If we get the “3-Rights” right, time is our friend

— Yeo Seng Chong

In March 2015, we went down to the office of Yeoman Capital Management to meet with its Executive Chairman and Founder, Mr Yeo Seng Chong.

Yeoman Capital Management is a Registered Fund Management Company (RFMC) in Singapore. Mr Yeo is a pioneer in the fund management industry in Singapore, having founded the company together with his wife, Mdm Lim, in 1999. Since 2005, the company has been running the flagship Yeoman 3-Rights Value Asia Fund, an Asia-Ex-Japan fund, since January 2005.

Mr Yeo had a wide range of experience before starting his fund in 1999. He had professional experience in both the public and private sector with listed firms like Centrepoint Properties Limited, Metro Holdings Limited and Singapore Technologies Industrial Corp (now part of SembCorp Industries Limited).

Mr Yeo frequently shares his investment wisdom through news and digital media such as The Business Times, The Sunday Times and The Manual of Ideas. We spent the afternoon with Mr Yeo to better understand his approach.

Investment Philosophy and Strategy

According to Yeoman Capital, since 1999, the collective funds have returned 12.74% per annum (net of all fees) to its investors for the 19 years and 2 months period up to Q4 2016. That far exceeded the performance of its benchmark, MSCI Far East Ex. Japan (MSEL CFFX), which returned 3.84% per annum over the same time window (implying an excess return of 8.90% p.a.). Yeoman Capital has achieved all this through its strong long-term investment process, focusing in the small-cap universe. At the end of 2016, the weighted average market capitalisation of all its holdings is S$240 million.

Yeoman Capital has been able to achieve this level of performance due to its investment strategy, with the basic premise of viewing stocks as operating businesses. Mr Yeo has a simple method of articulating his investment style. He coined his style of investing as the “3-Rights” approach. He focused on finding investments that meet his criteria of the:

• right business
• right price
• right people.

Finding the “right business” means that companies should show a reasonably strong balance sheet, stable cash flows and a considerable operating and listing history. Additionally, the right business should not be overleveraged and should have a reasonable capital efficiency in terms of its return on equity. Preferably, Yeoman Capital looks for companies with strong cash flow generation with a history of rewarding shareholders with dividend distributions.

Yeoman Capital is very disciplined in finding an investment at the “right price”. That means that the company has to provide a large “margin of safety” for Yeoman Capital in terms of valuation before it can be considered.

Lastly, having the “right people” is extremely important. Yeoman Capital looks for companies with a management team who are very experienced in their field. The management must have demonstrated good corporate governance, have a history of being fair to minority shareholders and demonstrate transparency in its financials before the fund considers investing in them.

Investment Process

So how does Mr Yeo start screening for companies?

Mr Yeo shared with us that the firm uses a quantitative screening method. The team starts by scanning for companies with metrics such as:

• low price to tangible book value, preferably having a ratio of 0.6 or lower
• pays a dividend
• strong balance sheet, preferably in net cash
• good return on equity history
• no major losses in its operating history
• has a history of positive free cash flow
• has a long listing history
• no history of large dilution to shareholders.

Once they have found a shortlist of companies to investigate further, Mr Yeo starts looking into more qualitative measures. This includes looking at the ability of the management. He prefers companies with a strong leader, someone with a long-term vision of the company. Mr Yeo avoids companies with directors who have questionable backgrounds.

As regards what type of companies or industries Mr Yeo avoids, he replied that it is simply the opposite of what he screened for in a company. Companies with high capital expenditure, low return on equity and who do not pay a dividend do not make the cut into his shortlist. One industry that is notorious for possessing some of these traits is the airline industry.

Due to the large number of stocks in his portfolio (ranging from 60–80 securities), Mr Yeo tends to avoid interacting too much with the managements. He likes to let the data speak for itself; interacting too much with the management might result in more noise. However, if possible, the team will still schedule a company visit.

Mr Yeo is very careful when it comes to asset sizing. He normally allocates a portfolio weight of between 0.5% and 1.5% to each stock selected. From then on, he will only add to the position after monitoring its performance and management performance for a few reporting periods.

When to Sell a Stock

The average holding period for Yeoman Capital is around five years. So when does he sell a company?

For Mr Yeo, there might be a few reasons. For one, he would definitely sell out an investment if he comes to the realisation that a mistake was made. Possible mistakes include investing in a fraudulent company or finding that the thesis of the investment did not pan out. He would also consider selling when a company reaches its full value or when a better opportunity comes along. Mr Yeo commented that “Everybody wants to get a prestigious name such as Apple or Google in their portfolio and they will pay any price, any valuation to get their wish, but a good business at a high price or high valuation does not always mean a good investment, in my opinion.”

Therefore, he has thought out this 3-Rights strategy, which has served him well so far.

On What Makes Asia Unique

One key reason why Mr Yeo does not hold on to his investment for a very long term (i.e. forever), as preached by legendary investor Warren Buffett, is due to the business environment in Asia. Asia by itself is a very diverse market, it is not just one big market. Cultures are very different when we compare country to country. For instance, in heavily populated places such as India and China, not only is there a difference in culture between regions, even the language used might not be the same! Therefore, it is much harder for companies in Asia to duplicate their business model and scale up, as many companies in places like the United States of America do.

Because of this, Mr Yeo felt that selling out of a fully valued company and investing back into another undervalued stock is the right way to address the situation here.

Advice for New Investors

Before leaving his office, we asked Mr Yeo for his advice to investors. He gave the question some thought and responded that it is very important for investors to do their own research instead of relying on others.

Doing our own research allows us to gain a better understanding of the company. Not only that, this process will also enable us to improve our investing skill and it will give us more confidence if we are to invest in the company. In parting, Mr Yeo added, “Don't rely too much on projections, projections tell more about the projector than the future”.

For further information, readers may look up the company's website at www.yeomancap.com.