Pneumonia is like a constant fog lying on the city, says Brad Aham, senior portfolio manager of Asian equities at State Street Global Advisors. But it is too early to tell whether the severe acute respiratory syndrome (Sars) will have a permanent impact.
Current events have not had an unusually large effect on his job, however. With a global portfolio in emerging markets, Mr Aham and his colleagues are used to some hairy situations.
'Investing has always been difficult. Sars is a very bad situation right now in Hong Kong but for our emerging markets portfolio a lot of our exposure is in the bigger Chinese companies. It is not clear that Sars has a direct and immediate impact on them other than sentiment and the equity-risk premium that might be applied,' he said.
'As a team we look at valuations and opportunities that are available globally. Sars is a big problem here, but look at Israel, for example, they are in a tough part of the world. In Latin America, in the past few years there was Argentina defaulting and Brazil going through a contentious election which had a big impact on the currency. Look at South Africa and the black empowerment issue. As an equity investor, there are always concerns and risks.'
Mr Aham is part of State Street's global emerging markets team based in Boston, Paris and Hong Kong that collectively manages about US$1.2 billion. He has specific responsibility for South Korea, with US$250 million under management, and Taiwan (US$150 million) and shared oversight of China (US$110 million).
The team takes a slow and steady stance, suiting its main clients, which are big institutions and pension funds. Fund managers communicate daily via e-mail and hold a weekly teleconference, combining a qualitative and quantitative approach.
'There is always a trade-off between events that are happening in the market place and the valuations and the prospective growth opportunities,' Mr Aham said.
South Korea has the biggest allocation of the North Asian markets, contributing 17 per cent to the global portfolio. Taiwan has an 11 per cent weighting and China 8 per cent, chiefly accessed via big companies listed in Hong Kong.
'In terms of where the portfolio is positioned in Asia, we are still overweight to China and have been for a while. We are underweight to Taiwan and Korea. We are overweight to Thailand and underweight to Malaysia; don't have any position in the Philippines right now and we have a roughly neutral weight in India.'
Much of the active investing process is relative to the benchmark MSCI Emerging Markets Free Index, with clients seeking outperformance over a multi-year period and the team imposing constraints on the size of bets taken.
'We take a large number of small bets and, hopefully, if we have a pretty decent batting average we can add value to the portfolio. We tend not to take very large bets because it is hard to be right the majority of the time. If we can get 55 per cent of our bets right most of the time then we think we are doing a good job,' he says.
One of the 'frustrating risks' Mr Aham faces in China, Taiwan and Korea is the misuse of cash flow, with minority shareholders having little say over what corporates do with their money.
In Korea, that amounts to noodle companies investing in golf courses or car firms having credit card divisions. In Taiwan, it is big technology firms securing finance for factories that are unlikely to turn a profit.
In China, there are obscure relationships between listed companies and their parents, often part of the government.
'At first pass we get attracted by the valuations, but you have to peel the onion and see what is inside. There is always a reason why something is cheap. You have to make a judgment call,' he said.
Mr Aham agrees with many sell-side strategists who are overweighting emerging markets in their global portfolios, which have outperformed developed counterparts in the past three or four years. While Asian investors may be moving to United States high-yield investments and developed market equities, big investors in the US and Europe are beginning to step up exposure to his universe.
'At the end of the '90s, people were looking at the massive run in the US. At that point they threw in the towel on emerging and just gave up,' he said.
Since then a litany of problems, ranging from the Tequila Crisis in 1994 to the Asian one in 1997, has brought about some positive change. Most markets now have freely floating currencies and are making progress on issues of corporate governance.
'We have seen a lot of marginal improvements and if you combine them with still very low valuations, as long as you hold a diversified portfolio there is a lot to be said for emerging markets globally,' Mr Aham said.
Despite the relative outperformance, State Street's emerging market mutual fund that is registered in the US was down 20.45 per cent last year, against a 20.58 per cent fall in the MSCI Emerging Markets Free Index. Over three years it is down 14.66 per cent against a 16.35 per cent index fall, according to Lipper. It remains in the top 25 per cent of emerging market funds on a five-year basis.
Graphic: profilgwz
PROFILE
1993: graduated from Brandeis University with bachelor's degrees in mathematics and economics. Started internship with State Street Global Advisors in active emerging markets team
1999: earned MBA from Boston University. Has also qualified as a chartered financial analyst and certified financial risk manager
2001: five months in Seoul before returning to Boston office
2002: moved to Hong Kong as senior portfolio manager, Asian equities