Cheah Cheng-Hye steers Value Partners through the crisis

Cheah Cheng-Hye is a name familiar to many in Asia's asset management industry. Together with his business partner V-Nee Yeh, Cheah co-founded Value Partners Group in 1993 and is among the pioneers of investing in mainland Chinese companies. As chairman and CIO of Value Partners, he has helped build it from a fund house managing the Value Partners Classic Fund (formerly known as the Value Partners A Fund) with $5.6 million in assets to a listed company managing 36 funds with $2.9 billion in assets. That flagship fund now has more than $430 million in assets. As of now, Cheah owns close to 36% of the fund house, while Yeh holds 18%.

Cheah is part of the very select list of 25 most influential people in Asia asset management compiled by AsianInvestor. He spoke with AsianInvestor about his experience in building Value Partners, how the fund house is surviving the crisis, and his plans for the future.

This is the first of a two-part interview.

Cheah Cheng-Hye

You keep stressing that Value Partner's corporate culture has contributed greatly to its growth over the years. Can you talk a little bit about your corporate culture? 

Cheah: The corporate culture is to put the company's interest ahead of the individual. Among other things, it means putting a lot of emphasis on professional excellence rather than individual greed. The theory is if the company becomes rich everyone will benefit anyway.

How do you ensure this corporate culture prevails?

You'll notice that everyone in the team with the same ranking gets identical pay and bonus. It doesn't make sense to reward one guy more than the other. We call it socialism to help capitalism.

How many fund managers do you have now?

We are divided into five clusters of around four to five fund managers. We lost one cluster because Jackie Choi decided to leave us last year.

How do you divide the clusters?

When our active funds under management exceeded $1 billion two years ago, we were very frightened that it would degrade our performance. I'm always a believer in the entrepreneurial spirit. If you have more than $1 billion under management, it's much harder to have an entrepreneurial spirit. So I split my fund managers into sub-teams. Each team functions like an independent boutique and it tries to run no more than $1 billion.

Starting last year we decided to assign sectors to each specific team -- so you now have a team that is in charge of real estate, gaming in Macau, aviation, utility, manufacturing, transport, etcetera.

Are you actively involved in the clusters? Do you still invest?

Yes. If I don't get my hands dirty, I will soon lose my touch. No one can really buy large amount of stocks without my personal approval. This is part of our quality control process. Typically, if you want to make an investment that exceeds 2% of the portfolio, you have to talk to me first. If you want to buy a stock with a P/E higher than 12 times, you also have to talk to me first. This is an additional layer of risk management.

We recently appointed in March two deputy CIOs, Renee Hung and Louis So. They joined us in the 1990s straight out of college. Eventually one of them will be CIO and then I will just focus on my role as a chairman.

We are about to revive the sixth cluster, to be led Fawaz Habel who will specialise in bonds.  We will be launching our first bond-focused fund within this year. As of now, we invest in bonds, as much as 15% but more typically 5%-10%.

So despite the crisis, you are hiring and venturing into new product offerings?

This is one of the central issues facing the management of this company for 2009. We have built up at great cost a very huge infrastructure. For an asset management company with an asset count of $2.9 billion to maintain a headcount of 80 is extremely extravagant. One of our corporate goals in 2004-2005 was to turn Value Partners into a world-class institutional fund manager. What that means is you have to build quite a lot of infrastructure when it comes to compliance, back office, accounting, client support and IT. Eventually we ended up with an infrastructure that can manage up to $10 billion, according to our estimate. In fact before the crash, in end-2007, we were managing more than $7 billion. We were getting quite close to reaching our target of managing $10 billion.

We built this huge infrastructure and then our AUM dropped by almost half overnight. So what do we do? One way to approach this is to cut costs like crazy and to get rid of all this surplus infrastructure, but another way, which is what we are doing today, is maintain our infrastructure and prepare for the market to come back. We are doing this for several reasons. It takes a lot of time and effort and luck actually to be able to get people to work together and build up this huge team that is world class and that can give a lot of comfort to institutional investors. Especially after the Madoff incident, people are very suspicious of smaller teams. The second reason is we believe the market is going to come back and when it does we will be one of the companies left that is independent, has a brand, and has the infrastructure. Others are shrinking head counts like crazy. We differentiate ourselves by keeping our people, letting investors know that we are still here, still a world class fund management company with all the support and infrastructure that you can ask for.

You did not have any cost cutting?

We did. We cut from 100 to 80 people in September 2008. Actually we cut 15 people and five left through attrition. Frankly speaking these people are not important to my main point, which is to build a huge infrastructure. The end result is we now have a management here that is running a factory operating at 30% capacity. If we were an airline, then only 30% of the seats are filled. We think that if we dismantle this infrastructure then we will undo at least five years of work.

Do you know when you can recover that AUM?

No. That's the thing about this business. The only thing we can do is to keep our fixed costs low so that we can remain profitable even with the underutilisation of our resources and facility.

How has the company been able to come so far since 1993 and how have you coped with the crisis so far?

Through our investment performance, gaining more clients, retention of key staff, and luck. We set up shop in 1993. It was an almost perfect coincidence that Chinese companies started to have IPOs. We were able to participate right from the very beginning with portfolio investing in mainland Chinese companies. We were already a pioneer right from the beginning and by emphasising bottom-up research all the more we were a pioneer. In those days there was very little effort to do bottom-up research of mainland Chinese companies. Most were making investment decisions based on sell-side research and the prospectus and the company itself.

Now that the circle has turned again because of the financial crisis, many buy-side companies are no longer doing their own research because it is expensive. We are one of the few who still insists on doing our own research. We receive all the sell-side research but we use it only supplementary to our own research.

From day one to now it's always the same thing - bottom-up research and company visits. Our team does between 2,000 to 2,500 company visits a year excluding phone calls.

Many of your fund managers have been with you from the start, with the average service around nine to 10 years. How have you been able to retain them?

We have been able to give share options to senior staff in general. We have this famous bonus system. In good years, we are among the best employers in the Asia Pacific region. Three of Value Partners employees were among the top 10 highest taxpayers in Hong Kong in 2006-2007. Our senior executives are among the highest taxpayers in our community.

For this year, I don't expect us to be in this list as our bonus has dropped so much. All this says is that we are very generous with rewarding our employees in good years. But our fixed salary is actually very low. In a bad year like 2008 and a year like this, people do not get much and some have to some extent live on their savings. The focus is to do good research and execution. At the moment, so far this year, we are ahead of the benchmark indices again, we are outperforming. You can safely assume that this year is turning out to be a good year for performance for Value Partners in general.