No-fee fund aims for 12% return

Teh Hooi Ling
14/11/2012

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.