Sid Choraria is Vice President of Investments at APS Asset Management.
Please tell us about the investment mandate of APS.
APS Asset Management was founded in 1995 by its Founder & CIO, Wong Kok Hoi, in Singapore. Mr. Wong has more than 35 years of investing experience in Asian markets. We celebrated our 20th year anniversary last year and our core values and vision of APS have remained largely unchanged. Mr. Wong founded APS to i) serve global institutional investors; ii) specialize in Asian equity investments; and 3) employ investigative research and independent thinking in the investment process. These 3 pillars still anchor APS and have remained the firm’s constant driving force through two decades of ups and downs.
The firm, one of the pioneer home-grown boutiques in Asia and has grown since 1995: It started with assets under management of about $15mm, which has since grown to nearly $2.8bn; APS started with 7 staff and 1 office, which has expanded to more than 60 staff and 6 offices worldwide as at end-August 2015.
What makes the Asian markets a fertile hunting ground for stock picking and generating alpha?
Asian markets are more inefficient than the developed Western markets. They are best exploited by 1) experienced local investment professionals and 2) deep fundamental and probing research. At APS, we have local professionals who speak the languages and have closely followed their sectors/countries over the years, field investigations including interviews with competitors, suppliers, industry specialists and verification of information with independent sources. In Asia, fundamental research tends to be preached more than practised and we tend to find analysts placing blind faith in reported numbers and over reliance on secondary research. Asian markets also tend to be short-term focused, and therefore taking a longer view to a business is a competitive edge for us. Asian markets from China, India, Japan, South Korea to Indonesia are disparate and complex – political, regulatory, culture, languages spoke–and having a long history investing in the region has enabled us to appreciate the differences and nuances.
Please tell us about your background and how you became interested in value investing. What events or people shaped your investment philosophy the most?
Prior to joining APS in 2014 in Singapore, I worked at Goldman Sachs and Merrill Lynch in Hong Kong. I became interested in value investing during the financial crisis when I stumbled across the early partnership letters of Berkshire when Mr. Buffett was still in his 20s. I was hooked after rereading them and re-read as much as I could, including Seth Klarman, Howard Marks, Mohnish Pabrai and Michael Burry. In 2013, I ended up wishfully writing a letter to Mr. Buffett with an investment research write-up I had written and was thrilled to hear back from the Oracle which greatly
shaped my desire to pursue investment research as a career and I joined APS as a research analyst.
How would you describe APS investment philosophy? Help us understand the process to go through from idea generation to the investment decision.
APS’ philosophy is centered on investigative research, rigorous valuation work and constant testing of our own investment theses. Understanding intimately how business models and companies make their profits and cash flow is crucial to avoiding torpedoes and generating alpha. We try not to do what others do. In other words, you have to be a contrarian, independent thinker. When investors all rush in, you had better dash for the exit. We focus on generating original ideas. Ideas can come from popular and unpopular industries/stocks, new industries/maturing industries as well as company specific leads for our short and long books. Different types of companies/stocks produce different types of alpha and we broadly classify them into four clusters – structural (long-term business trends), economic, dynamic and opportunistic. Identifying the source of alpha is important in portfolio construction. We would construct our own earnings and valuation model and spend time investigating and validating the reputation of management. We closely monitor changes in company and industry fundamentals.
How has market volatility affected your investment process, and have you tweaked your approach in any way as a result?
Volatility is a friend of a value investor and we welcome it as opportunities to generate additional alpha. We make a distinction between price volatility and fundamental fluctuations. We sell a stock when fundamentals deteriorate rather than when the price has weakened. If anything, we adhere to our investment process more steadfastly in times of heightened volatilty.
How do you assess the quality and incentives of management?
Charlie Munger is said to pay enormous attention to incentives. We also spend huge amounts of time understanding why management is allocating capital or acting or behaving the way they do. We look for management who prudently deploy shareholder funds, focusing on return on invested capital – and who stick to their core competency. Has management been buying back stock? Getting into several new businesses with a limited track record, or going on an acquisitive binge for the sake of growth is often times detested by us.
Can you recommend one or two recent books that have given you new insights into the art of investing?
Creative Cash Flow Reporting is a must read for any serious investor to understand sustainable operating cash flow. The other one is Daniel Kahneman’s book Thinking, Fast and Slow, which describes aptly the irrational side of decision making. Other than that, we would recommend investors print out Mr. Buffett’s partnership letters and read it repeatedly.