ALTERNATIVE THINKING - For qualified investors

BSF Asia Pacific Absolute Return Fund

Dynamism, dispersion and diversity in Asian equities

How a long/short approach is the perfect fit


In the latest addition to our alternatives range, we believe we have developed a perfect fit between style and substance.

The vast and varied Asian equity markets lend themselves perfectly to the long/short style of investing. Investing across borders, industries and different-sized companies, we have total freedom and are not penned in to any style or benchmark constraints.

This means that irrespective of where we are in the market cycle, we are able to tap into the substance: the volatile and, at times, inefficient opportunity set across the Asian universe of 2,000 companies in 14 countries, exploiting their respective currency movements against a backdrop of profound change brought about by structural reform and economic transition.

With such a rich and diverse opportunity set, we are confident that our well-honed investment process will unearth many prospects on the short side as well as in our long-only book, giving us even more scope to express our ideas than we have in our traditional strategies.

As stock pickers, expressing our views as strongly as possible is what sets us apart. In a benchmark-constrained long-only fund, taking a negative view is difficult – you are limited to going underweight, or simply avoiding a stock altogether.

Since MSCI data recently suggested that only 12 of the 600+ stocks in its Asia Pacific Index had a weight of more than 1%, underweights have become even further restricted. Using synthetic shorts allows us to express more views, more comprehensively.

Two recent stock examples exemplifying the process are Hero MotoCorp, India’s market leader in two-wheel vehicles and Tingyi, the largest instant noodle and beverages producer in China.

Representing the long book, we initiated a position in Hero around March 2015. Hero not only taps into the consumption theme and the rising middle class in India, it has also benefited from a pick-up in the rural economy, with motorbikes and scooters more popular than cars. The company enjoys a dominant and broad national distribution network, boasts a strong pipeline of new models and margins have naturally picked up as a result of falling commodity prices.

Further, Hero has held up better than was expected following the 2010 termination of its joint venture arrangement with Honda. The stock has since risen more than 30%.

Tingyi is a short example, as China’s largest instant noodle and beverage producer. Its key market has always been construction and blue-collar workers. As China shifts from a manufacturing nation to one led by consumption, the company has suffered from structural decline. Coupled with this lower demand, noodle prices have risen yet this has failed to translate into positive elasticity for the company. Simultaneously, competition from other noodle manufacturers is rising.

We first invested in August 2015, having noticed the share price was declining, but in recognition the structural impact would continue, we added to the position in the short book and are continuing to make money as a result.

The discipline and rigour we have applied for years that results in thousands of company meetings every year allows us to establish whether or not value exists.

Once that initial filter has been applied we spend hours cross-examining the stock with qualitative questioning and valuation analysis.

Looking ahead, we are excited about the possibilities.

Our local presence makes a huge difference. The seemingly imminent inclusion of China A-shares in the MSCI indices takes this up a notch, moving from an important ‘nice to have’ to an absolute essential if one wants to invest with credibility. Even a partial inclusion of A-shares might add as many as 400 new companies; information on which is rarely found in English, making informed investment decisions difficult for all but the most prescient of managers.

We feel this combination of long/short investing in the Asian equity markets is optimum.

We can express our views with greater conviction, and our local knowledge allows us to act immediately at the expense of our lesser-resourced peers. Many of the smaller boutiques based in the region may be forced into herd positions, while the beauty of working for an investment group like BlackRock means we have the resources to back up our ideas – quickly, comprehensively and with conviction.

This material is for distribution to Professional Clients (as defined by the FCA Rules) and Qualified Investors only and should not be relied upon by any other persons. Issued by BlackRock Investment Management (UK) Limited, authorised and regulated by the Financial Conduct Authority. Registered off ice: 12 Throgmorton Avenue, London EC2N 2DL. Tel: 020 7743 3000. Registered in England No. 2020394. For your protection telephone calls are usually recorded. BlackRock is a trading name of BlackRock Investment Management (UK) Limited. Past performance is not a guide to current or future performance. The value of investments and the income from them can fall as well as rise and is not guaranteed. You may not get back the amount originally invested.

The BlackRock Strategic Funds (BSF) Fund Fund is domiciled in Luxembourg. BlackRock Asset Management Schweiz AG, Bahnhofstrasse 39, CH-8001 Zurich, is the Swiss Representative and State Street Bank International GmbH, Munich, Zurich Branch, Beethovenstrasse 19, CH-8002 Zürich, the Swiss Paying Agent. The Prospectus, Key Investor Information Document, the Articles of Incorporation, the latest and any previous annual and semi-annual reports are available free of charge from the Swiss Representative. Investors should read the fund specific risks in the Key Investor Information Document and the Prospectus.

BlackRock Strategic Funds (‘BSF’) is a UCITS (icbe) as defined in section 1:1 Financial Markets Supervision Act (Wet op het nancieel toezicht; ‘FMSA’). BSF and its sub funds are listed in the register as defined in section 1:107 FMSA. Please refer to the Key Investor Information Document (essentiële beleggersinformatie; ‘EBI’) for further information about BSF and its sub funds. The prospectus and EBI of BSF and its sub funds are available on BlackRock’s website blackrock.com/nl.

All financial investments contain a certain risk. The value of the assets managed by BSF and its sub funds may greatly fluctuate as a result of the investment policy and your initial investment is not guaranteed. Past performance is not a guide to current or future performance. You may not get back the amount originally invested. Changes in the rates of exchange between currencies may cause the value of investments to diminish or increase. Fluctuation may be particularly marked in the case of a higher volatility fund and the value of an investment may fall suddenly and substantially. Levels and basis of taxation may change from time to time. Changes in the rates of exchange between currencies may cause the value of investments to diminish or increase. Fluctuation may be particularly marked in the case of a higher volatility fund and the value of an investment may fall suddenly and substantially. Levels and basis of taxation may change from time to time. BlackRock Strategic Funds (BSF) is an open-ended investment company established and domiciled in Luxembourg which is available for sale in certain jurisdictions only. BSF is not available for sale in the US or to US persons. Product information concerning BSF should not be published in the US. It is recognised under Section 264 of the Financial Services and Markets Act 2000. BlackRock Investment Management (UK) Limited is the UK distributor of BSF. Most of the protections provided by the UK regulatory system, and the compensation under the Financial Services Compensation Scheme, will not be available. A limited range of BSF sub-funds have a reporting fund status A sterling share class that seeks to comply with UK Reporting Fund Status requirements. Subscriptions in BSF are valid only if made on the basis of the current Prospectus, the most recent financial reports and the Key Investor Information Document, which are available on our website. Prospectuses, Key Investor Information Documents and application forms may not be available to investors in certain jurisdictions where the Fund in question has not been authorised. All financial investments involve an element of risk. Therefore, the value of your investment and the income from it will vary and your initial investment amount cannot be guaranteed. Emerging market investments are usually associated with higher investment risk than developed market investments.

Therefore the value of these investments may be unpredictable and subject to greater variation. Overseas investment will be affected by movements in currency exchange rates. Investments in China are subject to certain additional risks, particularly regarding the ability to deal in equity securities in China due to issues relating to liquidity and the repatriation of capital. As a result, the Fund may choose to gain exposure to Chinese equities indirectly and may be unable to gain full exposure to Chinese equity markets. The Fund uses derivatives as part of its investment strategy including the establishment of both ‘long’ and ‘synthetic short’ positions and the creation of market leverage for the purposes of increasing the economic exposure of a Fund beyond the value of its net assets. This use of derivatives may increase the overall risk profile of the Fund. The value of this Fund does not typically move in line with general market trends and is not expected to reap the full benefits of a rising stock market. Investment strategies employed by the manager may affect the risk profile of the fund, as both positive and negative share movements affect the overall value of the Fund. Investors in this Fund should understand that the Fund is not guaranteed to produce a positive return and as an absolute return product, performance may not move in line with general market trends or fully benefit from a positive market environment. The Manager employs a risk management process to oversee and manage derivative exposure within the Fund. The Fund utilises derivatives as part of its investment strategy. Compared to a fund which only invests in traditional instruments such as stocks and bonds, derivatives are potentially subject to a higher level of risk and volatility. The strategies utilised by the Fund involve the use of derivatives to facilitate certain investment management techniques including the establishment of both ‘long’ and ‘synthetic short’ positions and creation of market leverage for the purposes of increasing the economic exposure of a Fund beyond the value of its net assets. The use of derivatives in this manner may have the effect of increasing the overall risk pro_ le of the Fund. The insolvency of any institutions providing services such as safekeeping of assets or acting as counterparty to derivatives or other instruments, may expose the Fund to financial loss. The Fund’s investments may have low liquidity which often causes the value of these investments to be less predictable. In extreme cases, the Fund may not be able to realise the investment at the latest market price or at a price considered fair. Any research in this document has been procured and may have been acted on by BlackRock for its own purpose. The results of such research are being made available only incidentally. The views expressed do not constitute investment or any other advice and are subject to change. They do not necessarily reflect the views of any company in the BlackRock Group or any part thereof and no assurances are made as to their accuracy. This document is for information purposes only and does not constitute an offer or invitation to anyone to invest in any BlackRock funds and has not been prepared in connection with any such offer.

© 2016 BlackRock, Inc. All Rights reserved. BLACKROCK, BLACKROCK SOLUTIONS, iSHARES, BUILD ON BLACKROCK, SO WHAT DO I DO WITH MY MONEY and the stylized i logo are registered and unregistered trademarks of BlackRock, Inc. or its subsidiaries in the United States and elsewhere. All other trademarks are those of their respective owners.

RSM-5828