On this week's #Spotlight Saturday, we focus on Sean Bouwers, a MFIN graduate from the Queen's / Renmin joint degree in Beijing. He was responsible for creating the Beijing Global Macro portfolio and transitioning that team from passive research into active fund management. Read more about Sean's experiences and knowledge of the global markets.
Tell us about your background prior to the MFIN, your experience in QUAAF, and the creation of the Beijing Global Macro portfolio.
I grew up in Niagara in a small town and I stayed there for my undergrad at Brock University. I was always around family and so when I graduated, I wanted to do something fun, something far away. This opportunity came up in China to spend the summer there and study Mandarin and that's basically as far away as you can get so I packed my bags, went there for a summer and did a four-month language internship at a small school in Beijing. The four months flew by, and I came back to finish up my undergrad, however four months felt like it wasn’t enough; I didn't really get enough time to get a ‘full experience’.
I went back after graduation to work in a boutique investment bank that was centered around bridging the gap between China and the world, as there’s a lot of money floating around in China, but not too many foreigners that understand how to tap into that capital. At the firm, I edited documents, wrote research reports, made presentations, and put out teasers on the companies that we're working with.
After the summer internship I came back to Canada and after 3 months of intensive job seeking landed a job at Epic Capital, leveraging the interesting background of “a small-town kid that can speak Mandarin”. But of course, after just a year and a half, I was itching again to explore China further. I had gotten exposure to the culture and business sides, but I didn't really live there past four or five months. I had to get one last crack at staying there. Then this Queen's program pops up.
I had already been deliberating over whether I wanted to do a Master’s. I didn’t want too much overlap with my undergrad in finance, but for some reason ended up choosing finance again for the Master’s. The program is completed at Renmin University in Beijing and so I would get to make a real network of people there. When researching the program, QUAAF really caught my eye, because I could study while keeping a foot in asset management world. It would also allow me to connect with some classmates back in Canada that I would have otherwise not met with. QUAAF really interested me as I would be able to bring some of my experience of evaluating companies while learning from my Chinese classmates on deploying capital in China.
When I joined QUAAF, the Beijing team was focused on macro research. They did a wonderful job of picking countries or macro themes to write research reports on, while tracking country specific economic drivers such as GDP or employment stats. Previous teams were even able to work as sort of a consult team for hire for a UK based fund. When I joined on, we picked up where they left off, creating presentations on macro drivers in Asia such as an analysis of trade in Thailand. I was always interested in the research, but eventually I found that even though the team was getting more and more knowledgeable as a group, we weren't really acting on what we were learning. As someone coming from an active investment fund, I really wanted to put this knowledge base to use, and so I ended up pitching to the QUAAF Board a portfolio allocation for China. We realized quickly that that this would need to be broadened out, towards a global macro type portfolio where we had an allocation of QUAAF capital to invest outside of North America. Getting that across the goal line took a lot of effort and planning. And of course, it's even more difficult logistically when you're trying to manage a team in China while connecting with the team in Canada. A handful of the team worked hard on putting together a fund proposal document, outlining risks and our drivers for allocation decision making. I tried to balance this with having the remaining team work on a trade war report that outlined factual outcomes and put into context the ongoing trade dispute between the US and China. Together, both of these projects enriched the MFin program content while building on the QUAAF Beijing foundation.
What are some of the cultural differences that you see between doing business in North America and China?
This is another main reason why I chose the program as there's a lot of talk about China opening up financially with many international banks making headwinds into the market now. I really wanted to get over there and learn about capital market differences. One thing that any finance professor will teach you is that capital markets are efficient…and that's the furthest thing from the truth in Asia. In China you have an investor base that's very retail driven. You come here to North America or Europe, and your investor base is 80 to 90% institutional. It's completely flipped over in China. People are buying and selling stock based off of “my uncle's friends brother told me that this is a great pick” and “look at the chart and it goes straight up…so you should buy it now because it's going to be too late”. You get this crazy amount of volatility in a developing financial market. Even with talking to some of the program professors, I got to hear their opinions about the A-Share market versus Hong Kong Exchange, and how behavioral finance and perception really matters in China’s capital markets. Eventually I believe it will dissipate, and that behavioral finance will become less important as the market matures however in the meantime, I think there's a real opportunity for people that have a fundamental view on how to value companies in China. Day-to-day some stocks in China can really go all over the place but if there’s fundamentally sound, cash flow positive, solid business model, then you'd think that over time the volatility driven by investor sentiment cools off while weighting on fundamental analysis gains ground and you realize capital appreciation.
Another thing I found fascinating is the power of the Chinese government in capital markets. From a North American perspective, it's completely different that from what I am used to (although the Fed is currently testing this). In China, the government outright bans short selling, tells brokers to limit client selling, or has previously introduce a variety of buying and selling restrictions such as though the short-lived circuit breakers in 2016. Although this may be beneficial in an emerging financial market, it was something I had never experienced.
In North American markets, we're going through a bit of a valuation boom over the past couple years. Is that also true in in China?
Speaking broadly, the PE ratio for the S&P 500 has spiked in recent years to mid-20s. This could be due to a variety of reasons, from large scale shareholder buy backs reducing the shares outstanding to lower rates spurring an increase in borrowing, but basically over the past few years the growth in share price outpaced the growth in earnings in North America. China on the other hand recently saw a massive decrease in the Shanghai Composite PE ratio to the mid-teens currently. Now I don’t really focus too much on thematic or macro investing, but to me it would seem that relative to the US, China is currently being undervalued on an earnings-multiple basis.
I pair this thought with the overall market growth as well; over the last 30 years the S&P 500 returned something like 7-8% annually. I believe China’s Shanghai Composite did nearly double that over the same period. So, in effect you’re paying less per dollar of earnings in a country with historically higher growth rates. Obviously, you would need to factor in risks and whether or not you believe China can continue on the same sort of growth trajectory, or maintain and grow that earnings power.
In reality I am a fundamentals guy, and so I generally ignore broad industry or country wide valuation comparisons and prefer to read through financial statements, meet management, and check out facilities to determine if I think there’s real value. A big takeaway I got from my experience of studying and working in China was that to do this successfully, you have to be there physically yourself, or have a really strong network there, because it always looks impressive from afar.
For example, Luckin Coffee – a now infamous coffee brand in China – was supposedly the growth story you needed to be a part of (disclosure – I loved the company’s product, not so much the valuation). After only 2 years since starting up, the coffee chain had more stores than Starbucks across China. From a valuation perspective, people were willing to pay anything it seemed because the earnings (although negative) were eventually going to grow exponentially. That was the dream. However, I barely ever met someone who was willing to pay full price for their Luckin coffee. Online discounts were traded like currency over WeChat, and what should cost nearly $4 a cup ended up costing $2, and the moment the coupons were gone, people would switch brands. Factoring this with the amount of cash the company was burning, and a quick background analysis of the cast of characters behind the company from local Chinese MFin classmates, and it became clear it would not be sustainable for long.
I think this is what makes valuations in China difficult as well. The market is large, opaque, and fast changing. Luckin went from start up to IPO to delisted in less than 4 years. Valuations change rapidly, and so I when I decide whether or not something is over-valued, I tend to look at individual companies, their own earnings power, and what price I would pay for that potential. Are some companies overvalued in China or North America? Sure. But I think there’s always a deal to be found, if you’re patient enough.
Are some companies overvalued in China or North America? Sure. But I think there’s always a deal to be found, if you’re patient enough.
You speak Mandarin and that's tough for a lot of foreigners. Do you have any tips for people trying to learn new languages, especially this very difficult one?
Just sound it out. Haha – kidding. This sounds nerdy, but I got into some Chinese music and TV shows (海尔兄弟,PG1, and 延禧攻略… no hating allowed). It started as an interest in Chinese pop culture – especially internet slang and idioms – and ended up with making some amazing Chinese friends. Back in my undergrad I joined a Chinese club, which I thought would be a classroom type format but ended up being a bunch of Chinese people and myself getting hotpot a bunch of times, and I haven’t looked back.
If you're not in the environment it's extremely difficult though. When I first went to China back in 2015, I could count to 10, and I could say “my name is Sean and I grew up in Canada”, and that was about it. I figured everybody could speak a little bit of English so I could get by. I was so wrong. I ended up living with a 60 year old Chinese lady who could say ‘Hello’ and ‘WiFi’ - we would literally sit at the kitchen counter for hours, where she would message me on WeChat, I would translate it and then text her in English, where she would translate it. That's how we got along for two months. It was exhausting at first, but moving there for those first 4 months gave me an exponential learning curve in Mandarin.
In a nutshell, make as many local friends as you can, take away the ability to talk in your native language even for a short period, and don’t be afraid to make a lot of mistakes.
What’s one thing you miss most from Asia that you just can't find in Canada?
The food!! Sure, you can find good Chinese food in Toronto but it's just not the same. Saturday and Sunday we had class all day, and so after that Sunday class nothing goes down better than a cool drink and some 串, basically skewered meat on a stick. A couple beers later and maybe a karaoke room. It's those kind of nights with my friends in Beijing that I miss the most.
I miss the convenience as well though, as it’s on another level in China. You can order anything and everything you want through your phone. The subways are on time, there’s shared bikes everywhere, and the delivery infrastructure is amazing. Jing Dong makes Amazon Prime look like snail mail. Getting around the city is really easy too. They used to have a Chinese version of Uber called Didi, and when Uber and Didi were in the same market fighting, you could get an equivalent taxi ride like from Yonge and Finch to Union Station for as little as $5.
I advise everybody to download this app called WeChat just to play around with it because this is how a billion people in the world are communicating and paying for things. It's as if you you've got everything you need rolled into one app. It's Facebook + Instagram + WhatsApp + your wallet + Expedia + … everything. All in one.
Out of all the areas you’ve covered you've been responsible for throughout your career (special situations, real estate, healthcare, industrials, retail), which one is your favorite? And why?
Epic is a pretty nimble, opportunistic fund. We get to explore a lot of different areas, whether it's private, public, debt or equity. For me, I don't really think I have a favourite sector per se, but I like stories a lot. A name that’s been beaten up a lot, but with intrinsic value. A CEO that grew the company from nothing over 20 years. A business segment that’s forgotten about that could be spun out to realize value. There’s a lot of interesting stories in the small to mid-cap space, and being sector agnostic means I get to learn about a lot of new industries.
I like the small cap space in general as I think there is a lot of value to be found if you can be patient. With the advent of ETF and passive investing, fees have dropped dramatically leading to a drop in the number of active fund managers. I think this leaves a corner of the market under-served by capital markets and largely ignored by institutional investors, presenting an opportunity to find real value.
How do you go about sourcing investments? What's the edge you have over other funds in terms of finding these investments?
The network really helps. Epic has been around for nearly 20 years, and so being able to bounce ideas off partners and people in our investor networks with decades of capital markets experience is invaluable.
Being able to stay true to your thesis while testing your original thoughts – as unbiased as possible – is another key driven of our returns. When everybody has access to nearly the same type of information, you need to go where many people aren’t looking (like small cap in our case), test your thesis from all possible angles, and then figure out what’s the end game – why would there be some liquidity event or interest in the company you’re potentially buying. Patient capital is important as well.
When everybody has access to nearly the same type of information, you need to go where many people aren’t looking (like small cap in our case), test your thesis from all possible angles, and then figure out what’s the end game
Do you have any tips on how to approach developing an investment thesis?
It’s currently a very interesting time to be developing an investment thesis. Something I’ve really picked up at Epic is that multiples and comparable valuations in a time like this doesn't necessarily work as income statements will be in rough shape. What really matters is the earnings power of the company. We know that this year is going to be difficult for many firms, or that we are in for a bad couple of quarters, but what is this company capable of doing in the good times, and could those good times come back. Do you believe that things will slowly get back to a normalization? Will this company have the same earnings power that they did in the past? Does coronavirus increase or decrease demand for their products? Do they have enough liquidity on their balance sheet and in their credit facilities to survive depressed sales? If yes, then it starts to look attractive: I tend not to make investments to flip out the whole position in week or two, but because the there's a stable underlying business and I can see a road to recovery. I think there’s a lot of great opportunities right now.
For all the current Smith Master’s students and QUAAF team, what would be your advice on succeeding as part of the team, as well as in your career development?
Stay as transparent as possible. Everybody's busy with their personal schedules and schooling, so it's difficult to coordinate times while keeping everyone motivated, and it can become easy to lose sight of your core goals, and once you lose sights of your goals it becomes difficult to re-motivate people.
We had a pretty engaged team of 15 people that really wanted to join and contribute but with many working part time jobs on top of schooling. By making an informal team group chat we were able to include a lot of people while shooting ideas around, which I believe was valuable. Then the “formal QUAAF time” was for the portfolio, and presenters to share what they were working on.
The great thing about QUAAF and university is you have so many people from different backgrounds in the same room at the same time, and that's difficult to replicate. At Epic, it’s a small team and we're all finance people. In university or at QUAAF, it’s an environment where you have someone in marketing, someone in engineering, an entrepreneur, etc etc all coming together to share experience. Having that all in the same room, you get to lean on a network of pretty interesting people; being able to do that daily is an amazing opportunity.
Also, differentiate yourself. We're all graduating from similar backgrounds with similar degrees. You need to be able to stand out. Everybody is in a club now, and everybody has a long list of extracurriculars. You're in a high-performance bracket, most likely aiming for something above an entry level job. For me, it was picking up a bit of Mandarin, and being able to hold a conversation about China. Now I've got this weird angle that I think a lot of people in the room wouldn't have, and I've been able to hold a somewhat educated conversation with emerging market fund managers. I'm not saying everybody run out and go to China (although… it’s a lot of fun) but do something that differentiates yourself.
Lastly, never discount yourself. Never think “oh, I'm just a student, so I can't do X”. I used to call up investor teams all the time. CEO’s number is public? Get ready for a call. Why yes, I would like to talk to the board. The worst thing they can say is no. Punch above your weight. The more management teams I talk to, the more network I have, and the more network I have, the more people I can reach out to in the future to bounce ideas off. As a student, it's the best time to do this too. Because now you can just reach out to people with questions and if you tell them you’re a student at Queen’s, they’ll probably think that's even cooler. Now if I reach out, they’ll have their guard up. Being able to say “I want to talk to you because I'm trying to learn” – I think they would love that.
Lastly, never discount yourself. Never think “I'm just a student, so I can't do X”. I used to call up investor teams all the time. CEO’s number is public? Get ready for a call. Why yes, I would like to talk to the board. The worst thing they can say is no.
What's one book, movie, TV show activity you find yourself always going back to when you want to unwind?
I’m a huge fan of a TV show called “The Office”. It's one of those shows that even if I'm not actively watching TV, I’ll just have it on in the background. I've watched it an embarrassing amount of times…I've gone through every episode, every season, at least 5 times now. I guess listening to Michael Scott spit wisdom is how I unwind.