John Smith manages a mutual fund called Golden Dragon China Opportunities and he is based in both Beijing and Shanghai. He has a team of more than 30 analysts who regularly meet with companies in all of China’s provinces and the average amount of experience between John and his people is 20 years. John’s been running the fund for more than 10 years and it has grown to more than $5 billion in AUM.
The John Smith above, a fictional representation of your typical China-focused mutual fund manager, would appear to be the most knowledgeable, credible person on the outlook for Chinese stocks imaginable. On paper. When the producers at Bloomberg or CNBC are putting together a China segment, he is the guy they call (he’s an expert!). But in truth, he is the most dangerous, unreliable and biased person you could ever listen to on the topic – he is captured by his quarry, enamored with his subject matter and essentially a cooperative hostage by virtue of his own financial interests.
I’ve done battle with emerging markets and China fund managers on TV before. Unfortunately they are never able to admit that the picture is darkening and that maybe it’s not such a great time to invest in China. Equally unfortunate is the fact that I am not able to say “Hey, this asshole’s job is to find something constructive to say no matter what, that’s what he gets paid for.” In early 2011, I debated the China growth outlook with the head of commodities for Barclays Bank on CNBC, the gist of my bearish remarks on copper was that China was actively tightening to fight a real estate bubble. The gist of his bullish case was that Barclays was launching a copper ETN and that I should know my place. You know what’s happened since then.
Last fall I watched a China fund manager on stage at a Bloomberg event in NYC quietly sit through Gary Shilling’s thesis that China’s growth was slowing and was probably overstated anyway. He went point-by-point through his bearish outlook, hitting on demographics, bureaucratic corruption, weather trends, global trade realities and on and on. He used data, real-life experiences and specific examples to make his case.
And when he was finished, the China fund manager simply said, “Yes but of course this is just your opinion. In my opinion, everything will be fine and in fact, a slowdown is good for the country, it is the pause that refreshes.” Her response was data-free and amounted to “bad-news-is-good-news because I want it to be.”
And this is essentially what China fund managers have to do. They are captured and biased and conflicted and in many cases brainwashed anyway.
Here’s Mark Mobius of Templeton in the New York Times today stretching with all his might for a datapoint that makes the China story seem alive and well like it used to be in the mid-aughts:
Some still express confidence in the official statistics. Mark Mobius, the executive chairman of Templeton Emerging Markets Group, cited the reported electricity figures when he expressed skepticism that the Chinese economy had real difficulties. “I don’t think the economic activity is that bad — just look at the electricity production,” he said.
But an economist with ties to the agency said that officials had begun making inquiries after detecting signs that electricity numbers may have been overstated.
Don’t worry, should the electricity stats come under scrutiny, Mobius will begin citing port traffic in Zhejiang province or the amount of frozen yogurt sold at the New South China Mall.
Mobius is merely one example of many, they all do this kind of thing. And I am picking on the China fund managers only because the collapse there has been so obvious to so many for a while. But we can say the same for all sector or geographically-focused managers. Imagine the gold miner fund analyst coming on TV and saying “just buy the metal because these companies suck at life and will continue to underperform.” It would never happen.
Instead, the mantra is “find something to like and a reason to like it, even if only on a relative basis.” When that’s the underlying investment philosophy, failure is not only likely, it is practically an acceptable outcome.
No wonder the fund business is dying.