Asia Opportunity

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Asia Opportunity

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Asia Opportunity

Overview
Investment Approach
Investors
Insights

Overview

Strategy Facts

Capability:	Active Fundamental Equity
Team Inception:	December 2015
Benchmark :	MSCI All Country Asia ex-Japan Net Index
Related Product:	Pooled Vehicle
AUM³:	$333.67 Mn

Strategy Facts

Capability:	Active Fundamental Equity
Team Inception:	December 2015
Benchmark :	MSCI All Country Asia ex-Japan Net Index
Related Product:	Pooled Vehicle
AUM³:	$333.67 Mn

Summary

Morgan Stanley Asia Opportunity seeks long-term capital appreciation by investing in high quality, established and emerging companies located in Asia (excluding Japan) that the team believes are undervalued at the time of purchase. To help achieve its objective, the team seeks companies with sustainable competitive advantages and long-term growth that have the potential to create value, rather than focusing on short-term events, with stock selection informed by rigorous fundamental analysis.

$333.67 Mn

AUM

$333.67 Mn

AUM

Investment Approach

Philosophy

As part of Counterpoint Global, the Global Opportunity Team believes that it may achieve value-added investment results more consistently through bottom-up analysis and qualitative judgment rather than through top-down forecasting. Additionally, the team holds that optimal stock selection is primarily a function of making long-term investments in companies with: inherent sustainable competitive advantages (such as a patent portfolio, a network or community effect, etc.); brand-name recognition; the ability to redeploy capital at high rates of return; and strong normalized free-cash-flow yield. These characteristics, in the team’s view, provide the potential for consistent long-term growth and competitive returns.

The team believes that the development of insights is valuable to the investment process, and guiding principles combined with intellectual and process flexibility are critical to strong decision-making in pursuit of attractive investments.

Differentiators

Culture

The investment team’s culture is shaped by four core values that are cultivated and reinforced in many ways: intellectual curiosity and flexibility, perspective, self-awareness and partnership.

Reading Network

As part of Counterpoint Global, the Global Opportunity Team has access to a reading network that includes more than 150 investor and non-investor participants at Morgan Stanley. This allows the team to leverage the distributed knowledge of the firm and encourages cross-disciplinary thinking. Each week the team circulates articles, essays and thought pieces from a wide range of sources outside mainstream Wall Street in order to help enhance its knowledge and inform investment decisions.

Distinguishing Characteristics

– Our incentives foster long-term alignment with clients.

– Our disruptive change research helps find big ideas for portfolios.

– Our core values of intellectual curiosity, perspective, selfawareness and partnership promote a sustainable and repeatable investment process.

– Our investment philosophy is simple: Warren Buffett investment principles applied to growing companies⁶.

Investment Process

1	Idea generation
	Comes from screening, contact networks, value chain analysis, disruptive change research and our extensive reading.
2	Quality Assessment
	When we formulate our investment thesis on the quality of a company, we ask three key questions to determine the sustainability of competitive advantage and how it can be monetized through growth: - Is the company a disruptor or is it insulated from disruptive change? - Does the company demonstrate financial strength with high returns on invested capital, high margins, strong cash conversion, low capital intensity and low leverage? - Are there environmental or social externalities not borne by the company, or governance and accounting risks that may alter the investment thesis?
3	Valuation
	Focuses on the ratio of price to value derived from the key value drivers pricing, units, margin and multiple that determine the present value of free cash flow generation over a five-year time horizon.
4	Risk Management
	We define risk in absolute terms: risk is losing money. We believe that idiosyncratic risk can be reduced by addressing what matters at the company level. We manage valuation risk by not paying a price that exceeds value. We manage sustainability risk by analyzing the threat of disruption, financial strength and ESG externalities. We manage fundamental risk of deteriorating competitive advantage and growth opportunities. Portfolio risks are mitigated by reducing correlated factor exposures with the support of monthly reports from portfolio attribution and risk teams.
5	Portfolio Construction
	We buy when the quality is high and the price is below value. We weight the portfolio based on low price to value, high certainty of value drivers and low correlation between ideas. The result of our bottom-up investment process is a benchmark agnostic, highly differentiated portfolio concentrated in our highest conviction ideas.

Investors

Kristian Heugh

Managing Director

18 years industry experience

Krace Zhou

Managing Director

11 years industry experience

Insights

Video

Behind the Scenes with Kristian Heugh

01-mar-2016

Kristian Heugh defines the key differentiators and core values of his team’s investment process, focusing on competitive advantage and quality companies able to create value through growth.

RISK CONSIDERATIONS

Diversification does not protect you against a loss in a particular market; however it allows you to spread that risk across various asset classes.

There is no assurance that a portfolio will achieve its investment objective. Portfolios are subject to market risk, which is the possibility that the market values of securities owned by the portfolio will decline and that the value of portfolio shares may therefore be less than what you paid for them. Accordingly, you can lose money investing in this portfolio. Please be aware that this portfolio may be subject to certain additional risks. Asia market entails liquidity risk due to the small markets and low trading volume in many countries. In addition, companies in the region tend to be volatile and there is a significant possibility of loss. Furthermore, because the strategy concentrates in a single region of the world, performance may be more volatile than a global strategy. In general, equities securities’ values also fluctuate in response to activities specific to a company. Exchange traded funds (ETFs) shares have many of the same risks as direct investments in common stocks or bonds and their market value will fluctuate as the value of the underlying index does. By investing in exchange traded funds (ETFs), the portfolio absorbs both its own expenses and those of the ETFs it invests in. Supply and demand for ETFs may not be correlated to that of the underlying securities. Investments in foreign markets entail special risks such as currency, political, economic, market and liquidity risks. The risks of investing in emerging market countries are greater than risks associated with investments in foreign developed countries. The strategy may invest in restricted and illiquid securities, which may be difficult for the strategy to sell at a reasonable price. (Liquidity Risk). Derivative instruments may disproportionately increase losses and have a significant impact on performance. They also may be subject to counterparty, liquidity, valuation, correlation and market risks. Privately placed and restricted securitiesmay be subject to resale restrictions as well as a lack of publicly available information, which will increase their illiquidity and could adversely affect the ability to value and sell them (liquidity risk).

This communication is only intended for and will be only distributed to persons resident in jurisdictions where such distribution or availability would not be contrary to local laws or regulations.

There is no guarantee that any investment strategy will work under all market conditions, and each investor should evaluate their ability to invest for the long-term, especially during periods of downturn in the market. Past performance is no guarantee of future results.

A separately managed account may not be suitable for all investors. Separate accounts managed according to the Strategy include a number of securities and will not necessarily track the performance of any index. Please consider the investment objectives, risks and fees of the Strategy carefully before investing. A minimum asset level is required. For important information about the investment manager, please refer to Form ADV Part 2.

Any views and opinions provided are those of the portfolio management team and are subject to change at any time due to market or economic conditions and may not necessarily come to pass. Furthermore, the views will not be updated or otherwise revised to reflect information that subsequently becomes available or circumstances existing, or changes occurring. The views expressed do not reflect the opinions of all portfolio managers at Morgan Stanley Investment Management (MSIM) or the views of the firm as a whole, and may not be reflected in all the strategies and products that the Firm offers.

All information provided has been prepared solely for information purposes and does not constitute an offer or a recommendation to buy or sell any particular security or to adopt any specific investment strategy. The information herein has not been based on a consideration of any individual investor circumstances and is not investment advice, nor should it be construed in any way as tax, accounting, legal or regulatory advice. To that end, investors should seek independent legal and financial advice, including advice as to tax consequences, before making any investment decision.

DEFINITIONS

Active share is a measure of the percentage of stock holdings in a manager’s portfolio that differs from the benchmark index (based on holdings and weight of holdings). Active share scores range from 0% - 100%. A score of 100% means you are completely different from the benchmark. Free-cash-flow yield is a financial ratio that measures a company’s operating free-cash-flow minus its capital expenditures per share and dividing by its price per share. Free-cash-flow yield ratio is calculated by using the underlying securities of the portfolio. Return on invested capital (ROIC) is a calculation that represents the rate of return a company makes on the cash it invests in its business. Tracking error is the standard deviation of the difference between the portfolio and the benchmark returns.

OTHER CONSIDERATIONS

The indexes are unmanaged and do not include any expenses, fees or sales charges. It is not possible to invest directly in an index. Any index referred to herein is the intellectual property (including registered trademarks) of the applicable licensor. Any product based on an index is in no way sponsored, endorsed, sold or promoted by the applicable licensor and it shall not have any liability with respect thereto.

The MSCI All Country Asia Ex-Japan Index is a free float-adjusted market capitalization weighted index that is designed to measure the equity market performance of Asia, excluding Japan. The performance of the Index is listed in U.S. dollars and assumes reinvestment of net dividends.

The information presented represents how the portfolio management team generally implements its investment process under normal market conditions.

Weights and holdings and tracking error provided are a typical range, not a maximum number. The portfolio may exceed this from time to time due to market conditions and outstanding trades.

Morgan Stanley Investment Management is the asset management division of Morgan Stanley.