Thursday, November 15, 2012

No-fee fund aims for 12% return

A friend who email this to me.

BT 20121114 HLAGGREGATE 262966
Working for free: The fund's founders - Mr Tok (left), Mr Wong (centre) and Mr Kong - and their friends and family will put $3 million into the fund. They target to raise $20 million in the first year. The trio say they won't collect salaries. - PHOTO: ARTHUR LEE
A FUND that aims to deliver 12 per cent a year and does not charge any management fees - that's what a new fund management firm is bringing to the market. It is an offering to the increasing number of accredited investors in Singapore who have yet to qualify as private banking customers, said founders of Aggregate Asset Management.
Many of these investors have holdings in unit trusts that have not been doing well, says Kevin Tok, one of the three founders.
Mr Tok, who has 20 years of experience in financial planning, says most of these clients are directed to unit trusts by their financial advisers after having gone through the six-step financial planning process.
"There aren't a lot of options out there for them. The boutique fund managers in Singapore don't actively market their service to this group of people," he says.
There's no way a typical client can retire well with a portfolio of unit trusts that charge very high fees, he says.
Unit-trust investors have to incur 3 to 5 per cent of sales charge and one to 2 per cent in annual management fees regardless of whether the funds make money or not. "If you leave your money there for five years, 10 per cent of the money disappears. And the value doesn't add up," points out Mr Tok, 43.
"The trick of (growing your savings for) retirement is to find something that's proven, that gives you an average of 8 to 10 per cent return a year instead of going round in circles looking for all sorts of strange products, like gold products, or trying to find something unproven to hit your 10 per cent," he says.
Value investing - buying of stocks with low multiples of earnings and cash flows, low price-to-net tangible assets, high dividend yields - is a proven process that generates good long-term returns, says Aggregate co-founder and its fund manager, Eric Kong, 44.
"We have no doubts that the value investing process can put our clients in good shape in the long term for retirement needs," he says. "We are putting our money where our mouths are."
Aggregate Value Fund, a small-cap Asia long only fund, will not have any sales charge and there will be no management fees. Mr Kong, and another founder and fund manager Wong Seak Eng, 33, say they will not be collecting any salaries. The firm will only charge the fund 20 per cent should it manage to increase its value above the initial $1 per unit subscription price. Performance review will be done every six months, and subsequent fees will only be charged if the fund exceeds its previous high, that is it has a high water mark in industry parlance.
The three founders and their friends and family will put $3 million into the fund. They target to raise $20 million in the first year. "We are not worried. We are not desperate because we know that this process is a good and sustainable process. Even if we have to (have) packet lunch everyday for the first two years, we will do it," says Mr Kong.
Office now is a $1,000 a month shared space in Bishan.
Says Mr Wong: "We are already mentally prepared that we are subsidising our investors in the sense that we will pay for the rental, air fares for company visits etc out of our own pockets. And under the new MAS (Monetary Authority of Singapore) regime for fund management firms, we have to maintain a capital of $250,000 at all time. We are mentally and financially prepared for that.
"We may have to wait two, three, or five years. It depends on the market cycle. But we will definitely work hard to deliver for the investors so that we will also be rewarded."
As noted by Mr Kong, the value investing process as adopted by various value funds has shown impressive records. Yeoman Capital, where Mr Kong and Mr Wong were from before striking out on their own, has returned a 12.7 per cent compounded annually net of all fees in Singapore dollar terms over about 15 years to September 2012.
Target Asset Management returned 17.6 per cent a year between 1996 and November 2010. Its fund manager liquidated the fund as it had gotten too big. A new value fund was started in June 2011, and it has returned 3.99 per cent since inception to end-October in difficult market conditions. It outperformed the MSCI Asia ex-Japan Index by more than 10 percentage points.
Aggregate, says Mr Kong, will generate stock ideas in a quantitative way. Then it will add a layer of analysis before selecting the stocks for its portfolio. An independent search process is very important in generating stock ideas. "You have to be very impartial in the search."
He developed his search process, scoring companies on the strength of their balance sheets, earnings record, and dividends record. "There are more than 10,000 stocks out there. (This quantitative screening) gives you a very fast way of getting to the undervaluation when the news are not out yet," he says.
Mr Kong's background is in computer programming, having worked in the Ministry of Defence in operations research "where we used algorithms and computer models to solve real-life problems".
But investment is his passion. And so he took the Chartered Financial Analysis exams some 10 years ago. He paved his entry to the fund management industry by first joining the banks, Citi and UOB. He then offered to work for free in a local fund management firm in order to gain fund management experience. But he was rejected because the firm wanted a CFA charterholder. Mr Kong wasn't one yet because he didn't have the necessary work experience.
He eventually joined Yeoman in 2002 and was made a partner a few years later. He left the firm in end-2009 to spend time with his home-schooled elder daughter.
According to Mr Kong, since he started tracking his personal portfolio, the return was 17.8 per cent a year between May 2005 and June 2012. Currently, 30 per cent of his portfolio is in Hong Kong, 20 per cent each in Singapore and Malaysia, and the rest in Thailand and Japan.
Aggregate will take a very diversified approach, with each stock making up not more than 2 per cent of its portfolio in a steady state.
"Warren Buffett advocates the focus approach," says Mr Kong. "But we find that when you bring your holding up to 5, 10, 20 per cent of your portfolio, you'll make more behavioural mistakes. You start to get emotionally attached to the stock, you fall in love with the stock. That is dangerous because it can really affect your judgment."
Also, Mr Buffett has a gift. He is able to read business very accurately. Not everyone has that kind of gift, notes Mr Kong. Aggregate prefers a more conservative and boring approach. "We concentrate on what's currently on hand."
Mr Wong chips in: "We don't make any unnecessary projections into the future."
Aggregate would rather look at the track record of companies, going as far back as 10, 20 years. Typically, Mr Kong says, the fund will hold its stocks for about five years.
Mr Kong reckons now is a good time to start a fund because valuations for equities are not high. He sees great value in Hong Kong. Some stocks there are yielding up to 10 per cent. He names Oriental Watch, Lai Fung and Herald as examples of undervalued stocks in Hong Kong; New Hoong Fatt in Malaysia and MK Real Estate in Thailand.
On the marketing of the fund, Mr Tok says the plan is to put Aggregate Value Fund on the iFast platform for products that cater to high net worth individuals.
The minimum subscription of the fund is $150,000. There is a one-off $2,000 subscription fee to cover the administrative, legal and compliance costs. There is a 5 per cent early-exit charge within the first three years. This however will be waived for investors who may want to withdraw less than 5 per cent from the fund every year as income.
DBS Bank is the fund's custodian, Ernst & Young its auditor, and Rajah & Tann its legal advisers. Crowe Horwath First Trust Fund Services is the fund administrator.
Besides Aggregate, APS Alpha fund also does not charge management fees. Another boutique fund manager, Lumiere Capital, also launched its Lumiere Value Fund in 2007 without management fees. But it started charging one per cent management fees at end-2010.

29 comments:

Fat88Trader said...

What I like about this fund is that charges are based on performance.

They put in their own money.

They are experienced.

But, it's not for short term investment, they hold their stocks for average of 5 years and penalty for early withdrawal which is quite common.

coconut said...

is it justify to put money into their people hands for only 12% return?

don't get me wrong, 12% is a very good number, but it is an unknown or what is the chances of getting it vs losses?

is it justify the risk?



coconut said...

and if i'm not reading wrongly, you win only 80% and if you lose, you lose 100%!

thats worst than casino!

coconut said...

ok my mistake, its not 80-100 win lost ratio.

coconut said...

so these guys can only eat bread everyday if they cannot make money?

sounds more like it.

Fat88Trader said...

Hahaha, as I said, they put in their own money, they too will lose 100% and take only 20% of the profit, that's quite fair, much better than any unit trust that charge fees even when they lose money. Yet still so many fools put their money with these so call professional fund managers. I was once a fool!

Fat88Trader said...

These guys must be quite confident of their skill, knowledge and ability to perform, they kept their expenses low with a small office and of course eat bread in the beginning.

coconut said...

these are long only equity fund right?

given the current market conditions, of cos one is to expect at least 5-7% return on capital, if the market (price)stay as it is, thats a given.

so is it worth the risk for another 5% (in theory) return letting these guys play with your money?

don't forget, if the market tank, everybody lose money.

coconut said...

i think the best "low risk high returns" investment right now are the money in ones CPF account!

and its meant for retirement purpose, suitable for many people.

4% (thats what i understand) with guarantee principle.

coconut said...

after all being said, i just don't trust these guys from the look of their smile haha.

they should look serious when taken those picture.

coconut said...

lets put ourself in their shoe,

they probably think there is a bull market on the horizon. and they can bring in 10 million under their care.

we (they) will be able to make 1.2 million every year return projected, of which we will pocket 240k, divided by 3, thats 80k/person less expenses.

that doesn't sound like a good deal given the responsibility we have to carry.

there must have some other motivation (like interest, learning etc) behind them.

Fat88Trader said...

Yes, they are only long equity fund, find good under value stocks and then hold tight, averaging 5 years, Buffett strategy, and spend money visiting these companies to interview the directors. But of course there are directors that con them into believing the company's good performance, look at some of those S chips, have to f@#k those analyst that recomend them.

KAW said...

Hi coconut, cpf board only pays 2.5% for ordinary account and 4% for special account (which is reserved for ah gong to take if you owe them money). Both return is below current inflation. Not forgetting the ever increasing minimum sum requirement as we get 'nearer' to ever increasing retirement age too...

KAW said...

So that make cpf board one of the worse funds manager on planet earth...hahaha!

Fat88Trader said...

Agree with you Kaw, where did our CPF monies go, GIC or Temasek? And boasting that the returns are in double digit, with majority of the gains from monopolies held by government owned companies while suffering huge losses investing overseas. They are using our funds and paying us peanuts.

CPF should at least pay us 1% above Prime Rate, that's what the Banks are charging their best clients.

hyom hyom said...

Hi Fat88Trader,

I stumbled onto your blog while searching for information about this group of fund managers who are willing to work for free.

Interesting to come across a blogger who is a full-time trader with decades of real trading experience behind him. Will spend some time reading your blog.

Fat88Trader said...

Thank you for your support and welcome your comment, hyom hyom and hope you gain from the reading.

Ugly Little Monsters said...

Hi Fat88Trader,

Thanks for posting this up.
Interesting comments!

Our experience tells us that value investing can earn a +5% to +10% spread over the index over longer horizons. This has been proven by the results of existing value investors, academic studies (check out Fama and French) and our track record.

All the best in your trading!

Kong
Aggregate Asset Management

hyom hyom said...

Hi Fat88Trader,

I have spent some time reading through your blog and the comments (coconut is the most prolific contributor). From what I understand, you were a floor trader in your younger days. Your posts on HFT killing the former floor traders remind me of the documentary "Floored". Maybe you have already watched it. If not, I am sure someone of your background will love it.

http://www.youtube.com/watch?v=tCcxr-fyF4Q&

Since humans can never match the speed of machines, traders who rely on techniques like scalping will probably lose with HFT. One thing that puzzles me is why do successful past floor traders find it so difficult to move on to longer-term trading? Basic trading principles which you have shared like "Let your profits run, cut your losses" apply for both long-term and short-term trading. Since they have a successful track record, the basic principles should already been ingrained in them. The right psychology should also be installed, otherwise they will not even survive in the earlier days. Why can't they continue to be successful?

By the way, I come from a different world mainly in stocks with zero experience in Futures and Forex. Hope you pardon my ignorance in matters relating to Futures. It is impossible for people like me with a full-time job and young kids to trade frequently. Hence, I have to stick to end-of-day trading and longer-term investing in stocks.

hyom hyom said...

Hi Kong,

The Business Times article on your fund caught my attention. To be honest, fund managers do not give people good impression given that most of them underperform the benchmark but still get paid very well because of the fees they charge for asset management. Naturally, people like you deserve respect for not taking any asset management fees. I wish you every success in your new fund.

Eric Kong said...

Hi Hyom Hyom,

Yes, you are right - most fund managers underperform the benchmark - since they form the bulk of the buying/selling - so they are the average. Add in fees and transactions - so they underperform ;)

But people got a choice - they still park their money - although they have been disappointed. So who can blame the fund managers for continuing their fee structure - if it works, don't change it.

We are trying to change it - to align client interest - at our own expense - but we are up against the "norm". So in the end, the market will dictate the winners - they will vote with their money what kind of fee structure they want. It is going to be quite impossible to go against the grain.

Thank you for your kind words.

Kong

coconut said...

wow missed the weekend fun.

to Kong-Aggregate Asset Management, my apology to you for trying to be funny.

i'm a nobody as far as investing is concern, so please discard my comments.

coconut said...

as far as CPF is concerned, the key point is "low risk" vs return (relatively)

one cannot just look at return alone to justify his investment, or am i missing something?

Fat88Trader said...

Yes, Hyom, human can never match the speed of the machines, that's where short term traders like scalpers and spread traders find it so difficult to survive. Majority of the successful floor traders were very short term traders, hardly hold any position overnight, their edge was in the speed of execution, in entering a trade or cutting losses, leaning on big orders and having a feel of the market rhythm.

These edges were lost when we went electronic. I could make average of 20 trading days out of 22 on the floor, that gave me a lot of confidence. I was still able to do well until the HFT came in full force, I became the sitting duck and being the hunted. Their speed allow them to put in deceptive orders and manipulate the market with impunity having big capital support behind them. The cost of electronic trading has gone up compared to the floor days, while the HFTs have volume rebates from the Exchanges, this is another reason.

The Exchanges have extended trading hours so that they can earn more commission, it benefits the machine, they don't need any rest.

Of course, there are still 10% to 20% of the floor traders able to adapt and survive, but the days of the big money are gone for most. It's tiring competing with the machines for crumbs. The pyschological baggage of the floor traders make most unable to adapt in an environment where the edge has been lost despite their past experiences.

Stick to what you are doing, Hyom, have a full time job and have a longer view of the market and ignore the short term noise. If you are able to return 10% from your savings and compound them, that will be fantastic.

Until such time whereby you are comfortable, ready and have the passion for full time trading, then you may consider it.

Fat88Trader said...

Hi Kong,

Thank you for coming in. I would like to invite you, Hyom or any of the reader here to join our trading community, AFACT to network as well as sharing your knowledge and experience with our members.

I can arrange any of your team member to give a talk to our members.

hyom hyom said...

Hi Fat88Trader,

It is a compliment to be invited to your trading community by someone of your background. However, employers are suspicious of workers who trade the financial markets. Are they distracted during work hours? Do they monitor markets during work hours? It is for this reason that I never talk about the financial markets during lunch time. If colleagues ask whether I invest in any financial markets, I just say I have plenty of experience losing money which is 100% truth, then shut up.

I am perfectly happy sharing my experience which is nothing compared to yours. I hope you will not be unhappy if my preference is to share my knowledge and experience online as hyom without showing my real face.

hyom hyom said...


We are trying to change it - to align client interest - at our own expense - but we are up against the "norm". So in the end, the market will dictate the winners - they will vote with their money what kind of fee structure they want. It is going to be quite impossible to go against the grain.


I am sure the investing public will be better served if more fund managers adopt your incentive structure. Unfortunately, there is only so much money you can absorb before performance starts to deteriorate. Since fund managers like you are paid solely based on performance, you will have to close the gate if the market decides to vote their money overwhelmingly for you.

Hope you find the right kind of investors who understand your style of investing since there is only so much you can absorb.

hyom hyom said...

Hi Fat88Trader,

Thanks for your clear explanation on why floor traders are not able to cope with the onslaught of the machines.

Having an edge in a game provides the player with the odds in his favor to win. Once the edge is lost, the odds are against him. The more he plays, the more he loses. The more he plays, the surer he will lose. The mathematical law of large numbers guarantees his loss if he insists on playing a game which he does not have a winning edge. No amount of money management and discipline can protect a trader from losing if he does not have an edge. He can do the right things like cutting losses with discipline but the end result is that he will die a death of a thousand cuts. I hope these ex floor traders who used to be so successful will realize by the hundredth cut that they either stop playing or adopt a new strategy to tilt the favor back to their side.

Fat88Trader said...

Hi Hyom,

Understand your situation, definitely all employers would want their employees to focus on their job during working hours. No problem for not joining the trading community.

Trading shares allow you to invest for the long term, only consider blue chip stocks that pay dividends and you don't have to keep checking the prices everyday.