From a boutique firm to one of Asia’s largest asset managers, Value Partners has come a long way since its establishment in 1993. In the increasingly volatile Greater China market, the home-grown asset manager has demonstrated that perseverance and discipline – the doctrines of value investing – are often rewarded in the investment world. Louis So, Deputy Chairman and Co-Chief Investment Officer at Value Partners – and this year’s winner of the BENCHMARK Outstanding Manager, Greater China Equity – shared with us his disciplined investment approach.
BENCHMARK (BM): Congratulations on winning this hard-earned title, Louis! Your flagship fund boasts a long-term track record. How does your 3Rs investment philosophy help investors add value and preserve capital?
Louis So (LS): Thank you for this honor! As a long-term investor in Greater China, Value Partners has navigated through many volatile periods. Our long-standing presence would not be possible without our disciplined, bottom-up approach to investing, which can be summarized by 3Rs: Look for the Right Business that is run by the Right People and is at the Right Price.
The 3R-philosophy allows us to generate alpha by identifying winners through intensive on-the-ground research. Every year, our team conducts over 2,500 company visits and research meetings. The team’s internally generated research covers thousands of stocks in Asia-Pacific, but only less than 2% of the top ideas make it into our portfolios. We hunt for companies with sound fundamentals and discounted valuations, and we are on constant lookout for contrarian ideas with depressed valuations.
BM: Making the right judgment is central to your concentrated approach to investing, and such investment acumen is often a result of the investment personnel’s experience. Can you tell us more about your team?
LS: Certainly. We have one of the best investment teams in Asia, with over 60 onthe-ground investment professionals in Hong Kong, mainland China, Singapore, and London, with a special focus on the Greater China market. The members of the experienced and close-knit investment team have an average of 17 years of industry experience and 9 years at Value Partners. Most team members joined the firm at the beginning of their investment careers. The entire investment team is responsible for stock research, with constant information sharing to ensure efficient and effective coverage of our investment universe.
BM: As an investment expert in Greater China, how much more potential do you see in China’s consumption upgrade story?
LS: We expect consumption upgrade to remain a core investment theme in China. As China’s growth structure continues to shift from acting as the “world’s factory” to being a consumption-driven economy, we believe consumption will remain a growth pillar in China. Our position is supported by the country’s continued urbanization and steady wage growth. The sector beneficiaries of this trend are broad and include home appliance companies, white liquor manufacturers, e-commerce providers, and technology hardware makers. However, to select quality names, strict discipline is required. Therefore, we believe our strict adherence to value investing principles will be the key to success.
BM: Besides the consumption upgrade story, where else do you see opportunities in China? And what kinds of risks should we watch for?
LS: We see opportunities in two burgeoning trends in China: corporate consolidation and increasing R&D expenditure.
Corporate consolidation is gathering pace across various industries in China on the back of the government’s call for stepped up supply-side reforms, which include closing down “zombie” firms. Industry consolidation is helping large companies increase their market share and strengthen their pricing power. Over the past five years, the market share of industry leaders has increased noticeably. For instance, the combined market share of the top five air conditioning manufacturers in China has expanded by more than 12% between 2012 and 2017, totaling more than 80%. This growth is leading to stronger pricing power in consolidated enterprises, which bodes well for corporate profitability.
Meanwhile, China’s R&D expenditure is increasing at a faster pace than that of other countries. With a deep talent pool and policy supports, China is poised for more technological breakthroughs in areas such as high-speed rail, automation, e-commerce, and artificial intelligence.
On the contrary, the biggest risks in China stem from government policies, such as financial deleveraging, tighter controls on the housing market, and anti-pollution initiatives. While the pace of policy execution will inevitably affect the market, we believe that the authorities will refrain from proceeding with these policy changes too forcefully in order to avoid an abrupt slowdown in economic growth. BM