Lynas Capital (Lynas) is an independent fund manager based in Hong Kong. The firm was established by David Devine in 2002. He initially managed a private pilot fund for two years before launching the Lynas Asia Fund. Prior to founding Lynas, Devine was with Overlook Investments for ten years. For more on Overlook, you can see my post here.
Devine’s twenty five years of experience managing small cap Asian equity funds and visiting companies in the region have shaped the firm’s investment principles, which are broadly outlined on the Lynas website and worth a read. They are basically bottom-up, contrarian investors who look for a combination of value, growth and quality (more on that below).
The outlined principles are interesting to me for two reasons. First, they are shaped by a primary focus on under-researched small and mid-cap stocks, which is the space I think most individual investors ought to play in (to the extent one wants to be an active investor). Second, what struck me reading them was that they seem to be fairly rule (or perhaps checklist) driven. Using data and formulas to remove emotions from how you invest can allow for a more disciplined and repeatable process, which will probably lead to better results.
Anyway, below are the highlights and my takeaways from the write-up of their principles (please note that these are primarily for my own reference and that some parts have been paraphrased):
- Value is essential to the way they invest but one can use a variety of metrics to determine what is good value (e.g. price to earnings, price to NAV, price to sales, cash yield)
- Two examples:
- Price to sales: useful for companies that are recovering from a decline in margins. For example, a company whose market cap is ~0.5x of annual sales may be good value, regardless of its P/E, if its margins are recovering
- Cash yield: preference for dividend payers. Better aligns the interest of minority shareholders with the business owner. Profit growth is often not enough, but when it translates into cash dividend growth this ensures it is reflected in share price performance
- Common sources of under-valuation include: companies in industries that are out of favour, where under-valuation is dismissed as no-growth valuation and opportunities that result from time arbitrage (a disconnect between short and long term perspectives on a company)
- They do no invest in ex-growth value stocks
- Investing in Asian companies is risky so they expect strong growth to compensate for that risk
- In the case where a mistake is made, companies with strong growth characteristics also often have the necessary liquidity to allow for a swift exit and therefore minimise losses
- Look for management teams with “rational and achievable” growth plans over the medium-term
- They only like to buy cyclical companies that are at long term troughs and when margins, capex and market expectations have already collapsed
- Five pillars: growth, industry insight & vision, cost oversight, focus and honesty
- Growth: they like management teams who are committed to growth (see above)
- Industry insight & vision: managers who are constantly thinking about their business, understand their industry and know their competitors (“respecting the good ones, squeezing the weak”)
- Cost controllers / minimisers: companies that operate out of cheap premises, pay staff for performance, avoid expensive but low value-add corporate sponsorships etc. Other examples:
- New investments undertaken with limited budget first and willingness to cut quickly when performance doesn’t meet targets
- Costs reviewed and reduced throughout the business cycle – maximise profits during peaks, avoid financial difficulties during troughs
- Cost reduction not with the aim of milking customers but rather reducing prices in order to keep the pressure on competitors
- Focus: look for companies that stick to their core business and strategy – very few non-core minority investments create value or provide an economic return (this is probably very familiar to most Asia-focused investors)
- Honesty: look for businesses that maintain dividends in downturns, do not trade assets with their controlling shareholders and have recently been backed with fresh capital by their owners (I would also add looking at the history of equity / share issuances to this list)
- One thing that was interesting to me was that they do not particularly seek out high ROE companies – the rationale being you typically pay a high price for these and they are often vulnerable to competition, industry changes etc.