Top Equity Manager Cuts China Exposure, Adds Latin America

(Bloomberg) -- A top-performing fund manager has reduced his Chinese holdings and added Latin American stocks, but not because of the U.S.-China trade spat.

“I don’t believe what’s been weighing on Chinese equities has been the trade war,” said Noah Blackstein, who manages C$5.1 billion ($3.8 billion) at Dynamic Funds, a unit of Bank of Nova Scotia. “What changed last year in China was the regulatory environment.”

Crackdowns on new video games and social media are just two examples of unexpected regulatory changes that had a “material” impact on the profit of Chinese companies last year, said Blackstein, 49, who reduced his exposure to stocks like Alibaba Group Holding Ltd. and Tencent Holdings Ltd. as a result.

Blackstein manages the C$1.4 billion Dynamic Power Global Growth Class fund which has outperformed 1,083 global peers that have assets of more than $100 million, returning 388% over the past decade, according to data compiled by Bloomberg. The fund has returned 26% this year, putting it in the 96th percentile among its peers. His Dynamic Power American Growth Fund is in the 99th percentile among its U.S.-equity cousins with a year-to-date return of 28%.

The senior portfolio manager said he takes a bottom-up approach and is less interested in the macroeconomic outlook than he is in the potential of individual companies for growth. Currently, both his funds are heavily weighted to the tech industry.

Blackstein shared his take on everything from the U.S. Federal Reserve’s role in recessions to Lululemon’s pants for men. Here are the highlights:

Latin America

Blackstein has been finding opportunities in the Latin American payments industry with stocks like Buenos Aires-based MercadoLibre Inc. and Brazil’s PagSeguro Digital Ltd., whose share prices have doubled this year. “Places like Brazil are majorly under-banked,” he said, adding that PagSeguro is becoming “the Square of Brazil.” Eventually, Blackstein expects tech companies to solve the problem of under-banked people in both Latin America and the U.S., eliminating the payday loan market in the process.

FAANGs

“I despise acronym investing,” Blackstein said. “I hated BRICs when I heard it, I hate FAANGs even worse. What does Apple have to do with Facebook and Google? It drives me crazy.” Instead, he’s focused on cloud companies that are taking advantage of rapid increases in computing power to provide security and speed, such as Workday Inc. and ServiceNow Inc. He’s also a fan of e-commerce platform Shopify Inc., which is the best-performing stock on Canada’s S&P/TSX Composite Index this year with a 115% gain.

Fed Risks

The Federal Reserve’s decision to raise interest rates four times in 2018 has hurt the U.S. economy more than President Donald Trump’s trade war, according to Blackstein. “My biggest risk to the global economy is always the Federal Reserve,” he said. “I’ve been doing this a long time and every major correction in my career has been Fed-induced.” However, further hikes seem to be off the table for the remainder of 2019 and 2020 and Blackstein doesn’t expect a U.S. recession in the near-term.

Volatility

Volatility has become a synonym for risk in the market but Blackstein sees opportunities for active investors in a volatile market. “If you really know a company well and you’re comfortable with the five-year outlook and nothing has really changed, why isn’t that volatility an opportunity?” he said. Recent selloffs have been “quant-induced and ETF-enabled,” he said. “The marginal dollar in the market today is a dumb dollar.” This provides an opportunity for investors who take the time to meet with management teams and analyze their investments, he said.

Lululemon

Blackstein isn’t only invested in the tech industry. He holds Lululemon Athletica Inc. in his American fund and believes the athletic-wear retailer has “done a phenomenal job over the last little while.” The stock is up 40% since the beginning of the year and reports first-quarter results after the market closes on Wednesday.

Blackstein sees a particular opportunity in menswear, a category where Lululemon aims to more than double revenue by 2023. Personal experience has helped inform his view on that front: he loves their men’s pants. “Those are the most comfortable pants I’ve ever had,” he said. “I think I’ve bought three pairs.”

Here are the top 10 stock holdings in the Dynamic Power Global Growth Class as of March 31:

EPAM Systems Inc.
MercadoLibre Inc.
ServiceNow Inc.
GMO Payment Gateway Inc.
Atlassian Corp.
Workday Inc.
Xilinx Inc.
CyberArk Software Ltd.
Adyen NV
Momo Inc.

--With assistance from Shin Pei.

To contact the reporter on this story: Kristine Owram in Toronto at kowram@bloomberg.net

To contact the editors responsible for this story: Brad Olesen at bolesen3@bloomberg.net, ;David Scanlan at dscanlan@bloomberg.net, Jacqueline Thorpe

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