Success in fund management is based on hard work, research and an ability to read the major trends

— Dr Tan Chong Koay

In February 2017, we were fortunate to be able to meet with Dr Tan Chong Koay at his Singapore office. Born in Jeniang, Kedah, Dr Tan is the founder and CEO of Pheim Asset Management (“Pheim”), and the author of the best-selling Rising Above Financial Storms. In 2010, Pheim had assets under management of over US$1.8 billion.

Following the completion of his MBA from Western Illinois University (USA) in 1974, Dr Tan returned to Malaysia. Starting out as an investment executive in South East Asia Development Corporation, which wholly owned Asia Unit Trusts Bhd, the first such entity in Malaysia, Dr Tan was convinced that fund management would be with him for the rest of his life. In the next phase of Dr Tan's professional investment career, he was a fund manager with Arab-Malaysian Merchant Bank, which was then the largest merchant bank in Malaysia. In 1987 (the year of the infamous “Black Monday” crash), he was rated Top Manager for Retirement and Pension Funds in Malaysia. In the early 1980s, Dr Tan did his PhD paper on fixed income funds. In 1987, he created, developed and launched Arab-Malaysian Gilts, the first unit trust fund in Malaysia to invest in Malaysian government and bank-backed securities, which earned him the name of “Pioneer of Fixed Income Unit Trust” in Malaysia.

Dr Tan founded Pheim Asset Management Sdn Bhd (“Pheim Malaysia”) in 1994 and Pheim Asset Management (Asia) Pte Ltd (“Pheim Singapore”) in 1995.

In January 1994, Pheim Malaysia started operations, just when the Malaysian market hit its all-time high. Since inception, Pheim Malaysia has been profitable every single year for 23 consecutive years. Notable investors in Pheim's Malaysian Emerging Companies Growth Fund have included the Government of Singapore Investment Corporation (“GIC”), financial institutions and other high net worth individuals. When Pheim Singapore started in 1995, the company was also given the ASEAN mandate by GIC. In 1997, Pheim Malaysia, with its good track record, secured the coveted appointment as an external fund manager for domestic equity for the largest pension fund in Malaysia. There is probably no other external fund manager that has managed this pension fund for 20 years.

To demonstrate the magnitude of Pheim's track record, Pheim SICAV SIF – ASEAN Emerging Companies (“Pheim ASEAN Fund”) Fund was the only fund in history to be ranked No 1 by Morningstar for the 1- to 15-year periods in US dollar terms, for the Morningstar ASEAN Category. On the fund's 20th anniversary on 3 February 2015, Lipper Thomson Reuters informed Pheim that the Pheim ASEAN Fund had taken the top position for all the 1- to 20-year periods among all Equity Asean funds of the Lipper Global classification under the International Offshore Universe in terms of total returns in US$. Over the 20-year period, the fund recorded a return of 497.37%, outperforming the FTSE AW Asean Index by 452.81%, and also its closest competitor by 402.85%.

Dr Tan received the following notable awards and accolades for his contribution to the industry and society:

• “The Warren Buffett of Asia” by World Wealth Creation Conference 2017 for being one of the best performing fund managers and for truly enhancing value-investing.
• One of the 80 Global Chinese Eminent Business Leaders – Beijing-based The China Daily (2014)
• Best of the Best Awards, CEO of the Year for Malaysia – Asia Asset Management magazine (2008 and 2010)
• Outstanding Entrepreneurship Award – Asia Pacific Entrepreneurship Awards (2010 and 2016)
• China Top 10 Financial Intelligent Persons Award – China Culture Development Institute, PRC (2010)
• Most Respected Chinese Entrepreneurship Award in Asia Pacific – China Economic Trading Promotion Agency, PRC (2012).

Dr Tan also served as a committee Member of the Investment Management Association of Singapore (2004–2009), and as a Member of the Investment Advisory Committee for the Lee Kuan Yew Fund (11 years) and the Lee Kuan Yew Fund for Bilingualism Ltd (3 years) until 1 March 2015.

What Makes Pheim Unique?

Pheim has a consistent track record of significant outperformance in Asia. In 2003, Watson Wyatt Investment Consulting, Singapore, in conformity with the Level 1 verification of compliance in accordance with the AIMR Performance Presentation Standards (AIMR-PPS), verified that Pheim Singapore outperformed the respective benchmark every year for every composite for nine consecutive years (1995–2003) since inception. Additionally, as verified by Watson Wyatt Investment Consulting, Malaysia, Pheim Malaysia's Malaysian Composite (for the combined Malaysia mandated accounts) outperformed the KLCI benchmark every year for ten consecutive years (1994–2003) since inception. In the Award-Winning Funds Supplement (July 2004) issue of Smart Investor, Singapore, it was mentioned that “No one asset manager has ever ranked No 1 for so many periods in the history of this category (Offshore ASEAN) by Standard & Poor's”. Pheim was also the only Malaysian boutique company that handled the sovereign wealth funds of three separate government entities, of Norway, Malaysia and Singapore. It is also notable to mention that Pheim was believed to be the first manager appointed by the Norwegian government. Over two decades, Dr Tan believes that today's Pheim is stronger, and more experienced as a company.

Additionally, Pheim is an investment house that is not market cap sensitive. In the fund management universe, most funds are restricted to large cap companies. However, the biggest growth is often seen in small and mid-cap companies. Pheim is exciting in the sense that it is one of the few houses that cover companies over the entire spectrum of small, medium and large market capitalisation. Traditionally, Pheim is strong in companies in the small and mid-cap space. This is where you might be able to uncover multi-baggers. When some of these small and medium market capitalisation companies get hit, their valuations become so cheap. Within two years of the Asian Financial Crisis, Pheim made more than 15 times their investment in PT Tempo Scan, 10 times from Dialog and 7.5 times from Unisem.

On the flip side, if things go the other way, an investor might get hurt much more than with a large cap. And Dr Tan has a single advice to get out of such situations: literally get out; as an investor, you must be willing to divest your investments when your thesis does not pan out. Generally, over the years, this diversification contributed towards Pheim's resilient performance.

Next, with Pheim and Dr Tan specialising in Asia for decades, another advantage the team has is their on-the-ground knowledge and experience. Knowing the place and country well is a great plus. However, networking alone is not enough; Dr Tan emphasises that an investor needs to combine this with a good philosophy. Networking gives you information, but doesn't tell you when to get out.

In terms of employee growth, Pheim is also a company with a knowledge-based culture. When it comes to investment opportunities, Dr Tan encourages a cohesive learning environment. He enables everyone, new or old, to engage in discussions, to come together; this results in the people at Pheim gaining experience exponentially. Life is not just about making money; what matters is whether one can add value.

Pheim and the funds it manages have chalked up various achievements and won numerous awards. Among the more notable ones are:

1. Pheim ASEAN Fund:
   • best-performing fund by Lipper Thomson Reuters for all the 1- to 20-year periods among all Equity ASEAN funds of the Lipper Global classification under the International Offshore Universe in terms of total returns in USD on its 20th Anniversary on 3 February 2015; the total return in USD for the 20-year period ending 3 February 2015 was +497.37% vs FTSE ASEAN Index's return of +44.565 vs its top rival's return of +94.52% (2015)
   • outperformed all its benchmark indices for all 1-year to 19-year periods ending February and March 2014 in terms of total returns in US$; it also outperformed all its peers in the Morningstar ASEAN Equity category for the same periods (2014)
   • ranked No 1 in terms of total returns in USD by Morningstar, for all 1- to 15-year periods ending December 2010 for the Morningstar ASEAN Equity Category (2010).
2. Dana Makmur Pheim (Balanced Islamic Fund):
   • won a total of 14 awards from The Edge-Thomson Reuters Lipper since inception:
     • Best Fund among Malaysia Islamic Funds for the third consecutive year under Mixed Asset MYR Balanced – Malaysia Category for the 3-year and 5-year periods ending December 2016, and for the second consecutive year for the 10-year period ending December 2016 (2017)
     • Best Fund among Malaysia Provident Funds under Mixed Asset MYR Balanced – Malaysia Category for 3-year and 5-year periods ending December 2016 (2017)
     • other awards, i.e. Best Mixed Asset MYR Balanced Islamic Fund for the 10-year period ending 2012, 5-year period ending 2007 and 1-year period ending 2004 and 2003
   • won a total of seven awards from Thomson Reuters Lipper – Global Islamic classification:
     • Best Fund under Mixed Asset MYR Balanced – Malaysia Category for the 3-year, 5-year and 10-year periods ending December 2015 (2016)
     • Best Fund under Mixed Asset MYR Balanced – Malaysia Category for the 1-year, 2-year and 3-year periods ending December 2014 (2015)
     • Best Fund under Mixed Asset MYR Balanced – Malaysia Category for the 1-year period ending December 2013 (2014).

Dr. Tan managed EPF Domestic Malaysia mandate for 20 years ending March, 2017 with an unprecedented outperformance of more than 300%. Pheim's long-term track record speaks for itself. The team at Pheim works very hard to achieve the best results. And awards are simply tangible evidence of the results achieved from the all the hard work put in. The string of awards received by Pheim over the years are a testament to the fact that Pheim consistently delivers the best results over the long term.

Investment Philosophy and Strategy

Dr. Tan’s key unique and proven Investment Philosophy is simple, “Never fully invest at all times.”

A fund should be fully invested near the bottom of the market and trimmed near the peak. But it should never be fully invested at all times, as Asian markets tend to be volatile.

When the market is down, Dr Tan's general rule of thumb is to invest up to 90% of the fund. In 1998, Pheim was invested as high as up to 98% after the Asian Financial Crisis period.

A key difference between Pheim and other funds is its willingness to hold cash. Because, when a fund sells, this fund might underperform the market as the market continues to moves up. When the market is seen to be overvalued, Pheim's cash allocation was as high as 65% cash back in 1987. Throughout Pheim's history, there were also times when one or two funds had cash positions as high as 85%.

Dr Tan mentioned that it is unlikely Pheim will hold such a high level of cash in their funds today, because not only has the company grown larger; over the years the team has also accumulated a wealth of experience, and has a better grasp on uncovering undervalued stocks. If there is ever a divestment, Pheim targets to utilise between 50 and 60% of its proceeds.

Investment Process

Typical investment thesis includes companies with:

• focused and experienced management (CEO with 10–20 years' experience)
• high earning growth potential
• attractive profit margins
• strong balance sheet
• low leverage
• strong in their field
• reasonable valuation
• low broker coverage.

Dr Tan referred to two case studies from his book.

1. Geahin Engineering Berhad: Geahin Engineering specialised in making steel frames for skyscrapers. Before investing in the company's IPO in 1995, Pheim requested a factory visit. When Dr Tan and his team arrived at the factory, they were surprised to find that it looked old; but the workers were very busy. The management explained that, due to their additional projects, they were going to move to a larger factory soon. The company was in a niche business and was expected to make higher profits in the coming year. After the company visit, the team noticed that Geahin Engineering had low gearing, was very focused and had good growth potential.

   Pheim Malaysia participated in the IPO and bought additional shares up to just under 5% of the company's issued capital at an average cost of RM4.37 per share. After net profit increased from RM5.4 million (1994) to RM8.9 million (1995), growth slowed to 12% in 1996 at RM9.94 million. Pheim gradually sold the shares from early 1996 to mid-1996 at prices ranging from RM7.30 to RM23.94.

2. Unisem (M) Berhad: Due to its efficient operation Unisem is a semiconductor company with strong cash flow and profit margin. In 1998, Dr Tan visited Unisem's factory in Ipoh, Perak. Dr Tan noted that Unisem's factory was impressive, noting that it housed some of the most advanced equipment and had one of the best assembly and testing machinery layouts in the ASEAN region. Unisem also received external recognition (MS ISO 9002) for the quality of its operations in its first year. After meeting with Unisem's Chief Operating Officer, Dr Tan was in no doubt that the company was in very capable hands.

   Unisem faced competition primarily from the regional operators. Japanese and American companies were not in direct competition as they were more involved in frontline activities, whereas Unisem and its Asian counterparts were in the backline operations (wafer fabrication, assembly and testing). Its closest competitor, MPI, was involved in the manufacturing of lead frames (extremely competitive industry where Japanese manufacturers have the upper hand), hence Unisem had a higher profit margin.

   At that time, MPI was also suffering from a hedging misstep. Anticipating that the ringgit would strengthen, MPI hedged its mainly US dollar-pegged revenue while leaving its US dollar costs unhedged. Unisem's other competitor was Thailand's Hana Microelectronics, which had not resumed full operations after a fire damaged its plant. In Unisem's case, the company had been very conservative in forecasting its prospective earnings, and in 1998, Dr Tan and his team felt that the global drop in semiconductor sales was only a temporary setback and semiconductor sales would pick up in 1998. And with PCs accounting for about 55% of semiconductor sales, the rising demand for cheaper PCs, OEMs were likely to increase their outsourcing further to reduce costs.

   Unisem also met Pheim's criteria of having strong cash flow with no US dollar loans and low gearing. At that time, Unisem was in a net cash position and the construction of Phase II of its factory was internally funded. Unisem received payments in US dollars and benefited from the weak ringgit against the US dollar, hence the company was in a strong position. Eventually Pheim invested in Unisem, taking the view that Unisem was well-run and financially sound and the IPO was reasonably priced at RM5.10 per share. Pheim believed that Unisem was one of the few companies in Malaysia that had established size, stability and earning power. Pheim eventually divested the last batch of its holdings in Unisem near RM44, at its peak, in February 2000.

3. Other instances included:
   • PT Tempo Scan Pacific Tbk
   • Dialog Group Berhad
   • PT Astra Agro Lestari Tbk
   • Inari Amertron Bhd.

Investment Universe

Dr Tan looks for companies that have positive contributions towards society as he believes that responsible investing will result in sustainable excellence. Accordingly, Pheim embraces environmental, social and governance best practices in their endeavour to achieve positive outcomes.

Dr Tan views commodity companies as exciting, because they run in cycles. However, you have to know how to track them. When these companies get played to extreme highs, you have to know when to get out.

To do this, one needs to have a good feel of the business cycle to understand which part of the cycle one is in. One of Pheim's recent successes was attributed to their funds not being weighted in the oil and gas industry.

Additionally, Dr Tan avoids companies involved in casino operations.

On Market Timing

The team starts with the compilation of 20–25 years' worth of market data. Next the team proceeds to study the market's price-to-earnings ratio, the highs and lows of each year, analysing the market's position compared to its historical showing. Intuitively, one should sell when the market P/E is at the peak. Dr Tan notes that one of the key contributors to his investment success is his ability and willingness to sell when the market appears to be toppish.

The above is a quantitative way of looking at things. However, investment is not just a science, investment is also an art which requires your experience and feel for the market. By constantly interacting with CEOs and business, Dr Tan generally has a good “feel” of where the market is.

Investors can also look at this from a top-down perspective. If the economy looks toppish, and almost every company you read about or visit mentions that they cannot make more money, it is a sign of things to come. Dr Tan believes that all of us share almost the same thoughts on valuation. The key is being able to find out before others. When you hear about it, it is already too late.

This next piece of advice is highly applicable to us. A clear sign of danger is when you start to see people going wild, especially when people start to go along the lines of, “if I ask you to buy shares, if you follow me you will make money”. This is indeed a simple, yet effective rule of thumb to always keep in mind that the market could be currently overvalued.

On What Makes Asia Unique

Dr Tan thinks that Asia is unique in the sense that, as a region, Asia is among the fastest-growing economies in the world. The Asia ex-Japan region has a population bigger than any other region on this planet. This offers opportunity.

With diverse cultures, the spirit of entrepreneurship, as well as Asian's emphasis on education, Asia is a very dynamic place to be in. The ASEAN region has several distinctive dynamics that will drive economic growth such as the youthful population, rapid urbanisation, low labour costs, massive infrastructure needs and an emerging digital world. Additionally, ASEAN is also a region rich with resources, being the largest producer of palm oil, natural rubber, coconut, pineapple, fisheries and nickel.

There are many opportunities in Asia. The key lies in picking the right one. You have to pick the right people and the right company to invest.

Overall there is still growth in Asia. An example is Indonesia. From an investment perspective, Indonesia is a big fishing ground that is still largely unexplored. Coincidently, fisheries might be an interesting industry to look at. However, there aren't many publicly listed fisheries.

The Difference between Investing in the United States and Asia

Asian markets are much more volatile than markets in the United States.

• From 1980 to 2016, US had only two huge drops (1987 and 2008).
• In comparison, Asia was affected in the following years: 1987, 1993, 1997, 2000, 2001, 2003, 2008, and 2015.

Sometimes in Asia, sentiments can rapidly move in either direction. Dr Tan stresses that in Asia, very often when the market goes down, it goes all the way down, affecting both big and small companies. If big caps are so cheap, we do not have to look at companies with small market caps.

However, the frequency of large cap companies falling 90% does not come every day. Unless these large companies meet with a very severe situation, it is very unlikely for these companies to disappear. This happens more frequently to small cap companies. Hence, Pheim is still very interested in small and mid-cap market capitalisation range.

Lastly, with the huge swings present in Asian markets, an investor must be willing to divest and wait out at times. An investor needs to be able and willing to sell shares when the market is overvalued. In short, one has to be able to react fast. An investor has to be flexible in investing; it does not mean that if your target is 50% you stick to it without thinking. If there are better opportunities or higher risk present, an investor has to assess the situation as it is, and make a decision.

On Company Visits

When conducting company visits, Dr Tan's focus is on the ability and character of the Chief Executive Officer and the key management team. It helps if the Chief Executive Officer has more than 20 years' worth of experience in his industry.

Dr Tan highlights that by the time you meet with the Chief Executive Officer, you should have already done your homework. At this stage, you should have an idea of the state of the company's operations, financials and valuation. The key objective of this company visit is to gauge the character and capability of the company's key management. Dr Tan prefers Chief Executive Officers that are hard-working and focused.

In Dr Tan's opinion, a sign of a capable Chief Executive Officer is that, upon setting foot in the office, the Chief Executive Officer is likely to tell you most of the important history and future development of the business within 20 minutes, knowing the ins and outs of the company like the back of his hand.

On Corporate Governance in Asia

Entrepreneurs can make mistakes as they take risks. When they take risks, sometimes they lose and sometimes they win.

In an ideal world, you would want to invest in a company with the guy at the top that's honest, sensible, hard-working and practical. However, such a person does not come by easily. But it does not stop you from trying to find such a person.

In reality, there are trade-offs. If you only invest when everything is perfect, there is a sizeable chance that you might underperform. In Dr Tan's opinion, the priority is the person's ability to deliver. When it comes to the topic of corporate governance, the key is knowing how to handle it. Experience will bring you through.

On Exchange-Traded Funds (“ETF”)

As a fund manager, Dr Tan believes that if one doesn't strive to outperform the benchmark, there is no point being a fund manager; Pheim's funds have consistently outperformed the index over the long term.

Dr Tan is of the opinion that the ETF is not a “smart” product. This is because instead of reducing volatility, ETFs as a whole tend to result in more volatility. This stems primarily from the nature of ETFs being low-cost, making it both cheap and easy for investors to get in and get out of these vehicles, resulting in short-termism.

Another reason contributing towards volatility is when these ETFs are forced either to buy shares when investors invest in the fund, or to sell shares when investors redeem to get out of the fund. Due to the size of some of these ETFs, these movements are not minor.

What investors can do is to take advantage of the situation by investing in such companies at a discount in the event of such sell-downs.

Advice to Investors

Dr Tan has the following advice for investors:

• Write and remember the mistakes you make. And as a reader, you should not just accept what you read at face value, you have to analyse or get advice and decide for yourself.
• Most people know how to buy but they don't know how to sell; you have to be willing to sell when the market is toppish.
• We all share the same thoughts on valuation, you just have to go out, be disciplined and put things into practice.
• Investment is not about your academic results, investment is about your focus, hard work, and how you handle the major market trends.
• You have to be able to withstand volatility. If not, the stock market is not a place for you.
• Investment managers should not do what they like. Instead they should do what is right for their investors.
• Sometimes, doing nothing avoids losses. When Dr Tan started Pheim at a market high, he hardly invested and avoided losses.
• An investor must combine fundamental analysis, and the ability to read how the market or people are going to behave.
• Do not get discouraged by mistakes made even though the company's management lied to you. At times, investors run into bad patches.
• Talk to intelligent investors who have a long-term track record and are better than you.
• The past and the present are important but it is the future that matters.
• A business that embraces environmental, social and governance (ESG) best practices is a good business and will eventually achieve positive outcomes.
• Buy a stock that many want to buy later.
• The key to investment success is to find a formula to overweight winners most of the time.
• Never hesitate to sell a share when you think it is grossly overvalued.
• If you follow a proven investment philosophy, your chances of winning improve.
• Trying to buy a share at the lowest and then selling it at the highest is unrealistic.
• In a volatile environment, the investment philosophy “Never be fully invested at all times” should perform better than “Fully invested at all times” in the long run.

We hope you will benefit from Dr Tan's wisdom as much as we did.