January 28, 2000
Weekend Asia
'Hunt and Hold' Strategy Works
For Greater China Fund Manager
By ERIC BELLMAN
Staff Reporter of THE WALL STREET JOURNAL
In these days of rapid-fire buying and selling, Billy Chan's strategy practically qualifies him as a contrarian: He buys good companies and holds onto them.
While fund managers trade as much as twice the value of their whole portfolio on average each year, Mr. Chan, the lead manager for five Asian funds for Invesco Asset Management Asia Ltd. in Hong Kong, says his turnover is only around 70% of the value of his fund. He has held onto some of his favorites for years.
"I wouldn't say I'm conservative," says Mr. Chan, 33. "I'm prudent."
His prudence has paid off. The $73 million Invesco GT Greater China Opportunities Fund he manages has been among the three best-performing greater China funds over the last six months, year, three years and five years. It rose 80% in the last 12 months -- the Hang Seng index, meanwhile, rose 60% -- making it third out of 17 Greater China funds monitored by Standard & Poor's Micropal. (While the Greater China category includes funds with stocks from China, Hong Kong and Taiwan, the Opportunities fund is invested only in China and Hong Kong.)
Mr. Chan says his fund has done better than most others because of an extra boost from shares such as trading company Li & Fung Ltd. and micromotor maker Johnson Electric Holdings Ltd. He has been holding onto the shares for more than three years, riding rallies of more than 170% for each last year, while other funds cashed out or switched to faster-moving shares.
"It's very tempting to sell it after a 50% rise but we are willing to hold on to quality companies," says Mr. Chan, who holds a master's degree in engineering from Cambridge and has managed funds for Invesco for seven years.
He says a well-managed company will find a niche that will consistently generate profits, and that it will be able to adapt to protect itself from competitors and maintain growth. Short-term investors may jump in and out -- and sell once they believe the share has become too expensive -- but Mr. Chan says that once he's located a well-managed company, he digs in.
How does he find them? Like many investors, he begins by looking at economic cycles, industry trends and company news. Then Mr. Chan -- who spent three years examining company books as an accountant before moving to fund management -- filters out promising companies using his two favored valuation techniques. "I was a bean counter, so I already know what companies do to their books," he says.
First he looks at return-on-equity (one year of earnings divided by shareholder's equity). "ROE looks at the whole balance sheet" by condensing a company's assets, liabilities, profits and shareholder base into a single number. He says return-on-equity should be consistent, and between 15% and 25% in most cases, to attract his attention. Then he turns to the PEG ratio (the projected P/E ratio divided by projected growth -- lower numbers suggest better value), which he says is a better measure than price/earnings ratio for fast-growing high-technology companies.
Mr. Chan says the numbers look good for Li & Fung, which has more than 100 years experience supplying large companies around the world with everything from textiles for Gap clothing to action figures for toy stores in the U.S. This profitable niche has kept Li & Fung's return on equity above 30% and gives it a PEG ratio of 1.54. (He uses current year P/E and average projected growth for the next five years.) The share has shot up more 500% in the three years he has held it, but he has no plans to unload it, believing strongly it will keep climbing.
Johnson Electric is another long-term holding that has paid off. Shares of the company, which exports tiny motors used in electric toothbrushes, drills and vacuum cleaners around the world, have risen more than 500% in the three years he's held them. It's ROE has hovered near 20% and its PEG is 1.93. Mr. Chan says he'll only sell this share if there are indications that other companies are taking over the micromotor market.
One of his new positions is Computer & Technologies Holdings Ltd., which makes money by helping companies set up computer networks and access the Internet. The share, with a ROE of 23% and a PEG ratio of 1.4, has climbed more than 1,300% since it first became part of his fund in September 1999. But Mr. Chan plans to continue holding on. Computer and Technologies has won a contract to build a system for the Hong Kong government that allows people to pay taxes and bid for government projects online, and he's confident the company's management can parlay its connections and experience into profit-boosting Internet businesses.
Another new favorite: TCL International Holdings, one of China's largest television makers. It has an ROE of around 35% and a PEG of 1.2, Mr. Chan says. The share has more than doubled since he bought it in November. He plans to retain this stock as well, because he thinks its management is smart enough to expand its Teleweb venture -- which gives Chinese users Internet access through a box on top of their television sets -- into a real moneymaker.
Mr. Chan says a couple of his favorites are decidedly dull-sounding polyester fiber makers, Yizheng Chemical Fibre Co. and Beijing Yanhua Petrochemical. The shares don't look good in ROE terms -- both are below 10%. Yet, they are worth holding onto, he says, because they're likely to get their day in the sun once international demand starts lifting petrochemical prices again. The shares have risen more than 50% in the last year; Mr. Chan is holding out for as much as a quadrupling in the share price if polyester and plastic prices bounce. That could happen this year, he says.
Write to Eric Bellman at eric.bellman@awsj.com1
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