Shift your attention to small-mid cap value stocks
Reporter: Hong Pyo Lee | Date: Mar. 12, 2013
Money is honest. It floods into places where it can multiply itself and ebbs away from those with no momentum for future growth. The local investment management business is now facing an outright polarization. Some flounder while others remain hot. V&S Investment Management is definitely one of those faring quite well these days.
These days, institutional investors, as well as individual investors – needless to say, are asking V&S Investment Management to take care of their money. The reason is simple. The company has reported the top investment return among local investment managers over the past seven years. The company’s co-CEO, Chaewon Ri, said, “Sticking to our philosophy was the key to our success.”
Question: “V&S” is a unique name. What does that mean?
Answer: “V” stands for “value” and “S” “special situation.” The two letters represent our philosophy.
Question: “V” is easy to understand as it refers to value investment. But the “special situation” needs some explanation.
Answer: It literally means a “special situation.” Basically, we focus on undervalued companies with unrecognized value. We keep an eye on a handful of selected companies under a “special situation.” One of the most noticeable “special situations” will be an M&A.
Question: Is there a successful case in which “V” and “S” went hand in hand?
Answer: Hyundai Engineering & Construction can be the most noticeable case. We bought the construction company’s shares from the second quarter of 2010 to the first quarter of 2011 and posted 50% in return on investment. At the time, the construction company was the best in Korea but its stock price was low because it did not have the so-called “real owner.” We thought that the company would find the “owner” one day and the price actually shot up at the end of 2010 when bidders were locked in a fierce competition to acquire the company.
Question: The “value investment” has become a buzz word in the asset management business. Why is that?
Answer: The value investment can make more profits in the long run. In the case of the US stock market, which is the world’s largest, the annual average market return turned out to be 15.3% from the early 1970’s to the end of 1996. However, the return on stocks with low PER and PBR was 19.0% and 18.8%, respectively.
Question: It is difficult to assert if a stock is cheap or not. What are the criteria that you use to determine if a stock is cheap or not?
Answer: As mentioned earlier, PER and PBR are reliable indices. At the same time, we take a close look at the target company’s financials. Especially, we focus on its cash flows and assets – and its dividend policy, too. In addition, we see other factors such as the management’s competence, its business model and status in the industry. So you can say that we can take a comprehensive approach.
There is one more thing: We do not think highly of “growth potential” when we select a company to be included in our portfolio, because only God knows what will happen next. We assume that the company in question will not grow at all and then see its current situation, and decide to buy it or not. In fact, we invested on so-called “growth stocks” but their return was not impressive. Simply put, it was not our way. At the time, we realized that we needed to stand by our philosophy.
Predicting the future is like playing God. We pretend to believe that the target company will not grow at all in the future and then see its current value. We buy its share when we think that it is still “cheap.”
Question: It has been eight years since V&S Investment Management was established. How do you think your company did so far?
Answer: I am proud that we have remained safe but made profits at the same time. The company’s flagship fund, “V&S No. 1,” posted 67.4% in three-year return on investment, 22.3% in one-year return, and 4.6% in three-month return. According to KG Zeroin, a local fund evaluation specialist, our rates of return belong to the top 8%, 4%, and 2% for the three-year, one-year and three-month periods, respectively. In other words, we have been doing well so far.
Since the company was established in October 2007, we managed the money of wealthy private investors up to 2011. We began to receive money from institutional investors from early-2012 and currently about KRW 80 billion is under our management. I believe that institutions think much of our long-term performance. Currently the total assets under our management amount to KRW 170 billion.
Question: What was the most memorable case?
Answer: The above-mentioned Hyundai Engineering & Construction case was the most memorable of all and fits well with our investment philosophy. It ideally combines the strategy of putting money on a value stock with our focus on a special situation. I believe that we have more accurate view on M&A than other investment advisers because my partner, co-CEO Namho Lee, and I both worked for a foreign investment bank in the past.
Paradise can be counted as another success story. We saw its asset value and it paid off because it has become a “growth stock” with the rising numbers of Chinese tourists visiting Korea.
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