Asian fund managers (3)

One kind reader pointed me at the following book:

The book (written in 1994, published in 1995) seems to be out of stock. I noticed some second-hand prices which seem to be on the high side, readers might want to try their luck at a larger library. Unfortunately, I have never owned or read the book, but found the following review by "Henry":


While a little dated now, in the style of John Train's "Money Masters" books, this tome recounts the modus operandi of consistent stand-out-performance investors in Asia. It includes some well know subjects (eg Dr Doom, Marc Faber) and some less well profiled. The author herself could easily be among them - for she later formed an open ended Asian fund which over the last 12 years has compounded at a rate of more than 28% pa (hence my interest at this late stage in reading her work).


Interesting is the following post, "Nuggets from my book", written by the author herself (December 1998), after the Asian crisis but before the internet implosion.

Asian fund managers (2)

I wrote about the Carrian scandal before: here and here.

I wrote before about successful Malaysian fund manager Cheah Cheng Hye, founder of Value Partners based in Hong Kong.

But what I didn't know was that these two items are connected. In "The Value Investors" by Ronald Chan, it is mentioned that Cheah was a journalist in 1983 with the Wall Street Journal Asia:


"... while investigating red-hot Hong Kong-based conglomerate Carrian Group, Cheah discovered that the company had incomprehensible accounting practices and was involved in strange dealings with Bank Bumiputra Malaysia. The company soon collapsed amid a chain of dramatic events, including accounting fraud allegations, the suicide of a company advisor, and the murder of a Malaysian bank auditor. Cheah's resulting story in the Asian Wall Street Journal was an impressive combination of crime investigation and in-depth analysis of the company's financials."


This is just one of the gems in the above mentioned book:

I have lamented that almost all investing books centre around Wall Street, that there is hardly any book dealing with markets in Asia or Europe. The above book makes a refreshing change in that.

Twelve fund managers are interviewed:

• Walter Schloss, Walter & Edwin Schloss Associates
• Irving Kahn, Kahn Brothers Group
• Thomas Kahn, Kahn Brothers Group
• William Browne, Tweedy, Browne Company
• Jean-Marie Eveillard, First Eagle Funds
• Francisco García Paramés, Bestinver Asset Management
• Anthony Nutt, Jupiter Asset Management
• Mark Mobius, Templeton Emerging Markets Group
• Teng Ngiek Lian, Target Asset Management
• Shuhei Abe, SPARX Group
• V-Nee Yeh, Value Partners Group
• Cheah Cheng Hye, Value Partners Group

The Asian component is clear in the last five fund managers, two of which (Teng and Cheah) were born in Malaysia. Teng is running the Singapore based Target Value Fund, about which I wrote here.

Cheah's reasons to set up an own fund are described as follows:


"Honestly, I had become a little fed up with the finance industry and wanted to do my own thing because the industry was, and probably still is, full of what I call 'financial pirates'. These individuals join finance not because they are passionate about investing, but because they have the 'money disease'. Because they think the industry will enable them to make a lot of money, so instead of becoming engineers or lawyers they become bankers. They are a disgrace to human civilization because they contribute nothing!"


Walter Schloss was interviewed for the book a few months before he passed away on February 19, 2012 and the views he provides reflect the wisdom gained over a long and successful life.

An interesting book for people who like to read about fund managers from all over the world, their biography, what drove them to become value oriented and issues like: humility, being contrarian, margin of safety.

This book is not meant for people who like to read about concrete (valuation) techniques or even stock tips.

I hope to read more of these books, especially with an Asian component in it.

Value fund managers go on strike

Partly due to the QE (Quantitive Easing = money printing) programs of the FED (and other central banks) strange things are happening. Lots of rich valuations, for instance:

"Can you put a price on friendship? You can if it’s in a painting by Francis Bacon, whose three-part portrait of fellow artist Lucien Freud has set a record for the most expensive artwork ever sold. "Three Studies of Lucien Freud,” a 1969 triptych by the Irish-born Bacon, sold for $142.4 million in a Christie’s auction Tuesday night in New York." according to this article.

"A 59.60-carat pink diamond sold for $83 million, a record for any gemstone at auction. The oval-cut stone’s price exceeded the previous record by 82 percent at an auction last night in Geneva held by Sotheby’s, which called the gem one of the earth’s greatest natural treasures. Those prices include the buyer’s premium." according to this article.

"Today the Wall Street Journal reported that Snapchat turned down a $3 billion or more all cash acquisition offer from Facebook. The news has taken many by surprise, as Snapchat has no revenue, and is an exceptionally young company." according to this article.

Snapchat is a mobile apps where users can send photo's or pictures that disappear in a few seconds. Needless to say, the apps is quite popular with youngsters, but USD 3 Billion (please notice the "B") is also quite a bit of money, especially if the company has not yet shown any revenue nor profit (only losses).


Property prices in Singapore, Hong Kong, Melbourne, Sidney, Beijing, Shanghai etc, are also sky-high, hardly affordable for young people with average incomes. Also in Malaysia, the property market is pretty hot.

We notice the same in the share market, smallcaps are being played, warrants, all kind of speculative companies (especially in the mining and energy industry).

Greenspan and Bernanke can be truly proud of their "experiment", bubbles start to form in many places.

If there is one thing I learned from 20 years investing in the share market: if valuations are pricey, don't try to find the last value stock, better raise some cash.

The following article is from Bloomberg, stressing this same point:

Value Fund Managers Go on a Buyer's Strike

Wally Weitz beat 90 percent of his rivals in the past five years by buying stocks he deemed cheap. Now he says bargains are so scarce that he’s letting his cash pile up. “It’s more fun to be finding great new ideas,” says Weitz, whose $1.1 billion Weitz Value Fund (WVALX) had 29 percent of its assets in cash and Treasury bills as of Sept. 30. “But we take what the market gives us, and right now it is not giving us anything.”

Weitz, whose cash allocation is about the highest it’s been in his three-decade career, joins peers Donald Yacktman and Steven Romick in calling bargains elusive as stocks trade at record highs. The three are willing to sacrifice top performance for the safety of cash as stocks rally for the fourth year in the past five. The mutual fund managers’ comments echo those of private equity executives Leon Black and Wesley Edens, who say steep prices make this a seller’s market.

As the Standard & Poor’s 500-stock index has risen 23 percent in 2013, the average amount of cash in funds that invest in U.S. stocks increased to 5 percent as of Aug. 31, from 3.7 percent the previous year, according to data from research firm Morningstar (MORN). Some fund investors frown upon equity managers who sit on large piles of cash, saying they prefer stockpickers to stay fully invested. “We hire them to run stocks, not time the market,” says Richard Charlton, chairman of Boston-based NEPC, which advises institutional investors.

Value managers, who look for stocks that are cheap compared with a company’s earnings prospects, cash flow, or assets, have sat on their hands before, including during the runup in 2007 and 2008 to the financial crisis, says Russel Kinnel, director of mutual fund research at Morningstar. Most of the cash-heavy managers say their decisions are based on individual stock prices, not any attempt to call a market top. Holding cash during market rallies can depress returns. Yacktman trailed 60 percent of rivals this year through Nov. 1 and 82 percent in 2012 at his $11.4 billion Yacktman Focused Fund (YAFFX), according to data compiled by Bloomberg. The fund, whose cash level rose to 21 percent as of Sept. 30, from 1.4 percent at the end of 2008, bested 92 percent of rivals in the past five years. “We are having a more difficult time finding bargains,” Yacktman wrote in an e-mail.

Romick, managing partner of First Pacific Advisors, took a similar stance in his second-quarter letter to shareholders of the $14.1 billion FPA Crescent Fund. “We find it difficult to invest in an environment that seems manipulated to engineer higher asset prices regardless of business fundamentals,” he wrote. His fund, which outperformed 68 percent of rivals over the past three years, had 40 percent of its assets in cash and short-term securities as of Sept. 30, according to FPA’s website. It beat 97 percent of its peers in the 2008 bear market. The fund had more than one-third of its assets in cash equivalents as of March 31 that year, filings show.

In bear markets, value managers find it easy to put their money to work. Weitz’s Value Fund had 7.8 percent in cash at the end of 2008, regulatory filings show. “It was a wonderful time,” he says. “There was so much to buy.”

Asian fund managers (1)

In my opinion, there are three good ways to invest in equities:

[1] Do it yourself: you need to spend lots of time on it, but it can be pretty rewarding while learning a lot in the process. I have invested in Asian shares for about 20 years (for 16 years mostly Malaysian shares), booked returns of 15+% per year which is very typical for decent value investors. My hunting ground for investable companies has the following characteristics:

• Small and medium size, not yet discovered by large fund managers
• Focused, they tend to be better than conglomerates, but also more easy to analyse
• Good corporate governance, where the managers are prepared to share the profits with the minority shareholders
• Decent dividend yield, although a company growing fast might want to keep cash in the company, in general companies paying some dividend tend to perform better is my experience
• Good to decent balance sheet, needed to withstand a rainy day
• High ROE (Return On Equity) of at least 15%, may be the most important criteria of all; there are similar concepts which are also excellent like ROCE etc. I hope to revisit this subject in the future.
• Good and consistent track record (correlated with the previous)
• Cheap price relative to their good quality track record
• Be aware of cyclical companies near their cyclical high (they look cheap, but aren't)

Pretty common sense all of the above, but amazingly, these kind of companies are often found to be boring by other investors, are thus neglected and offer good value for patient investors.

However, not everyone has the time to devote to this, or don't have the right attitude for it. Even the best investors will sometimes have disappointing results in the short or even medium term, one need to have the stamina to deal with that.

[2] ETFs (Exchange Traded Funds): funds that are passively invested and thus have (very) low management fees. Good for "macro calls", I for instance am quite interested to invest in companies in Africa, for which I use an ETF which invest in larger companies spread out all over the continent, to reduce country risk. There are a huge amount of ETFs, each with a different focus, again, one should do his homework before investing in them, but they can serve their purpose quite well.

[3] Managed, good quality funds: these funds are actively managed by fund managers with a long and distinguished track record. There are quite a few good or excellent fund managers focused on Asian shares. Although management fees are much higher than for ETF's, excellent fund managers are indeed worth it.


The last category is the subject of this posting, and I will revisit it several times in the future.

In the past I did write several times about some Asian fund managers, for instance:

Value Investing with Cheah Cheng Hye
Claire Barnes and the Apollo Asia Fund
Top holdings of good Asian funds


Just to be clear:

• I do not receive one cent commission by writing about these fund managers
• I might or might not have money invested with them
• I might or might not know them
• I think they are good, that they select the right kind of stocks, that they have good track records, but I could be wrong, and even if I am right, past results are no guarantee for good results in the future
• As usual, readers should do their homework, either when they want to invest in these funds, or when they want to follow some of the top holdings of these fund managers

The first fund manager I like to present is Yeoman Capital Management. I had encountered them a few times in HK small caps in which I was interested.

A good article about the fund can be found here.

Valuebuddies had a nice posting about the manager, drawing my attention, including some links to interesting video's:








Sun Hing Vision is a company in which I have owned shares myself, also because David Webb invested in it.

Some posters at Valuebuddies have better eyes than me and guessed which books are shown behind Yeo Seng Chong:

On the top deck :
- Competitive Strategy: Techniques for Analyzing Industries and Competitors
- You Can Be a Stock Market Genius
- Common Stocks and Uncommon Profit
- The Essays of Warren Buffet
- Value Investing : From Graham to Buffett and Beyond
- Competing on Analytics
- Beating the Street
- One Up On Wall Street
- The Value Imperative

On the bottom deck :
- The Wealth of Nations
- 2x Intelligent Investor
- 2x Security Analysis

Joel Greenblat and Value Investing

I wrote a short posting before about Joel Greenblatt, this time I like to present more material.

The first time I heard about Joel Greenblatt is when a friend recommended this book a long time ago to me:

"You Can Be a Stock Market Genius: Uncover the Secret Hiding Places of Stock Market Profits"

It is a great book about "special situations" (mergers, spinoffs, arbitrages, etc.), definitely not meant for a beginner in stock market investing. The only minor point for people interested in Asian investing is that it is 100% focused on the US market (as unfortunately the large majority of books about investing). It is written in 1985, but still relevant and I would highly recommend it, the logic presented is very compelling.

Twenty years later he followed with:

"The Little Book That Beats the Market"

It provides a rather simple formula to chose and pick shares. The returns, backtested on a reasonable large sample, looked very promising. Basically the formula choses shares with a high ROE at a relative low PE multiple.

[As "K C" rightly pointed out in the comments, Greenblatt actually uses EBIT (Earnings Before Interest and Tax) and EV (Enterprise Value), I use myself ROE and PE, I think the two methods are quite similar]

Since no formula is perfect, users of the formula are encouraged to pick about 20 to 30 different companies, to diversify the risk.

Five years later he followed this up with"

"The Little Book That Still Beats the Market"

An updated version based on the latest data.

I have to admit, I haven't read this latest book, I found the proof in his previous book compelling enough.

Also, the proof that his formula is still working can be found here, a presentation Greenblatt held at the 2009 Value Investing Congress:





The link to the presentation slides can be found here.

Quite amazing that such a simple formula is enough to beat the market, while more than half of the US fund managers are trailing the relevant index.

The Magic Formula's website can be found here.

The holdings of the "Formula Investing US Value Select A (FNSAX)" which uses the formula for its stock selection can be found here.

Big question for Asian investors: would this formula also work, say in Malaysia or Singapore? My guess is it would indeed work. But unfortunately the data to test this assumption is not readily available, like in the US.

Are you a value investor? Take the Apple test

Interesting posting from Prof. Ashwan Damodaran about Apple on his blog "Musings on Markets".

He writes:

"Based on my estimates, and they could be skewed by my Apple bias, at its current stock price of $440, there is a 90% chance that the stock is under valued."

 

Plus 5 investment tips from the professor:

1. Don't bet the house: No matter how confident you are in your value assessment, don't go overboard and invest a disproportionate amount of your portfolio in Apple. This is not just about you being right on the value but also about the market coming around to your point of view, and that is not in your control or mine; betting more than 10% of your portfolio on this stock strikes me as foolhardy.
2. Don't double down (Dollar averaging): I have never been a fan of dollar averaging, which not only muddies the water about when/how much you invested in a stock but results in increasing your bets as the market goes against you. Take a stand against the market but do not make this an ego trip, where admitting that you are wrong becomes impossible to do. Thus, while I feel more confident now that the stock is under valued than I was a week ago when I bought the stock for $500, I don't plan to buy more shares.
3. Think of buying the business, not the stock: The old adage that you are buying a piece of a company, not a share of stock, is particularly relevant when you make a bet like this one. My intrinsic valuation is determined by Apple's capacity to generate profits and cash flows and is not dependent upon whether portfolio managers are investing with me or analysts are lowering their price estimates. If I buy Apple at $440 today and I can hold the stock, I will get a share of a cash that is paid out and a share of ownership in the cash that is withheld. I have to keep reminding myself of that truth, even if the market moves against me.
4. Do not track the day to day stories: In an increasingly connected world, I know that this is really difficult to do, but there is no harm trying. Turn off your financial news channel, don't read opinion stories about Apple and avoid equity research reports like the plague.
5. Be willing to wait... even if you are not sure what you are waiting for: The big question that those of us who chose to make this bet face is what the catalyst will be that brings the market back to its senses (at least as we see it...). From my experience, it is almost impossible to tell. For instance, how did Netflix, which was a tailspin, a year ago, turn itself around? There was no single precipitating event but a collection of small news stories and solid earnings reports that seemed to settle the fears that investors had about the company's future direction. With Apple, it could be a new product, a couple of healthy earnings reports or a stock buyback.

Disclosure: I have also started to buy some shares of Apple at USD 450, knowing very well that the share might easily go down further.

At the start of each year, Damodaran constructs a spreadsheet with fundamental data from each listed stock. The dataset can be found here. Malaysian and Singaporean stocks can also be found under "emerging markets", in the rather peculiar category "Small Asia". I recommend to first download the file to disk and then to work on it. It might be interesting for value investors who like to work with  filters to find some value ideas.