Why a single family office is side stepping the AI hype
Wellco Capital, a Singapore-based single-family office, is shifting its investment strategy towards value-focused opportunities.
Citing elevated risks in US equities and adopting a measured approach to artificial intelligence (AI)-driven companies, the firm emphasises balance-sheet strength and cash-flow stability as central pillars of its approach.
Wellco Capital
“US equities are trading at high valuations relative to their history and other major markets,” Kah Ken Kam, investment manager at Wellco Capital," told AsianInvestor.
The family office invests in multi-asset strategies to obtain endowment-like returns over the long term.
“There’s little margin of safety against risks like the strong dollar, persistent inflation, and lingering Trump-related uncertainties,” Kam added.
As of September 30, 2024, the S&P500 P/E ratio is 79.2% (or 2.0 standard deviations) above its modern-era average, according stock market tracker Current Market Valuations.
By this valuation, the market is highly overvalued, highlighting Kam's concerns.
On artificial intelligence investments, Kam expressed mixed sentiments.
While noting the transformational potential of artificial intelligence, he highlighted valuation concerns, particularly in the semiconductor space.
“I don’t know how to evaluate the future returns on the billions being spent on AI chips by big tech,” Kam said.
Also read: AI boom fuels hunt for niche bets beyond tech titans
“Meanwhile, US chip stocks trade at high price-to-earnings ratios, despite significant sales exposure to China. Trump may use the threat of a trade war as leverage, which remains an overhang on the global industry,” he added.
According to new research released by UBS, volatility in the broader semiconductor and tech sectors is expected to pick up in the near term, especially as President-elect Donald Trump’s tariffs loom.
But they also believe that solid fundamentals should provide support for quality semiconductor companies with exposure to the AI growth story.
Also read: How AI can help asset owners unravel the private markets puzzle
OTHER INVESTMENT FOCUS
While cautious about the broader US equities market, Kam continues to invest in specific opportunities, such as equity-linked notes on big tech firms.
“I believe their stock prices will trade sideways,” he said.
Other US sectors that attract his attention include online betting companies, T-Mobile, banks, and selectively undervalued commercial real estate stocks.
“I am selectively looking for unloved US commercial real estate stocks,” Kam said.
Europe, with its higher likelihood of rate cuts, offers a distinct investment landscape for Wellco Capital.
Kam highlighted German residential real estate, French shopping malls, EU offices and logistics, and UK nursing homes as areas of interest.
The family office recently added UK homebuilders to its portfolio, capitalising on the sell-off following the UK budget announcement.
“BT Group in the UK is also a core holding,” Kam shared, emphasising the importance of cash flow and balance-sheet strength in investment decisions.
Wellco Capital is also actively studying Boeing for potential exposure.
“Large order book, massive losses – can they get their act together?” he questioned, referring to Boeing’s substantial production delays and quality control challenges, which have significantly impacted its profitability in recent years.
RE-EVALUATING METRICS
Kam remains critical of oversimplified valuation metrics like EV/sales, particularly in venture-backed companies.
Enterprise Value-to-Sales is a popular valuation metric for venture-backed companies, especially for startups in high-growth sectors. It compares a company’s enterprise value (market cap + debt - cash) to its revenue, offering insights into how much investors are willing to pay per dollar of sales.
“EV/sales skips the conversation of profitability and business model efficiency,” Kam explained.
He pointed out, that this metric often fails to capture the full financial picture, potentially leading to mispricing and overvaluation in the absence of profitable operations.
Kam remains selective within AI-related investments, favoring companies that use artificial intelligence to enhance operational efficiency and engagement.
“I like companies like Netflix and Spotify, which are direct beneficiaries of artificial intelligence in driving engagement or improving cost efficiency,” he said.
Among his notable investments, this year is Reddit, which he considers an AI play due to its unique community base and relevance in training large language models.
“Reddit entries are showing up more often on Google searches,” he said. “It’s impossible to value Reddit except by comparing its market cap relative to Big Tech and considering Sam Altman of OpenAI’s stake in the company.”
One such example is a secondary limited partner fund interest in a 2020-vintage data center fund with Big Tech clients in the US.
“The lack of distributions in the private equity industry works well for me in this case, as I’m dealing with highly motivated sellers who may sell with up to a 30% discount,” Kam said.
This approach highlights the growing trend of private equity funds offering attractive secondary market opportunities, where investors can purchase limited partner interests at a discount.