The Fund’s investment process involves
Step 1:
Eliminating companies with potential accounting tunneling FRAUD and misgovernance risk prevalent in Asian companies with unusual related-party transactions which escape the detection by western-based financial tools and techniques, based on our proprietary fact-based forward-looking fraud detection system that we are grateful to have the opportunity to be invited to present to the top management of the Singapore financial regulator;
Step 2:
Analyzing the business model for QUALITY, including its resiliency to maintain profitability and protect market positions through up/downturns in the economy and to allow the companies to better manage rapid, sometimes disruptive, technological change;
- Strong leading market positions with proven records across business cycles as this enhances pricing power and creates the foundation for sustainable good profitability, as well as an attractive position in the value chain without being dependent on specific suppliers or customers;
- Continuous innovation and R&D to achieve and ensure strong market positions, create new categories of growth and profitability over time; Long runway and addressable market to compound growth from solving pressing problems for their customers;
- Exposure to service and after-market sales to improve the understanding of customer needs, build customer loyalty, and also offers attractive profitability, additional growth opportunities and increased product penetration;
- Prudent stewardship and allocation of capital; Strong balance sheet and robust cash flow generation that can be used for reinvestment into the business, for example in R&D and market expansion, to capture attractive opportunities, as well as steady cash distribution to the investor;
- We are watchful for longer-term fundamental changes, as opposed to reacting to short-term news “catalysts” which could be manipulated to create buzz around a stock, monitoring the ratio of the sales contribution from new products/ services and markets/ customers
Some of the unconventional but intuitive metrics we employ include;
- Still staying hungry or contented/conservative/complacent ( 小 富 即 安 )? Sales contribution from new products/ services and markets/ customers
- Still scalable? Not stuck by sticky costs? Can business model overcome sticky super- variable overhead (SGA costs) to scale up? Selling, General and Administrative (SG&A) cost is thought by many Asian entrepreneurs to be a “fixed” or at least a “semi-fixed” cost but they had increased even faster than sales. Check whether SGA as % of Total Asset and SGA as % of Sales are declining despite rising sales.
- Still naive & over-confident? Gone through baptism of fire? Incremental EBIT per dollar of capex to assess the tipping point in mastering the learning curve to scale up
- Going global? % of overseas sales in replicating business model in overseas markets after commanding domestic market leadership, ideally at between 5 to 15% for tipping point
Step 3:
Selecting entrepreneurs and owner-operators with VALUES & PASSION for their business. This is seen through their thought leadership and value-add to the community whilst serving with integrity, and the corporate culture they build.
“You look at all the successful companies, what is the key? Their brainpower. The thinker, good management, good innovators… Successful CEOs are like gems you find on a beach. There are many pebbles, many beautifully colored ones, but they are all stones. Now and again, you will come across a real precious gem, a real emerald, pick it up, polish it. He must have a set of qualities that fits with the job, has energy, drive, ability to interact with people, ability to get people to work with him in a team.”
– Lee Kuan Yew, founding Prime Minister of modern Singapore, in Hard Truths to Keep Singapore Going
