Cheah Cheng Hye, the founder of Value Partners, was a recent guest on Star Media’s Power Talks series. The event was held in Malaysia. He gave a speech about some of the lessons he has learnt over the course of his ~46 year career as both a journalist and an investment manager. He also answered audience questions on a wide range of topics. The entire event lasted about 1.5 hours and it really is worth watching. The video is currently available from Star’s website (the link is here) but I have also included my own transcript / notes below. Any transcription mistakes are my own.

Just for context, Value Partners was founded in 1993 and is currently one of Asia’s largest listed, independent asset managers with ~US$14.4bn under management. Their investment strategies cover absolute return long-biased, fixed income, multi asset, alternative, relative return and thematic for both institutional and individual clients in Asia Pacific, Europe and the United States. They also offer exchange-traded funds under the Value ETF brand.

Cheah Cheng Hye was one of the stand-out investors profiled in the book “Asia’s Investment Prophets” by Claire Barnes back in 1995. In 2010, he became the first Asian to deliver a keynote speech at the Annual Graham & Dodd Breakfast Seminar at Columbia Business School. The title of that talk was “Value Investing: Making it work in China and Asia” and the link to the video is here.

Speech:

• He actually prepared two presentations – first, his thoughts on what works and doesn’t work in building a successful career and second, the investment lessons he has learnt over the years.
• Started with some personal history: he was born (and grew up) in Penang. He left Malaysia in 1974 but still comes back regularly to visit family. He was a journalist for 17 years. Got a late start as a fund manager (he was 36). Founded Value Partners in 1993 with backing from the Yeh family. Currently owns ~25% of the parent company. The first US$5m in assets under management came from friends and relatives. Built his reputation as a specialist in small and mid-cap stocks, at a time when they were “despised” by institutional investors.
• Likened his experience of building Value Partners to being both the cook in the kitchen and the customer-facing restaurant manager. Being a good investor isn’t enough,  you also need to be a good entrepreneur. The two often require very different skill sets. Fundraising is especially tough.
• Believes that 50% of his overall success can be attributed to luck – simply being at the right place at the right time. First, he started working in 1971. At the time, unemployment was high and many people in Malaysia were desperately poor. He didn’t know it then, but that period was the start of the economic miracle that eventually transformed Malaysia and the rest of Southeast Asia. Second, his investing career started in 1989, which was the bottom of the market right after the Tienanmen massacre. In his own words, there was nowhere to go but up.
• Luck aside, there are perhaps three distinguishing factors that explain his success:
  • Character: He became an expert in learning how to learn (he says he’s a reading addict). Also helps to be a self-starter and have an adventurous, risk-taking spirit. His generation had little in the way of safety nets. Believes that your name is your personal brand. He is very conscious about how he allocates his time and is focused on continuous self-improvement.
  • Training: His background as a journalist allowed him to put events in a historical, social and political context. At the time, this was a big advantage versus fund managers who could only look at things from a financial perspective. He says that an increasingly competitive society has made young people today put too much of an emphasis on hard skills versus soft skills (communication skills, courage, imagination). In the investing world, one also needs to be a contrarian and dig deeper for an edge.
  • Values: He prides himself on his extreme self-discipline. Feels that he is more demanding on himself than he is on others but this allows him to keep getting better over time. He also tries not to have an ego. His error rate is about 1/3 – not a perfect score by any means, but it has been sufficient over time.
• In terms of building a business, he says that the corporate culture at Value Partners has been the biggest factor in the firm’s overall success. Many senior people at the firm joined after completing university and have never left. All employees have to sign a promise to the company to be honest, take pride in their work without a personal ego, commit to a lifetime of self-improvement and put the client first. The firm also has a no-blame environment – they don’t punish mistakes, just bad attitudes. He has also shared the success and many of his employees have been some of the highest tax payers in Hong Kong over the years.
• Other key skill sets for entrepreneurs in the asset management business are fundraising (marketing & sales) and hiring and building an effective team.
• He then went through the second presentation he prepared. As an investor, he said he has learnt five important lessons over time:
  • Invest based on common sense (his model is right business, right people, right price).
  • Be a long term investor and avoid short term trading.
    • Over the long term, value outperforms other strategies but there can often be periods of significant underperformance so one needs to be patient.
  • Have a bias toward or preference for high dividend stocks.
    • These can often be 20-30% of total portfolio returns.
  • Be a contrarian.
    • This requires courage, fundamental knowledge and patience.
    • Always remember to ask whether your counterparty knows more than you.
  • Have strength of character.
    • More than anything, one needs to have the “killer instinct” to step up and make the big bets during periods of opportunity (they don’t come that often).
• He says there are lots of skills required to be a successful commercial fund investor. These include origination, research, decision making, transaction structuring, execution, monitoring the investment, exit strategy and a macro / portfolio overlay.
  • Figure out what your strengths and weaknesses are and build a team around it.

Q&A session:

• On the recent tightening of China’s capital flows:
  • Says tightening is due to worries about the currency but doesn’t think the situation is a serious one. Key to the puzzle is what the dollar is going to do. He sees the weakening of the US dollar since the start of 2017 as good news for China, Malaysia and the US.
• On the China / US relationship:
  • His view on this topic is shaped by other experts he has talked to. He thinks that while the two countries may not like each other, they do need each other. Big reason is that the US has a very low savings rate and needs to import capital while China has the biggest pool of savings globally. From China’s perspective, they also need continuing stability to see through their vision of doubling per capital income by 2020.
• On Chinese capital inflows into Malaysia:
  • He thinks there is no single source of or theme relating to Chinese investment in Malaysia. It’s more an aggregate of micro / individual decisions. Time will tell regarding China’s ultimate intentions towards Malaysia. For now, he thinks one of China’s biggest problems is overcapacity across many industries so they are keen to invest in and sell to other markets (including Malaysia).
• On the Malaysian market:
  • Biggest factor is the currency. Will only invest in Malaysia if he believes the currency won’t hurt them. The ringgit has under-performed over the last three years and US dollar denominated investors have lost ~25% via movements in the currency alone. His personal view is that the ringgit has bottomed out, along with crude oil prices. In addition, palm oil prices and perception of the political situation has also stabilised. Recent weakening of the US dollar will also help. Believes the “correct” range for the ringgit versus the dollar is probably between 3.80 and 4.10.
  • Previously only invested in the Malaysian palm oil sector, but doesn’t see Malaysia as just a commodity player anymore. Government reforms are slowly improving. Starting to look at companies in a wider range of sectors.
• On his best and worst investment:
  • Wanted to discuss his worst investment first to get it out of the way. The company was Oasis Hong Kong Airlines, founded by Reverend Raymond Lee and his wife Priscilla. Vision was to build a low-cost airline similar to Air Asia. He put in US$30m. The airline went bust in 6 months after running into all sorts of problems. He made the investment at the height of his own arrogance, around the time Value Partners was being listed and when he was the largest individual taxpayer in Hong Kong. Another backer had actually promised him a US$10m personal guarantee, so he managed to get some money back.
  • Best investment was a ~15% stake in BYD pre-Buffett. He went to see Chairman Wang when the company was first listed. BYD had started out in batteries and then later diversified into cars. Everyone thought he would fail but he felt management knew what it was doing.
  • Another success was Guomei – attended a management meeting alongside other big fund managers. Company was a distributor of electric appliances. Was very quickly impressed by what he saw so he stepped out in the middle of the meeting to “go to the bathroom” – actually put in a buy order ahead of the other fund managers. Said it highlighted the importance of being fast and alert.
• On the topic of poor corporate governance in Malaysia:
  • His view is that one has to accept that life is sometimes unfair. He started his career investing in HK small and mid caps, so he is very familiar with the typical range of corporate governance issues facing investors. His own approach is that you’ve got to play the hand you are dealt. There are enough good companies out there, so don’t spend your time focusing on the bad ones.
• On cash as a hedge:
  • Doesn’t really believe in utilising cash as a hedge although he does have some gold in his portfolio for that purpose. One cannot live in fear of the next financial crisis – he’s lived through enough of them by now. Having a long term and value-oriented approach is important. He tries to make as much as he can in the “summers” of equity markets so that when the “winters” come he can get through it.
• On predictions for the next crisis:
  • No idea when it will happen, but feels that the most likely source will be the US or Europe. Thinks the origin is likely to be political in nature (says politics has been the biggest driver of financial markets since 2008). Many politicians in the West are simply pushing the can down the road rather than solving problems. Over time, many societies have become very fragmented and don’t really believe in their political leaders. Western civilisation has reached a very different stage in terms of the mismatch between expectations and reality.
• On Malaysia from a macro perspective:
  • Country needs to be careful they don’t get caught in the middle income trap. Government and policy makers need to strike the right balance – they have to protect their citizens and industries, but not at the risk of reduced global competitiveness. Compared it to the situation in Hong Kong, where many local people feel they have no stake or participation in economic growth. This outlook is in turn a big driver of social instability.
• On his vision for Value Partners:
  • Sees a golden opportunity for Value Partners to become the Asian version of Fidelity. World’s biggest pool of savings is currently in China and people there want good quality financial products. China property bubbles happen because the money has to go somewhere. Money needs to be managed and invested properly.
• On succession planning:
  • His children are still too young to get involved in the business. His eldest son wants to become a writer. Value Partners is a listed, professionally run company. Recently hired a new CEO (Au King Lun). He hopes that can ramp down from working 7 days a week currently to 4 days a week over time.
• On competition vs. other global asset managers:
  • China opportunity is a big one but the challenge for all asset managers is to increase AUM without hurting performance. He feels Value Partners can still comfortably double their assets under management base from here but at some point it will probably impact performance. There is also a lot of fee pressure in China – people want performance but are unwilling to pay much for it. His team has been looking into and experimenting with smart beta, robo advisory services etc. Challenge is how to go from a boutique to a high quality, mass manufacturing product.
• His advice for young professionals today:
  • He sees a very different set of challenges for younger generations versus those for his own. Does not recommend jobs in the financial services industry – feels there is currently an oversupply of talent and that people entering today are probably looking backwards. Future returns unlikely to be as attractive as they were in the past. Thinks the rise of artificial intelligence and robotics will have a meaningful impact on society and what jobs are created. Sees interesting career and investment opportunities in technology, healthcare and education.
• On reading and other hobbies:
  • Still reads a lot. When he was growing up in Malaysia, he read a lot about chess and history. He is also a game fanatic, in particular chess and blackjack. Learnt how to count cards when he first came to Hong Kong. He clarified that he is a systems player and not a gambler.