Reflections on 2002 and Prospects for the Coming Year
Wong Kok Hoi is the Managing Director and Chief Investment
Officer of APS Asset Management based in Singapore. He has
been the lead manager of the APS Asia Pacific Hedge Fund since
its launch in April 2002. Prior to establishing APS, Mr. Wong
was employed by Citibank and the GIC in Singapore. He has
20 years of investment experience. The APS Asia Pacific Hedge
Fund is an Asia including Japan, equity long/short fund. It
was up 20.26% for the year 2002.
Interview with Wong Kok Hoi
- How did the marketing efforts go at the Goldman Sachs
conference in Tokyo, and what are the marketing plans for
The trip to the Goldman conference in Tokyo was fruitful.
We had more than 10 "one-on-one" meetings with
prospective investors. Two fund-of-funds are now looking
seriously at investing in our fund. Currently, the fund
size is US$10 million. Now that we have built a track-record
we are planning a roadshow to the States and Europe early
next year. We believe we should meet with some success
because our performance has been strong since its inception
in April 2002, up 20%, making it one of the best funds
this year. This is despite the volatility and uncertainties
in the Asian markets.
- What are the current risks for your portfolio if the
United States proceeds with military action in Iraq in the
first quarter of 2003? How are you addressing these issues
The APS Asia Pacific Hedge Fund is very much a market-neutral
fund, i.e. with low net exposure to the market. We create
our alphas from pure stock selection rather than market-directional
bets. Therefore, events such as a war in Iraq or terrorists
attacks don't affect our fund negatively. We will make
money for as long as our stock-picking skills continue
to be sharp. This comes from diligent work into company
fundamental research and valuation work. This has been
our competitive edge all these years.
The annualised standard deviation for the fund is
quite high at 20% per annum since the fund was launched
in April 2002. Is this volatility a concern or are you
marketing the fund as a high risk/return product?
I am aware that the investment community in general has
a fascination with standard deviation as a measure of
risk. At APS we take a different view. We do not see volatility
in isolation; we see it together with mean return. In
our view, a fund with a minus 5% return with a standard
deviation of 5% is a riskier investment than a fund with
a mean return of 20% with a standard deviation of 20%,
regardless of the angle from which you look at it. I will
bet my house on the later fund anytime. We at APS believe
that we reduce the risk of the fund by undertaking careful
company research and doing detailed valuation work, and
by so doing we aim to push the mean return of the fund
as far to the right as possible. We don't think by tweaking
the standard deviation you are actually reducing portfolio
risk. I wish investing was as simple as we studied in
textbooks. Since we launched our fund, it has not broken
below par value. You can't say that our fund is risky
when you don't lose money, can you? We think you reduce
your fund risk by not making big bets especially with
your short positions and not by guessing the market direction.
Hence, we never thought, not even for a moment, that we
are running a high risk/return fund.
- You made very healthy returns in going short Japanese
banks, is this a trade that you still view as having profit
Firstly, we don't take trading positions, which is unique
for long/short hedge funds. All our positions are established
for the long-term. Many Japanese banks have negative equity
so although we had made a killing by shorting them we
don't think it is time to square our positions yet. I
need to see some signs that the economy is about to turn
the corner before I square my positions.
- What other sectors are you finding interesting in
Japan for both the long and short portfolios?
Selective stocks in the drug, video game, electronic,
auto and consumer finance sectors make interesting long
candidates and the majority of stocks in the remaining
sectors are excellent short candidates. In a nutshell,
I think Japan is a fertile ground for short candidates.
What countries and sectors in your mandate are you
most optimistic about for 2003?
We are bullish on the manufacturing, consumer finance,
drug, and consumer sectors. We have no preference for
any country. We are particularly bearish on banks, property,
telecommunications and government-run companies.
- How are you finding the current conditions to borrow
in Korea? Are you shorting individual names in Taiwan through
Currently, we do not have short positions in either Taiwan
or Korea. However, we are currently looking at some Korean
stocks. Swaps are expensive and we eschew paying high
- You also run an extensive relative-value book in the
fund. What is the relationship of this book with the investment
style for the rest of the fund and the firm?
That is correct. About 60% of our positions within the
fund are correlated in one way or another. We have, for
instance, a pair between Japanese banks and Korean credit
card companies such as LG Card. We believe that over the
long run, credit-card companies are certainly more profitable
than Japanese banks. Korean credit-card companies are
making a spread of about 13-14% versus the 2-3% that banks
are struggling to make. Long-run sustainable ROEs of LG
Card for instance is expected to be above 30% as against
Japanese banks making negative or low single-digit ROEs.
LG Card is selling at a forward PE of about 4x and price-to-book
of close to 1x.
This is definitely a classic example of what we do at
APS: investing in companies with strong structural and
competitive advantages that will last for at least 3-5
years - and buying them when they are still cheap. We
are prepared to hold these stocks long-term and "weather"
the market gyrations in between. We will then short stocks
that suffer structural weaknesses and are overvalued.
Once the positions are taken, we will keep a very close
watch on any possible changes in the fundamentals of these
What are your views on exposure (both net and gross)
going into January 2003?
Initially when we first started out the fund, we wanted
to leverage the fund quite substantially. However, with
the benefit of our experience so far, we found out that
this was not possible. To date, our gross and net exposures
have been less than 220% and 15%, respectively. Going forward,
our net exposure will decline even further. We really want
to generate alpha through our stock picking skills and nothing
Can you discuss your current views on Venture Manufacturing
(Singapore) and Samsung Electronics (South Korea), the
two biggest holdings in the fund at the end of November?
Venture Manufacturing remains the most profitable contract
manufacturer in the world today. The company's first-half
results, announced in September 2002, showed that the company
continued to surprise investors on the upside. Its net profits
were up not 5% or 10% but 35% in times when other contract
manufacturers are bleeding. Credit must go to senior management.
We have invested in and tracked the company for 7 years
now; and we think management is first class. We are not
selling yet because the company will continue to benefit
from the accelerating outsourcing trend.
Samsung Electronics is a story that most people are familiar
with. It is the world leader in DRAMs and TFT-LCD, and
is rapidly increasing global market share in the mobile
handset business. The company is immensely profitable
with free cashflow that alone is expected to be US$5.5bn
this year (pre-tax profits exceeding US$12bn). With so
much cash, the company is able to invest in building fabs
and R&D that pulls it ahead in the technological race,
while its competitors lag behind. The amazing thing is
that the stock is not priced at 20-25x PE as you might
expect, but is priced at about 8x PE! We think that the
company will be a very powerful and dominant technology
company this decade.
APS Asset Management
+65 6333 8600