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Hedge Fund Interview with Wallace Lo, Fund Manager for Guoyuan Global Opportunities Fund

VisionGain Capital (Cayman) Limited and VisionGain Capital Limited (collectively “VisionGain Capital”) were founded in 2007 and their investment team has extensive experience and knowledge in investing. Backed by the research and corporate network of its strategic investor and business partners, VisionGain Capital aims to combine the discipline of investment management with its global value chain investment approach to capture the investment opportunities globally.

VisionGain Capital has recently teamed up with Messrs. Yuen Tin Fan, Francis, and Wallace Lo and established a joint venture called Global Value Chain Investment Corporation. Under this joint venture, a new fund with similar investment objective and strategy as the Guoyuan Global Opportunities Fund will be launched in August 2014. The new fund will have US$50 million as seed capital.
  1. Guoyuan Global Opportunities Fund focuses on investing in equity and equity-related securities with a global mandate. Please share with our readers a bit of history about your fund and the kind of investment strategies you employ.  
  2. The fund was launched in February 2010 and has been outperforming peers and the underlying markets by a wide margin in the recent two years.  

    The fund was initially focused on companies with China economic exposure regardless of where the companies are listed or based. It was practically a Greater China-concept fund. However, that strategy did not work as well as expected. In 2012, we started to rethink our investment philosophy with regard to the global investing environment. We concluded that investing in a single economy would be challenging (for the reasons discussed below). As such, we started to gradually broaden our investment universe and build our global investing capabilities. In 2013, we formally changed the investment mandate from China to global equity. The fund was also renamed as Guoyuan Global Opportunities Fund from Guoyuan Global China Opportunities Fund.    

  3. As we understand, the fund was previously known as the Guoyuan Global China Opportunities Fund and had considerable exposure to China. What factors were behind this decision to switch to a more global mandate? 
  4. Investing in a single economy is increasingly challenging, for two reasons. Firstly, no matter how strong an economy is, it does have ups and downs. It is very difficult, if not impossible, to sustainably outperform the underlying market across each and every economic cycle. Even the best fund managers would find it hard to achieve that. Secondly, the global economy is highly integrated with players in a single industry spreading across the globe. Consumers also have global choice of products nowadays. Investing in a single market or economy will effectively limit the fund from owning the most valuable names within the global value chain. These are the reasons for switching our mandate from Greater China to global.   

  5. Building on the above, given the expertise of your investment team in Chinese equities, do you foresee an increase in your allocations towards China going forward? 
  6. Under the new mandate, any market allocation is a result of stock selection. We look across the global value chain of an industry. If we find a company having great investment value, we will not miss the chance no matter where the company is located, be it in China or elsewhere. Therefore, we have not given up the Greater China market.

    Furthermore, I believe our expertise is not limited to just China equities. We are increasingly a global equity house in certain industries such as new energy, new media, new consumers and new technology.  

  7. With regard to your investment philosophy, could you tell us about your horizontal stock selection approach and how it helps in driving superior returns for your fund? In addition, what is the rough breakdown of your asset allocations across the various industry sectors? 
  8. To explain the horizontal stock selection approach, it will be helpful to use the smartphone industry as an illustrative example.

    Simply take a world map and spread it on the table. Decompose your smartphone into different components. Map those components in the world map according to where they are made or designed, and then you will see a global value chain of the smartphone industry across the map. Based on this mapping, we look into each segment and individual players in the value chain. We compare them against peers, analyse the supplier-customer relationships, understand the demand and supply dynamics, study the cost structure etc. By doing so, we are able to comprehend the industry dynamics and competition landscape, and identify the value creation segments in the value chain. When we have identified the most valuable companies, we assess whether they are investable with regard to their valuation, growth potential, management quality, balance sheet and other relevant factors. Finally, we make our investment decisions.  

    This horizontal stock selection approach has helped us to generate superior returns, for three reasons. Firstly, we are able to have a comprehensive view about individual companies as well as the entire industry. That helps us to filter out a lot of noise that may lead to poor investment decisions and eventually, loss. Secondly, studying each industry segment from upstream, midstream to downstream helps us to identify the future trends. That in turn helps us to position ourselves earlier than others and to buy before it gets expensive. Thirdly, we usually invest in a pair (both existing industry leaders and emerging players). By investing in the existing leaders, we are able anticipate the future of the emerging players that gives us a pretty good idea of whether the latter are worth investing.    

    In terms of sector allocation, we primarily focus on New Economy. That includes new media (e.g., social media and online video/music streaming), new energy (e.g. solar energy and electric vehicles), new consumers (e.g., online shopping and online travel booking) and new technology (e.g., robotics, driverless cars and wearable devices).   

  9. Your fund has delivered outstanding returns over the last couple of years and has comfortably outperformed underlying markets. Can you share with our readers some of your key winning themes over this period?
  10. The winners in the past two years were social media (e.g. Facebook and Tencent), electric vehicles (e.g. Tesla), online travel agents (e.g. Priceline and Ctrip), new consumers (e.g. China Lodging Group and Great Wall Motors) and smartphone related plays (e.g. ARM Holdings, AAC Technologies and Sunny Optical).

  11. What are your main risk management principles in limiting your downside volatility? How do you construct a portfolio to hedge your equity market exposures effectively in a primarily long-biased equity market portfolio?  
  12. The biggest risk in investment, speaking from experience, is we have not understood the companies well enough before we buy them.

    We do not believe in the conventional ways of risk management which are based on historical data and are backward looking. Diversification and stress testing could also lead to very wrong investment decisions. For example, the Greater China markets have been performing poorly in the past four years. But at the same time, we have seen many five-baggers and even ten-baggers. The way to win is to keep adding onto those great names when their share prices come down due to market noises. However, the conventional risk management principles may require fund managers to stop losses when the share price has fallen, for example, 20%. That may actually be the point we should buy aggressively. The best way to manage risk, speaking from experience, is to study the companies thoroughly and comprehensively. If we have solid understanding of the company fundamentals, we will be able to filter out most of the market noise and avoid making wrong decisions. As an extension of this belief, we actually think diversification could be counter-productive in risk management. If we have too many holdings in a portfolio, we are not able to spend enough time on each of them. That will result in poor understanding of the fundamentals and ultimately investment loss.  

    As such, we believe in concentrated portfolio and comprehensive research as the best risk management tools.             

  13. Your fund is relatively liquid, with investors allowed to redeem their funds on a monthly basis. While liquidity is of great importance to investors, do you find your universe of investable securities being noticeably restricted by the need to match the redemption terms of your investors, particularly in M&A and special situations that require time to play out and may be illiquid?  
  14. Very fortunately, most of our investors believe in the principle of long term investment as much as we do. In the past four years since the fund was launched, we had less than US$1.5 million of redemption. Even in 2011 when the EU debt crisis was heightened, investors redeemed less than US$0.5 million during the year. We do select investors as much as investors select us.  Investors are thoroughly told of our investment philosophy before they invest. Shorter term investors would usually walk away after the discussion.      

    So far, redemption and liquidity has not been a problem partly because of our loyal customers and partly because we own many mega cap names (e.g. Google, Amazon and Facebook) which account for at least 50% of the portfolio value. That said, we will be mindful of the liquidity risk as our AUM grows to a substantial level in the future.

    Speaking from experience, it is very rare, if not never, to have all illiquid names in the portfolio underperforming at the same time. When the share price performs, the stock tends to be more liquid even with smaller cap.     

  15. Could you share with us a rough breakdown of your investor profile (e.g. HNWIs, fund of funds, etc.)? What kind of investors are most aggressive in terms of allocations based on your fund’s unique value proposition? 
  16. Our investors are mainly corporations (60%) and high net worth individuals (40%). We do not have fund of funds clients. Corporate clients are the most aggressive in allocations because they do not face redemption pressure at their ends and they are very professional in long term investment.

  17. Lastly, please share with our readers some of your high conviction themes for the near future.

    For the next two years, I see more opportunities in wearable devices, Internet of Things, electric storage technology and virtual reality. I would also pay attention to the economic recovery plays in Europe.

Contact Details
Wallace Lo
VisionGain Capital Ltd
+852 3468 5398 / 5607