“Don't do what others do”

— Wong Kok Hoi, CFA

In May 2017, we met with Mr Wong Kok Hoi for an exclusive interview at his office in Singapore. Founded in 1995 and headquartered in Singapore, APS Asset Management (“APS”) started with assets under management (AUM) of just US$15 million. As at April 2017, its AUM has grown to US$2.7 billion. APS has also expanded into a company with 65 staff over six offices worldwide.

Mr Wong, the founder and Chief Investment Officer of APS, has over 36 years of investment experience, including being the Chief Investment Officer at Cititrust Japan, Senior Portfolio Manager at Citibank Hong Kong and Senior Investment Officer of Government of Singapore Investment Corporation. Mr Wong was also the recipient of the Mombusho Scholarship in Japan and graduated with a Bachelor of Commerce from Hitotsubashi University. After that, Mr Wong went on to complete the Investment Appraisal and Management Program at Harvard University.

From the start, APS started with an ambitious objective – to manage Asian assets for predominantly institutional investors, rather than the regular boutique investment firms' path in the 1980s of managing family and friends' money. Even after 22 years, the core values and vision of APS have not changed, APS still specialises in the Asian markets, employing investigative research and independent thinking in their investment process. Today, nearly 95% of their assets under management come from institutional investors such as public and private pension funds, endowments and foundations, and the rest are from family offices, financial institutions, sovereign wealth funds and corporates.

Started as Far East ex-Japan long-only manager, APS subsequently ventured into other strategies. As at 2017, APS offered six strategies.

Long-Only Strategies

• APS China A Share
• APS Far East Alpha
• APS Japan Alpha
• APS Vietnam Alpha

Long-Short Strategies

• APS Asia Pacific Long Short
• APS Greater China Long Short

APS's China A share fund, a pure China A-shares strategy, is the firm's single largest fund, with assets under management of US$2 billion.

In just the past two years (2015–2016), APS was awarded the following:

• Eurekahedge Asian Hedge Fund Awards 2016 – Winner of “Best Singapore-based Hedge Fund: APS Greater China Long Short Fund”
• AI Hedge Fund 2016 Awards sponsored by BarclayHedge – Winner of “Most Consistent Asian L/S Fund: APS Asia Pacific Long Short Fund” and the Winner of the “Best Long/Short Asset Manager – Singapore”
• 2016 Preqin Global Hedge Fund Report – Winner of Top Performing Hedge Fund in 2015: APS Greater China Long Short Fund
• HFM Asia Hedge Fund Performance Awards 2015 – Winner of the “Long/Short Equity Overall” Category (APS Asia Pacific Long Short Fund)
• Singapore SME 1000 Award, 28th Annual – Winner of Net Profit Excellence Award (Finance), Winner of the Sales/Turnover Excellence Award (Finance) and Winner of the Promising SME Award (Crossing $20 million turnover).

We spent about two hours with Mr Wong, and the following was what we learned from our exclusive interview with him.

What Makes APS Unique?

Mr Wong sees APS as a pure alpha manager, driven mostly by the goal to generate alpha. Alpha is the term used in the financial industry to indicate excess returns above the market index. As a fund, APS does not restrict itself to investments of any size, geographical (within Asia) or sectors. In short, APS goes to where the alphas are.

APS was founded with three goals in mind, and to this day, Mr Wong and his team still: (1) do investigative bottom-up research, (2) specialise in Asian investments, and (3) serve global institutional asset owners.

Investment Philosophy and Strategy

APS uses a “Four Alpha-Hats” Investment Approach. This is first done by classifying stocks according to their alpha attributes. Next, APS conducts research on these companies with the help of four different “hats”.

Mr Wong quipped that in school, we learn from finance professors that alphas are alphas. But as market practitioners, Mr Wong observed that alphas produced by different types of companies behave very differently. With that knowledge, Mr Wong and his team classifies alphas into four buckets – structural, dynamic, economic and opportunistic.

• Structural alpha: Stocks that possess structural strengths and core competencies resulting in likely outperformance over the long term. These include companies with a long-term durable moat, companies riding on long-term structural trends, or companies with core competencies of strengths not easily eroded away in the next 5–10 years. APS's investment horizon typically is longer than 3 years for this type of alpha.
• Dynamic alpha: Stocks that are in the cyclical industries such as semi-conductor companies, property companies or airline companies. Although these companies have the potential of a strong alpha in an upcycle, on the flip side, a downcycle would produce strongly negative alpha. Mr Wong commented that the key here is understanding when to get out and not to overstay. APS's investment horizon is about two years for dynamic alpha stocks.
• Economic alpha: This is where the traditional value stock fits in. In this group, the companies might have low or no growth rate. Typically, they might trade at a very low valuation in the single digit P/E multiples range. But because they are selling at a fraction of their underlying intrinsic value, these companies may still produce alpha for APS to capture. APS's investment horizon is 1–3 years.
• Opportunistic alpha: Stocks experiencing special events such as restructuring, product repositioning, mergers and acquisitions. APS's investment horizon is relatively short here at 3–12 months.

The four hats approach is essentially how APS conducts research and constructs its portfolios.

• Benjamin Graham hat: Mr Wong commented that back in 1965, there were only about 100 CFA holders worldwide. By 1985, there were probably close to 8,500. Today, there are over 100,000 CFA holders worldwide. This means that the type of security analysis done at APS is also done at many other firms, translating to a markedly reduced value-add. Hence, one cannot just rely only on the traditional, more commonly known as the “Benjamin Graham”, type of security analysis to produce alphas. In summary, it is a necessary but not sufficient condition to produce alphas.
• Businessman hat: When investing, one must think like a businessman. At APS, Mr Wong and his team find that looking at a business or company from the perspective of a businessman forces them to take a deep dive and think long term. This is because as a businessman, when you buy a company, you might be stuck with it for 5, 10 or even 20 years. This is unlike a listed stock, where you can just sell it the very next day if you change your mind. So, the things a businessman looks at might be quite different, and this is very valuable in APS's investment process. For instance, a businessman would want to invest in a business with sustainable core competencies, run by competent and smart managers – exactly what an investor should look for as well.
• Sherlock Holmes hat: Like the detective, APS puts on their Sherlock Holmes hat to investigate companies, the reason being that the investment terrain in Asia can be tricky and uneven, with corporate practices varying from country to country. For instance, Mr Wong joked that there is no point in asking management if they are honest or smart. More often than not, management tends to tell you what you want to hear. Instead, it might be more useful to check with third parties like former employees, competitors and customers. Competitors very often will give you a shockingly honest assessment of their peers, and can be a more illuminating source of information compared to just reading sell-side reports or industry research reports. This hat also includes a study of possible red flags with the checklist containing instances like frequent changes in the company's C-Suite level officers, directors, auditors, etc. As a parting note, Mr Wong noted that this does get better with experience, especially when it comes to understanding management.
• APS hat: Relative to the conventional tracking error approach, APS believes if they can construct a portfolio with the four buckets of alphas, it would result in an optimal alpha portfolio. APS tends to build their portfolio with 50–70% of their portfolio invested in structural alphas, 20% in dynamic alphas, 15% in economic alphas and minimal exposure to opportunistic alpha.

On APS's Investment Process

APS typically approaches an investment as follows:

• Generate original ideas: APS looks for long-term structural trends, contrarian ideas, new industries and companies, and company-specific leads.
• Understand source of alpha: APS then groups these ideas into the four alpha groups – Structural, dynamic, economic and opportunistic.
• Inside-out Research and Valuation: Thorough research is done by understanding the business model, conducting site visits, engaging in staff interviews, looking at the management's reputation and track record, and finally valuing these companies.
• Build alpha diversified portfolio: Once the ideal investments are found, APS proceeds to invest in these stocks with the help of the APS hat.
• Monitoring and review: Lastly, APS constantly monitors the companies in its portfolio, looking for changes in company or industry fundamentals.

Mr Wong then went on to share with us examples of some investment opportunities APS had considered from the approach of a structural, dynamic and economic alpha, respectively.

On Company Visits

APS is a strong believer in company visits, as it allows one to pick the minds of management. Mr Wong mentioned that when you start with a report of a company, you will form an opinion of the company. However, that is just one perspective into the window of the company. As the saying goes, seeing is believing, thus Mr Wong believes in going on-site to do his due diligence, guided by the idea that “You won't form conclusions on what you see, but it makes you ask questions.” And this will give you yet another input into your analysis of the company.

Some years ago, Mr Wong encountered a company which, despite high top-line growth, had consistently low return on equity. Mr Wong could not understand the reason. That was until he made a company visit. Upon arriving, Mr Wong noted that the garden of the company was beautiful, it was nicely manicured. This implied that the company spent a lot of money on unproductive things. True enough, during a tour of the factory, there were idle machines and workers. This stuff cannot be seen from the annual reports alone.

In contrast, a Taiwan-listed company which Mr Wong had a chance to visit some years ago had a machine running right next to the reception area. Pretending to be naïve, Mr Wong questioned the general manager on this and the response was a simple, “Why not?” With a management deploying capital as wisely as this, it might have been a factor contributing towards high profitability, with good return on equity year after year, even through recession periods.

One final example on the importance of company visits is illustrated by a food catering business that APS was looking at some years ago. This was the largest caterer in China, supplying millions of lunch boxes a day to government departments, factories, etc. Earnings growth was 50% p.a. for five years in a row; however, P/E multiples were in the teens. Mr Wong joked that this company was looking like the cheapest growth stock in the universe! Moreover, this company was the official sponsor for Beijing Olympics. With all this, Mr Wong and his team could not understand why the market was valuing it so cheaply. APS also noted that there were blue-chip fund managers on the company's shareholder list. Right before their visit, Mr Wong recalled that it was discovered that this company had an unusually high level of capital expenditure for a food catering operator – its five-year cumulative capital expenditure was four times its five-year cumulative profits. This led to Mr Wong and his team questioning the company's need to spend so much. To that, management responded that this was for distribution centres and kitchenware. But Mr Wong was not sold – this was nowhere close to “French cooking” – and wondered to himself about the utility of spending hundreds of millions in kitchenware and distribution centres. A second red flag that stood out was the company's frequent reliance on bank loans and shareholder funds for additional capital.

At this point, Mr Wong and his team felt that something was probably not right. But they did not want to form a judgement too early, so the team decided to take a look at the company's “French kitchen equipment”. Upon setting foot in the facility, APS analysts found out that for a food caterer for millions of lunch boxes, the place was not clean – unacceptable standards for an operator in the food industry. This was when APS got nervous. Additionally, the kitchen and distribution centres did not seem to justify the investment they had made. Not surprisingly, within a year, company went bankrupt.

Asia's Investment Outlook

In Mr Wong's opinion, there are a few macro trends investors should take note of.

First, the emergence of China as both an economic and military power. Already the second largest economy in the world, China cannot be taken lightly. Take commodity prices for example – in 2016, commodity prices shot up on China's increased spending in infrastructure projects. In the coal industry, when it was reported that China closed down some of its coal mines, coal prices went through the roof, with many coal mining stocks enjoying strong rallies.

Second, the emergence of middle class consumers in Asia. This has significant impact on industries all over Asia, and tourism is one of them. Today, the Chinese are the number one spender on tourism globally, and Mr Wong expects this gap to widen.

Finally, Mr Wong also noted that we could expect a low interest rate and low-growth environment over next five years.

Industries Beyond APS's Circle of Competence

An industry that Mr Wong tends to avoid is the banking sector, for the simple reason that Mr Wong and his team believe that it is difficult to analyse banks.

Take for instance the non-performing loan (“NPL”) ratio. Mr Wong highlights that it is very tough for even an experienced analyst or a fund manager to accurately ascertain the bank's “true” NPL ratio. Even in serious cases, take for instance the global financial crisis – even the regulators were informed at the eleventh hour. So how is it possible for an external investor to accurately analyse a bank's financials? Mr Wong felt that investing in banks would require a huge leap of faith on the part of the investor. With that said, he makes an exception for investing in banking stocks—after a financial crisis or after a deep recession.

On Reviewing of Positions

Mr Wong commented that APS conducts a review of its investments all the time, simply because fundamentals change continually. For instance, one cannot set a fixed date of, say, every Monday or the first day of the month to review our portfolios. Events happen in real time and so should our reviews.

If somehow you learn that the fundamentals of your investments have changed, you should review them right away. However, if there are no fundamental changes to your company, there is no need to review your positions at all. Mr Wong recalled an investment into one of the telecommunication companies in Thailand some years ago. Within a week of their investment, a new government announcement allowing new entrants into the industry prompted them to sell off their position right away.

On Spotting Red Flags

APS's investment universe also extends to cover even Australian equities. Mr Wong talked about an Australian electronics retailer – Harvey Norman Holdings Limited (“Harvey Norman”). Harvey Norman was selected by APS as a short candidate.

First, the dynamic alpha presented itself in the slowdown of Australia's property market with its impact trickling down to the entire retail industry. Second, it was reported that Amazon had plans to enter the Australian market soon. And Mr Wong keenly noted that Amazon is a disruptor that sells electronics, furniture, bedding and fittings at low prices.

Finally, APS put on their Sherlock Holmes hat and uncovered several accounting irregularities, subsequently producing a negative report on the company two years ago, calling the company out. Harvey Norman was later investigated by Australian regulators, shareholders' associations and shareholder proxy groups for similar accounting irregularities, proving that APS's initial investigation about the company was spot on.

On Market Exuberance

Mr Wong recounted an old story – while on a business trip in Switzerland, a taxi driver started to brag to him about his Japanese stocks. That was when Mr Wong decided that things had gone too far. Shortly after, he unloaded most of his Japanese stocks. Just weeks later, in December 1989, the market crashed.

Mr Wong mentioned that there are many signs when the market appears to be overvalued. A litmus test is when you start hearing teachers, housewives, cab drivers, etc. talk about stocks. This is a time when one must keep one's sanity and not be greedy.

On Transparency and Disclosures

Mr Wong believes regulators in the region should step up their efforts in protecting investors. He mentioned that from time to time there will be “naughty boys” in the market ready to abuse innocent investors.

Besides having clear and stringent rules, regulations supervision and enforcement are absolutely vital to the long-term healthy development of capital markets.

Advice to Investors

We asked Mr Wong for some words of wisdom to share with you. Here is his advice:

1. Do not invest in things you do not understand.
2. Do not invest with the crowd; do not seek comfort from group think.
3. When something is too good to be true, it is often not true.
4. Do not trade – many people think that they are smart enough to time the market, but the empirical evidence shows conclusively that market timing is a money-losing activity.
5. Invest for the long term.