense, the indication seemed like somewhere between 67% of where we were pre COVID, but it takes time for that to improve. In the more recent March service PMI, we saw one of the highest numbers at 58.2 and the highest since the COVID outbreak.

(21:08):
So we think things are really kind of on the right track. But for us, as we think about how to really benefit from what we believe is a pretty real reopening, and as you mentioned earlier, rebounding from a very low base, it's important for us to look for sectors that we think are seeing clear fundamental improvements, and not just simply ones that kind of fit a broader thematic of reopening. So, like numerous names in travel lodging, consumer sectors, have recouped near highs, and we think it's likely that they won't have enough earnings followed through to really support the stock. So it's really imperative for us to find stocks that are, first and foremost, we have a strong fundamental thesis and a structural tailwind. And if the backdrop of reopening further accelerates the thesis, that's a meaningful bonus for us. We can't really be the only leg of our thesis.

(21:48):
And we also, as you mentioned, feel that finding opportunities that are more domestically geared, it isn't an issue of benefiting more from reopening, it's more that we also think on top of it, it helps somewhat protect from some of the geopolitical stuff that's happening. There's less volatility from that standpoint. So if we generally think about just giving an example of a sector that fits in that framework, we've been spending a lot of time on the insurance sector in China, and we're quite excited about it because there's a very key fundamental story there, which is insurance continues to remain under penetrated. And in the last four or five years the industry's gone through meaningful restructuring and we're seeing some pretty important kind of top-down structural tailwinds for the industry with the government introducing individual pension schemes, and new tax benefits for long-term savings.

(22:28):
And this is all going to be pretty meaningful for the industry. And then it does have a reopening link to it because the industry has benefited from a lot of mainland Chinese visitors, particularly to Hong Kong, who come down, typically buy insurance products because just some of the better structuring and in terms for insurance in Hong Kong, and mainly Chinese visitors have really picked up quite a bit in Hong Kong. So near term, it benefits from reopening, but the point is that there's a bigger structural thesis that gets us excited. These type of opportunities are more the opportunities that we're looking for.

Greg Dowling (22:52):
I was going to switch gears a little bit, and Mike, I was going to ask you how the China reopening impacts Japan?

Michael Yoshino (23:02):
It's a great question. We think it actually should be very positive for Japan. And not only is China Japan's largest trading partner, but pre COVID, Chinese visitors were over a third of all visitors to Japan. So that's effectively gone to zero in the last three years. So the rebound in, for example, in Chinese tourists, probably from this summer will serve to significantly boost Japan's domestic economy. And as mentioned, there are many, many Japanese industrial consumer companies with significant exposure to China onshore, whose businesses and earnings have been massively negatively impacted over the past three years. And I think during this time, they've really restructured their businesses to take out significant costs, improve efficiencies, such that as their top line bounces back, earnings should really significantly surprise to the upside. So as Kenny mentioned earlier, while we're certainly positive on China and in the fundamental improvement trajectory from here, a big way in which we can express is through Japanese companies with significant China exposure.

Greg Dowling (24:01):
I was going to ask you, I feel like every few years, for maybe the last 30 years, somebody says this is the time for Japan. It is so cheap, you got to buy Japan. And then nothing happens and they bring it back up like a couple years later. So is this the time for Japan?

Michael Yoshino (24:17):
Yeah, I mean I wish I could tell you how many times that we've heard that over the past 20 years. But you're right, it seems to come and go every couple of years, where foreigners get pretty hyped up about Japan, and then ultimately the pace of change disappoints them, and they kind of move away from it. We don't think Japan is that interesting from a macro or top-down market perspective, given obviously there's a long-term lack of growth and given the significant demographic headwinds. But for us it's always been a great stock picking market at the micro level.

(24:47):
As you know, it's a very difficult market to understand, and diligence will not only due to the language and cultural differences, but also there is a lack of a well-trained investor base in Japan. What that does is create a wealth of opportunity to find diamonds in the rough in a very liquid and broad-based universe. And so while I think foreign investors have wavered between being hot and cold on Japan over the years, what I would say is that over the past 10 years there has been dramatic improvement in Japan in terms of corporate governance, in terms of the quality of the management teams, their understanding of capital efficiency and management, and even their receptivity to foreign investors.

Greg Dowling (25:25):
Is that really the legacy of Abenomics?

Michael Yoshino (25:28):
That's a good question and I can certainly talk about our thoughts on abenomics, but I think that it certainly has helped. It's certainly nowhere near where it needs to get, and certainly not at the pace which I think we all would've hoped to have seen. But even in the past couple of years, there have been some dramatic changes in Japan, which we never would've thought we'd seen. Such as voluntary take private MBOs. We've seen a significant return of excess capital shareholders, where companies are buying back 25% of their shares outstanding. And so, certainly everything is moving in the right direction.

(25:59):
And despite that, valuations are very low relative to historical averages. Well below that of other developed markets, foreign positioning is incredibly light, even today. And yet there are Japanese companies with world leading technologies, products, and brands. So I think there are reasons to be positive on Japan, but as I mentioned, it's a difficult market for foreigners to "get." And certainly as institutional coverage has continued to regress over the years, this has created opportunities for fundamental investors like us, who really understand these companies, and can communicate with the management teams in the local language.

Greg Dowling (26:31):
So you mentioned that a couple times, being fundamental of stock pickers. It feels like there's a major shift going on, and maybe it's nothing, but it feels like something. And how do you play that macro?

Michael Yoshino (26:42):
The truth of the matter is that it probably does matter, even though we're fundamental investors. Because from the standpoint of the implications on FX, on global rates, and to be honest, even the direct impact that BHA has on equities. For example, there were periods of time during 2017, 2018 and even 2020 when the BOJ was coming in to buy ETFs every single afternoon session when the topics was only down 20 basis points in the morning session. So in that type of environment when that's happening, they're significantly distorting the market.

(27:15):
And so fundamental price discovery was certainly impaired and for us what was frustrating is that our shorts simply didn't go down, because the BOJ continued to support them. So this is something I think that you have to be aware of, especially, for example, staying away from stocks for which the BOJ was buying a large percent of their free flow, or for example, index heavyweights, because they're tendency to just skew towards buying the indexes. And as you mentioned BOJ policy today, certainly it can be argued that is at the start of a period of a significant directional change. And I think that can have a very large impact on currency markets, and for better or worse, dollar-yen and other cross rates still have a very large impact on the fundamental earnings of many Japanese exporters. So it is something that we need to be cognizant about.

Greg Dowling (27:59):
But I think of all the cross-border investment between Japan, China, and Mike, you mentioned it, right? China's the biggest trading partner of Japan. And corporate Japan has put a lot of supply chains in China, and COVID has impacted that, a lot of things. I mean there's been so many things going on. I think even back to some of the weather-related, Fukushima way back when, I think people... COVID was kind of the last straw with people thinking about their supply chains. And so how does French shoring, or near shoring impact some of these decisions? Is Japan putting supply chains in Mexico or Thailand, and how does China react, and just help us think through this, or is this more, a lot of talk and not much action?

Michael Yoshino (28:43):
One would've thought that Japanese companies, particularly at the weekend would've brought back or started to bring back more production onshore, but that actually hasn't been the case.

Greg Dowling (28:51):
We need people for that.

Michael Yoshino (28:53):
We need people for that. Well, they can build automated factories, but they haven't been doing that. And certainly, over the past three years, to your point, with the experience we've seen in China, not being able to get into the country, not being able to operate a lot of times under lockdown, Japanese companies have been aggressively reconfiguring their supply chains to move production out of China and to other areas of Asia. In particular, Southeast Asia.

(29:15):
So this is something that we think will likely to continue. I think the one exception probably is, and this is related to obviously, the geopolitical tensions that have come to the surface over the past few years, but the one industry with an exception is technology in the semiconductor supply chain. So there's actually a substantial push by the Japanese government to onshore a lot of semiconductor manufacturing to Japan. And so Kyushu, which is Japan's largest southern island, we'll see a massive boom in semiconductor production capacity, supported in large part by Japanese government subsidies to a large project led by TSMC, which will have ripple effects on the build out of that infrastructure and the industry around it. So that's one area that we think you'll see significant shift in the capacity and the power dynamics of the supply chain going forward is in semiconductors.

Greg Dowling (30:05):
The chip wars for Hill. Ken, what about in China? Are you seeing China having supply chains leave? Is it really just a drop in the ocean?

Kenneth Lee (30:14):
I think the issue, this is very different when we talk about respective industries. So I think Mike touched on, for instance, even Japan's interest on onshoring key areas of high technology. And I think those are areas where you're definitely seeing... Whether it's the semis supply chain or areas of very sensitive technology, a lot of countries are looking to bring that back because of the strategic value of having that production onshore and the importance of keeping that technology. And I think China recognizes that's kind of an inevitability, and they recognized it for some time, to be frank. It's just that the pace of development of a localized technology base has been slower than originally hoped. And obviously, things like the US semi bands only going to make things worse. But even when they kind of laid out their roadmap with key players in China in terms of building new semi fabs, they've always talked about reserving a couple fabs that were purely localized equipment just 'cause they knew that it was essential for them to be able to be technology self-sufficient to a degree over time.

(31:05):
But I think, as it pertains to the more production of areas like apparel, even some of the lower end components, and you think a lot of countries would like to move things, whether it's to Southeast Asia or to India, but they're finding that a lot of the infrastructure, a lot of the know-how, a lot of logistics, a lot of the higher connections in terms of electricity, it just isn't there. And even just the labor base isn't robust enough to really substantially move things over. So I do think in areas that are, I guess less strategic, people find that the value to move things over or the cost of doing so is actually much higher, and a lot of ways logistically very difficult. So we think that's going to be kind of a much longer process.

(31:43):
But the much more higher end, particularly technology related areas, I think China realizes that they're under the clock in terms of really trying to figure out how they can really start producing things locally. Because if, as mentioned, geopolitical tensions continuing into the chip war is very real. Right now the ban is on leading edge, but that extends to lagging nodes as well. China's in a really difficult position, so that's an area they've accepted a lot of onshoring by other countries is going to continue to happen and they need to figure out ways to be self-sufficient.

Greg Dowling (32:10):
Yeah, I've heard that as well, just that it's slower because... It's amazing all the infrastructure in China, the ports, the railhead, the electricity, it's really hard to replicate in a short period of time, whether if you're Vietnam or Thailand or Malaysia.

Kenneth Lee (32:23):
It's really interesting. People talk about just making, let's just say athletic apparel, whether it's Lululemon or things that have some technology in the fabric, just the amount of complexity in terms of having co-location of all your suppliers in a certain area, and logistics being there, and everyone being connected, it's just really hard to replicate that very quickly. From companies that just have to know how to do a button, or certain seams, and things like that. And it's not well understood that there's real IP there, and understanding how to efficiently get one piece to another manufacturer to do one part and move it to another area, and then that co-location. The decades it took to set that up, isn't something that's easily replicated. So I think that will take time.

Greg Dowling (33:01):
So we focused mostly on the two biggest economies. Makes sense, right? Japan and mainland China. So what are the other opportunities in North Asia, in Korea, Taiwan?

Kenneth Lee (33:11):
I actually think this question is related to the question we just talked about. For us historically, as it pertains to Korea and Taiwan in particular, our exposures there have, a lot of the times, has been derivatives of insights in our two key North Asian geographies. Then China, as you may suspect, typically is usually the big end market for a lot of Korean, Japanese companies. So if we see insights in moves, in shifts in market share, or consumer preference, a lot of times we're able to express it in Japan and Korea. Taiwan, along with Japan and Korea, tends to be impacted more kind of on the industrial tech side, or potentially commodity side where China tends to be that incremental shift in fine demand. And that has pretty broad implications throughout the region, and we'll typically find ways to express that in Korea, Taiwan as well.

(33:56):
But I think going forward, given a lot of the geopolitical issues we talked about a lot of the onshoring of things, there's going to be additional implications. It can be expressed in Korea and Taiwan. So the unfortunate trend of decoupling the building of separate supply chains, it does have pretty broad implications, but you're also seeing a situation where, for a lot of Korean and Taiwanese companies, you're seeing a meaningful increase in their addressable market, both from stronger alliances with Western countries, but also because of the redundancy of Cap Ex, and the purchasing need for reconfiguring the supply chain. It's pretty inefficient, but if we have separate supply chains to degree, there's going to be a lot of redundant build. So a lot of semiconductor equipment companies are going to be supplying tissue supply chains. There's going to be a lot of components that are going to be doing the same. So, I think in the initial years of that, probably going to see the addressable market increase. So it's something that we're staying on top of.

Greg Dowling (34:43):
Question, Mike, I'm going to start with you. I'm going back to Asia for the first time since COVID hit, going to Shenzhen and Hong Kong. Hong Kong's a place I've been a lot and one of my favorite cities. When I go back post COVID, what hasn't changed, and what has changed? What will I notice?

Michael Yoshino (35:02):
Obviously, Hong Kong has been through a lot in the last four years. Even prior to the pandemic, going through a lot of political turmoil, obviously. But it really has been a phenomenally resilient city. I think what you probably will notice that has changed. You've seen a fair share of expats that have left the city, certainly during that period, especially families. But we have seen a lot of new faces, and influx of people there are still constructive on the region, and have started to flow in. Now that the border's reopened.

(35:29):
I think obviously, a lot of service industry businesses, whether it be iconic restaurants, shops, et cetera, that shut down, unfortunately, as a result of the pandemic and not being able to stay afloat. But in the meantime, a lot of new stores have popped up and have taken their places. So I think it's pretty emblematic of the strong entrepreneurial spirit of the population in Hong Kong, and the understanding of the need to adapt. So you probably won't see a ton of noticeable differences, but since pre COVID, in fact I'm always amazed at how normal things seem. Those are probably a few things you'll notice.

Greg Dowling (36:02):
Ken, anything?

Kenneth Lee (36:03):
Initially, it was sad to kind of see some of the changes happen. You do see a lot of people that you knew whether from work or even through your schools, I tell you that they're leaving the city, and that was depressing for a period of time. But as things started to reopen, and you start to see a lot of the business activity pick up, the vibrance of the city really feels like it's coming back. And we have acquaintances and friends that have made that shift, whether they're from Hong Kong to Singapore, talk about the possibility of wanting to move back. And as a city, it's just really unparalleled in some respects. I think unless you've really lived here, you don't really understand how special the city is in the sunset. It's got a very work hard culture. People are flying out doing diligence trips or meetings throughout the region, but then when you come back, from a social standpoint the topography of the city's amazing.

(36:50):
You can be at the beach within 20 minutes of the work district. There's some of the best hiking in the world in Hong Kong, and I think people really appreciate the lifestyle here. So as a city, I think it's one that has a tremendous amount to offer. And as we're really reopening and activities back, I think a lot of people recognize that. A lot of people we know, as you mentioned yourself, up there on a list of cities that kind of come back to on their business routine. So we're excited to see a lot of these visitors.

Greg Dowling (37:16):
All right, let's finish with a few fun questions. So very tough question here. Who is tougher, lacrosse players or hockey players?

Michael Yoshino (37:25):
Well, Greg, I think we all know the answer to that.

Greg Dowling (37:29):
Ken, what do you think?

Kenneth Lee (37:30):
Well, as Mike said, I think we all know the answer to that.

Greg Dowling (37:32):
Your guys are avoiding. You guys both have pretty interesting backgrounds. One, you talk about your investment resume and you're like, "Wow, that's pretty amazing." But you guys are pretty good athletes too. So maybe just quickly, Ken, we'll start with you. What's your lacrosse background?

Kenneth Lee (37:46):
I think probably starting with Mike would be better, in the sense that he's had a much more serious hockey background. For me, I grew up in Maryland, lacrosse is pretty much religion there, so you were forced to play. The high school I was in, at least back then, we didn't have a middle school program, so most of us just picked up a stick in high school, and unfortunately, we were in a pretty competitive league, so it was pretty painful every Saturday when we had games. It was a great experience. And the high school now has improved leaps and bounds. They've actually played for a couple national championships recently, so it's definitely not the same school that I went to. But then had the opportunity to walk on to the team in college at Amherst College, and that was a phenomenal experience. I was able to play four years of lacrosse there, and then eventually didn't have much exposure to the game after we started working.

(38:31):
But then when I moved back to Hong Kong, I was introduced to the local community here, which was really surprising to see that there was such a vibrant community of lacrosse here. And that's really something that's been very fortunate, and we've had a lot of support from some big figures here. For instance, Josiah, Alibaba's been huge in supporting the lacrosse program here in Hong Kong. And in 2014 I had the opportunity to represent Hong Kong at the World Games in Denver, which was actually the same year that we launched the fund.

(38:57):
So in June, we had the games in Denver. I remember Mike and I were just kicking off some of the initial investor calls when I was in Denver, so trying to get through those calls, and finish up our games there. And then came back and we were head down for the next three or four months, really gearing up for the launch, and we launched in September of that year. Certainly a pretty exciting experience. My exposure to this sport now has been more on the coaching side, still have been a big part of helping to coach some of the middle school and high school programs here, and love seeing the game grow in Asia. It's been great.

Greg Dowling (39:26):
That's fantastic. All right, Mike, what's your background?

Michael Yoshino (39:28):
Sure. I was fortunate to have grown up actually in a hockey family. My father went to Michigan Tech on a college hockey scholarship, actually won an NCAA division I championship back in '65 with Tony Esposito as his classmate and his goalie. So to be honest, he was a much more successful college player than I was. But after growing up in Winnipeg playing youth hockey, I then went and played junior in a Saskatchewan boarding school called Notre Dame, and then played a pro overseas in Japan, actually, after college for a team called the OG Eagles in what was back then the Japan Ice Hockey League and is now the Asia Hockey League. That seems like ages ago. So now I'm really focused on coaching, and fortunately both my kids play hockey, so. Love coaching them and watching them play. But really look forward to winning the FEG Ice Hockey classic again tomorrow.

Greg Dowling (40:13):
You might be my first pick. We'll see, we'll see. Asking for a friend, but as someone who may be going back to Hong Kong, and hasn't been in a long time and loves to eat, I need each of your best dim sum recommendations. You can only give one. We'll start with you, Ken.

Kenneth Lee (40:29):
That's a pretty personal question because my parents ran a dim sum restaurant in DC for over 40 years. So yeah, dim sum's a pretty serious affair in our family. You can only choose one. Hong Kong has such a broad array of good dim sum restaurants, from super high-end restaurants, to local neighborhood favorites. But I guess if I had to choose one, I choose this one more for the experience, I'd have to say, when guests come to town, we usually go to Max Palace in City Hall. And it's one of those last remaining really big dim sum halls. It's huge, seats hundreds of people. It's a big wedding banquet hall as well. And it's got a great view of the harbor, and it's one of those few places that still has those old school trolleys where you can see all the dishes being pushed around. And if you're kind of one of those truth fanatics, you get up, and you proactively hunt down your dishes, and look for carts. So it's a great experience. That's our go-to if guests are in town.

Greg Dowling (41:16):
All right, you're up, Mike. What's yours?

Michael Yoshino (41:19):
Gosh, you should really go with Kenny's recommendation because I never had the language capabilities in Hong Kong or the courage to try the real local places. And so our favorite was probably One Harbor Road at the Hyatt in Juan Chai there. It's one of our favorite places to go, certainly with the kids on the weekend.

Greg Dowling (41:35):
All right, we've answered all the tough questions. Is China investible? Who's tougher lacrosse or hockey players? At least we tried to answer that one. And the best sum in Hong Kong. All right. Hey, thanks so much, Ken and Mike for this. This has been just absolutely wonderful, very enjoyable and very educational, so thank you.

Michael Yoshino (41:54):
Thanks, Greg.

Kenneth Lee (41:55):
Thanks so much, Greg. Appreciate it.

Greg Dowling (41:57):
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