Value Partners' corporate culture vital to its business model
Cheah Cheng-Hye is a name familiar to many in Asia's asset management industry. Together with his business partner V-Nee Yeh, Cheah co-founded Value Partners Group in 1993 and is among the pioneers of investing in mainland Chinese companies. As chairman and CIO of Value Partners, he has helped build it from a fund house managing the Value Partners Classic Fund (formerly known as the Value Partners A Fund) with $5.6 million in assets to a listed company managing 36 funds with $2.9 billion in assets. That flagship fund now has more than $430 million in assets. As of now, Cheah owns close to 36% of the fund house while Yeh holds 18%.
Cheah is part of the very select list of 25 most influential people in Asia asset management compiled by AsianInvestor. He shares with AsianInvestor his experience of building Value Partners, how the fund house is surviving the crisis, and his plans for the future.
This is the last of a two-part interview.
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| Cheah Cheng-Hye |
Is China your biggest market in terms of investments?
Cheah: The single largest market is China-related shares but we are investing as far away as Australia. About two-thirds of the $2.9 billion AUM is invested in China.
Do you plan to branch out more?
The bond fund we plan to launch will be a regional fund with a significant amount of non-Chinese names. There will be other products that will be launched in the coming months that will not be tied to a specific geography. We are planning various new products over the next six to 12 months. But China, in the foreseeable future, will always account for no less than half of our AUM.
If and when the market turns, will you hire more people?
We are actually flooded by job applications and we may actually be increasing our headcount very slightly within the next two months, with the new bond guy hiring new people. The company as a whole remains a profitable business so we don't feel there is a need for us to do anything drastic.
Of the five investment management businesses of Value Partners Group, which one is contributing the most to your bottom line?
Value Partners Limited, because of the flagship fund. But the percentage is gradually declining. Sensible Asset Management, three years from today, may be a serious market player because the market is changing. Sensible's product launches in the coming six to 12 months may be quite important.
What are your immediate plans?
We can't go into specific details, but in general we are trying to work on the kinds of products that we hope will appeal to mainland China. Don't forget that 9% of this company is owned by one of China's biggest insurance groups, Ping An Insurance. In alliance with Ping An, we hope to do product offerings that may be co-branded that will appeal to the people of China. Additionally, we are optimistic about the appetite in the Asia-Pacific region for index-linked products and we have some very original ideas that will allow us to have a niche in this market.
We are also planning an enhanced ETF. We have a fund right now which is called the Asia Value Formula Fund, which has served as a learning curve for us. We want to differentiate ourselves. We will come up with an enhanced ETF.
The fund we have today was based on an article I read in the CFA magazine about three years ago. Some professor looked into the S&P 500 and he said that rather than have a normal index product that mimics the S&P 500, you could pick out the 50 most undervalued stocks -- with lowest value and highest yield -- and that product will help you outperform a normal ETF. So we applied that to the MSCI Asia ex-Japan Index. We picked out what we think are the 100 cheapest companies within the index and then we launched the fund.
The dynamics of asset management is changing. The source of funding now is moving away from US and Europe to Asia-Pacific including Hong Kong, China and Singapore and so our fund raising and product offering and menu will all have to be adjusted to fit the changing consumer demand.
Do you expect to have more on-the-ground offices in other markets in Asia, just as you do in Singapore?
The mainland Chinese market is very diverse. We are not trying to attract the whole country. We are appealing to a certain type of investors who already respond to our brand, Ping An's brand or the other partners that we are lining up. Our clients are mostly institutional investors, more than 50%. Setting up an office there is not a priority. Travelling back and forth to China is not a problem for me and my team.
Are you going to be targeting mainland investors mainly as a third-party provider?
We will be making use of different formats. We have a very active business development group led by our CEO Franco Ng who is pushing all the buttons here in terms of what kind of format to take.
Are you trying to expand your reach in the retail market?
We have partnered with HSBC and the bank has been distributing our products in Hong Kong since August. It is distributing the Value Partners Classic Fund, Value Partners High-Dividend Stocks Fund and Value Partners Taiwan Fund. Other retail distributors are Dah Sing Bank and Bank of East Asia.
What have been the major challenges you have faced in building the business?
The major constraint has been getting people to adopt our corporate culture and what we call the three Qs: good IQ, good EQ and good CQ or common sense. Your typical Asian guy with an Asian culture and a Western education comes back with very high IQ, poor EQ, and almost zero CQ. We have to change that and we have to build on their EQ and CQ.
There are a number of bright young Asians but when it comes time for them to display leadership and innovative thinking, you will find them lacking. They tend to be exam-conscious people, they read a lot of books, follow a lot of procedures. They sometimes forget that what counts are practical results.
This is a human-based business where supply can create its own demand. If you supply innovative and highly creative products, the demand will find you. After the financial crisis, demand is sensitive to performance and comfort level, especially with regard to your track record, reputation, compliance, structure, client reporting and infrastructure.
One other challenge is the shifting source of wealth from the west to the east. In that respect, we are lucky because of Manulife and Ping An, which allow us to access a huge base of Asian clients. In contrast, boutique fund managers who rely solely on investors in the US and Europe are having a hard time. [Editor's note: Value Partners has had a relationship with Manulife since 1998, with the fund house managing the insurance company's China Value Fund.]
Other challenges are much more mundane and much more within our ability to cope. There is the current challenge thrown up by the global financial crisis that means we are not as rich as we used to be, our salaries have come down, our bonuses have become very tiny, our company earnings have dropped sharply. For people like me who have been in this business for a long time, I consider this a part of the environment. It's just like being a fisherman, sometimes you get a lot of fish, sometimes none.
The underlying challenge has not changed since 1993. It is the challenge of coming up with a good quality product and to outperform. That challenge will never change.
What has been the greatest challenge you have faced so far?
The most challenging experience I faced in my entire career has definitely been the global financial crisis of 2008. I was just surprised by it. Luckily, we have been selling down since late 2007, not because we thought there was a crisis coming but because we thought there were not enough stocks to buy. We were one of the few China funds that were building up its investments in gold. We have been buying gold since 2003. And gold was 5% of our fund. And during the crisis, because of gold's relative outperformance, that increased to 9% of the fund. In a sense we were prepared for the crisis because we had a lot of gold and cash.
Nevertheless, the crisis hit us very, very hard. And our fund performance dropped by 47% in 2008. Our earnings dropped 95% [to a net profit of $67 million in 2008 from $1.4 billion in 2007.] It was very difficult. Having said that, I am not devastated.
This year, we have announced three corporate objectives for the whole group to follow. This is how we are rebuilding our house after the shock of the financial crisis. The king of all priorities is the performance of the funds. Everything that people do and think about must be devoted to fund performance. The second priority is sales performance, to attract our ability to attract new money or at least minimise redemptions. The third priority is not to have any compliance failure; we don't want any compliance problems.