Value investing is simple to understand, but very hard to implement

— Aggregate Asset Management

In early 2015, we were able to get the opportunity to meet with the team behind Aggregate Asset Management. Aggregate Asset Management is a fund management company based in Singapore. The firm started its flagship fund – the Aggregate Value Fund – in December 2012.

Aggregate Asset Management was co-founded in 2012 by three passionate value investors, Wong Seak Eng, Kevin Tok and Eric Kong. Before co-founding Aggregate Asset Management, Wong Seak Eng had a wide range of experience in the audit, corporate finance and fund management industry. Kevin Tok had strong experience in the sales and marketing of financial services as he worked in insurance companies such as AIA Group and Manulife. Eric Kong worked with financial firms like Citibank and United Overseas Bank and was also a partner with a boutique investment firm before co-founding Aggregate Asset Management.

Aggregate Asset Management prides itself as being the only fund management company in Singapore that does not require its clients to pay a fixed management fee. Instead, the company prefers to charge a performance fee on returns, ensuring that its interests are aligned with its investors.

Aggregate Asset Management aims to achieve a net return of 10% a year over the long term for their clients. And by “long term”, the company means a period of five years or more. By the end of 2016, the Aggregate Value Fund generated a return of about 10.55% per annum over the four-year period. We sat down with the team to find out just how they do it.

Investment Philosophy and Strategy

Aggregate Asset Management's philosophy is value – the fund invests in undervalued securities listed in Asia by employing a bottom-up approach to security selection through fundamental analysis.

First, Aggregate Asset Management believes that to succeed in investing, they cannot be doing what everyone else is doing, they have to be contrarian. This means they do not just follow the ideas of large funds or popular blue chips. They focus on generating ideas through internal stock screenings and public news flow.

Unlike many funds, Aggregate Asset Management does not make investment decisions based on economic or industry trends, choosing instead to focus on specific companies. The team likes to search for companies that have fallen out of favour with the market, and also those which are experiencing temporary declines in their business.

In summary, Aggregate Asset Management likes companies with strong balance sheets that are trading at steep discounts to their net assets.

Investment Process

Aggregate Value Fund is a long-only value fund investing in Asia companies. By using quantitative screenings, the team is able to filter out the best and subsequently study them in depth.

The team starts by screening for companies with:

• strong balance sheet
• low price-to-book ratio
• net-net working capital, more commonly known as “cigar-butt investments”
• high risk-to-reward payoff, or a high margin of safety.

Typically, they might end up with a shortlist of about 3,000 stocks. From that list, they would then generate an internal scoring system for their watch list. They might invest a small amount in the companies that pass their scoring system, generally at less than 1% of the portfolio. Aggregate Asset would only increase that position over time, when they are more comfortable with the company. The firm diversifies widely to avoid concentration risk on one particular stock. The team tends to allocate not more than 5% in any given investment.

Next, the team highlighted that their analysis involves a company's current and past financial statements, company announcements and any available public information. After analysing these documents, the team is then able to come up with a valuation for an indication of the attractiveness of a stock, or its “margin of safety”. The “margin of safety” is the difference between a stock's market price and its intrinsic value.

Eric then made a very interesting point. They see themselves more as wholesalers of stocks instead of concentrated stock pickers. The team does not actively meet management of companies to find new investments. Rather, they tend to rely mostly on public information available, such as financial statements or the news. This means that Aggregate Asset's portfolio is made up of a wide variety of stocks, all in small allocations. In this way, the fund would not be impacted too much if one of their holdings did not go as expected. The advantages of this approach are that the chances of blow-ups and serious permanent impairment are low.

However, this does mean that as a retail investor, without a large asset base or the time to cover such a variety of companies, one would find it challenging to replicate their strategy.

Investment Universe

The fund comprises investments in Hong Kong, Malaysia, Singapore, South Korea, China and Thailand. The companies under consideration have to meet Aggregate Asset Management in-house screening and internal scoring process prior to investment. As mentioned, the team is attracted to companies that have fallen off the radar or those that have suffered a temporary decline in their fortunes.

Aggregate Asset Management has its own circle of competence, companies that the team is comfortable with. Thus, the team sticks to this circle and avoids investments in companies outside this circle. A subset of this circle also includes certain ethical considerations. Companies outside of this circle include companies in “sin” industries, for example companies involved in alcohol, gaming and tobacco operations. They would also avoid information technology companies, new initial public offerings or businesses that are just starting up. In this manner, the team can minimise unforced errors, simply by being more conservative in their selections.

Additionally, the team highlighted that they do not invest in Initial Public Offerings (IPO) as they want to be able to assess a company's track record prior to investment.

When to Sell a Stock

According to the team, the fund tends to hold on to a stock for at least five years as undervalued stocks need time for their value to be realised. The team does not set target prices for their investments. Instead, they review each investment on a case-by-case basis.

They tend to sell out only if the business is failing, in the process of being privatised or if better opportunities are found.

Detecting Red Flags

As a function of their investment approach (focusing on companies trading at very cheap valuation), it is inevitable that they would end up with mostly small and medium cap companies. With such a scenario, we wanted to find out from the team how they detect red flags and value traps in the companies they come across.

There is no shortcut. Aggregate Asset Management goes about mitigating such risks by doing their homework. The team follows a company for some time before investing. The reason for this is to give the team sufficient time to gauge both the actions of management and the performance of the company.

On What Makes Asia Unique

Aggregate Asset Management is a fund manager that invests purely in the Asian stock markets. We were therefore curious about the biggest difference the team found between markets in Asia and developed markets like the United States.

An interesting point they brought up is how companies in the US market can be less reliant on valuation. There are more examples of great companies that continue to perform well for shareholders even when they are trading at sky-high valuations. That is not the case in Asia. In Asia, investors need to be more cognisant of the price they pay for an investment. Buying an investment at too high a price can be a terrible mistake.

Investors' Advice

Before leaving, the team dropped these nuggets of wisdom:

• Do not jump straight into buying your first investment.
• Spend more time learning the basics, on how to read a financial statement, on how to question the merit of a business, and how to value a company.
• Do not dream about finding huge gains from your investments. Instead, focus on how to minimise your losses, your return will follow.
• Never stop learning, never stop reading.

We hope you will benefit from their advice as much as we did.