"Focus on events"
Reporter: Jong Hyun Lee | Date: Nov. 11, 2013
[Translation]
It was reported in September 2012 that Halla Climate Control (018880) had decided to acquire the global climate control business of Visteon, a leading American automotive supplier, which was the company’s largest shareholder. Following the news Halla’s stock price was on the slide, falling from KRW 24,100 at the end of August to KRW 20,000 in November. Many thought that the acquisition would weigh down on the company’s balance sheet.
However, an investment manager was daring enough to buy up the company’s underperforming shares. V&S Investment Management made a bold decision to invest in Halla Climate Control at the end of 2012.
“Visteon’s climate control business was undervalued by the market observers. At the same time, I thought it would create a positive synergy with Halla’s existing businesses,” said Namho Lee, co-CEO of V&S Investment Management. Halla acquired Visteon’s climate control arm in January 2013 and its stock price jumped by 45.6% from the beginning of the year.
V&S Investment Management is well known for its “event-driven” strategy that focuses on special situations that companies happen to face in their business. While asset managers and investment advisors focusing on long/short funds, V&S Investment Management has been looking for events that would lead to viable investments.
The investment manager’s event-driven strategy first drew the attention of market players when many companies vied for Hyundai Engineering & Construction (000720). In 2010 nobody knew who would be the owner of the construction company. Rumor had it that Hyundai Motor Group might not buy it and its stock price plunged. Considering its value and marketability at the time, however, V&S Investment Management decided to buy the construction company’s shares and the decision led the investment manager to post a 50% return in the investment. After that, V&S Investment Management has been known as “master of the event-driven strategy.”
The investment manager’s name, “V&S Investment Management” tells how it is focusing on special situations. The “S” in the company’s name stands for “Special Situations.” What does that mean? CEO Lee explains: “It means a big event that may affect a company’s value, such as M&A, spin-off, restructuring, bankruptcy, and lawsuit.”
Halla’s acquisition of Visteon’s climate control business was one of the typical special situations that V&S Investment Management was looking for. It is not easy for any company to purchase its largest shareholder’s global business because it may cause many financial problems. At the same time, however, the acquisition was expected to create huge synergy effects. The investment manager bet on the synergy effect and pulled off a success.
Paradise (034230) is another success story of V&S Investment Management’s strategy to make the most of special situations. The investment manager bought the stock of Paradise for four years from 2008 to 2011. At the time, the stock price hovered at about KRW 3,000 to KRW 10,000. Currently, it now fetches more than KRW 20,000.
“We saw its assets when we began to buy its stocks,” said CEO Lee. “Later its value increased when it consolidated its subsidiaries. We are not buying new stocks these days because the stock price has increased enough. But the company plans to consolidate its subsidiaries continuously so we will not sell the stocks now.”
The event-driven strategy sounds easy but in fact there are tons of factors that you need to consider. It is impossible to analyze the special events without taking into account decisions made by numerous stakeholders, macroeconomic factors and unique features of the industry which the company belongs to. Therefore the event-driven strategy is usually considered to be a high-risk investment method favored by hedge fund managers. It should be noted, however, that about 70% of V&S Investment Management’s funds come from institutional investors that usually favor safe assets. Then why is it that they put their money in V&S Investment Management?
<80 items in portfolio … diversified investment strategy to reduce risks>
V&S Investment Management is in the middle of Seoul’s posh Cheongdam-dong street where boutiques of luxury brands rule. However, the office is far from stylish and is crammed with hundreds of files. Each file has a name of a listed company that was visited and cautiously measured by the company’s analysts.
The counting went on and on. Seeing hundreds of files, I asked if they have analyzed all of them. The answer was “Of course.” An investment manager usually put money in about 20-30 companies. In the past automakers, refineries and chemistry companies were blue chips and most of asset managers channeled their money into a handful of good investment destinations. At the time, there was even “seven princesses,” or the top seven investment destinations.
V&S Investment Management did what others dare not to. It has 80 items in its investment portfolio, which is as large as that of a fund manager. CEO Lee says that they keep a large portfolio in order to cut down risk factors. Loyal to their principle, they did not increase their investment in automobile, chemistry and refinery industries in 2010 when these industries were on the lime stone. Its diversified investment has protected the investment manager from several market plunges in the past. Its first fund “V&S No. 1” was established in October 2007 or just before the bankruptcy of Lehman Brothers. The fund had to face financial crises from the start but its cumulative return stands at 123.2%. Surviving the market doldrums here in Korea, it has posted a return of over 8% year to date while the Kospi index fell more than 4% during the same period.
“We make a final decision after taking into consideration many factors including asset value, profit value, cash flows and dividend rate, as well as cyclical changes,” says CEO Lee, adding: “Our risk-adjusted rate of return is the highest among local investment managers.” The risk-adjusted rate of return is a risk-based profitability and if it is high it means that the company is making profits in a safe and consistent manner. The amount of assets under the investment manager’s management increased by KRW 200 billion from KRW 90 billion during the first half of 2012 to KRW 320 billion during the first half of this year.
“As the Korean stock market is hobbling due to unfavorable external factors, a growing number of institutional investors are putting their money in safe investment destinations,” says CEO Lee.
CEO Lee believes that undervalued companies, or companies whose stock price remains low for their performance or asset value, are drawing attention of investors from the second half of 2013. The market will be no more driven by large companies but it will be led by undervalue companies in the near future.
He predicts that the emerging trend will continue for next one or two years. He concludes: “The market experienced a turning point in June 2013 when the market was less affected by large companies. A market trend tends to remain unchanged for a while so I think the new trend will go on at least one or two more years from now.”
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