Top stock picker Derek Kwong says 'be boring'
Derek Kwong is recognised as one of the best asset managers in Hong Kong, in large part, he says, because he avoids 'hot' stocks
For Derek Kwong, one of the best-performing China-focused asset managers, it is more important to pick the right stocks than to forecast the upper limit of the stock index.
Kwong, the founder and chief investment officer of Hong Kong-based Basic Asset Management, achieved a 58 per cent investment return for the Golden Bamboo Fund under his management in 2012, leading Bloomberg to rank him the China hedge fund manager of the year for funds under US$100 million.
For comparison, Hong Kong's benchmark Hang Seng index gained 23 per cent last year.
Kwong said his fund has generated an 11 per cent gain in the first two months of this year, against a 1.6 per cent rise in the benchmark index during the same period.
He said that rather than rushing into so-called hot sectors, such as solar power stocks, he preferred buying "boring names": stocks which may have a potential for a re-rating and become highly sought-after.
Kwong said he did not have a preference for a specific sector, either, and investing in Hong Kong's stock market was best done on a case-by-case basis.
This approach led him to accumulate investments in companies with low valuations which jumped later on the back of a change in government policy or earnings improvements.
Kwong has been buying gas and chemical firms since 2010, both of which turned out to substantially outperform the index.
"People always have a sector preference but I don't. I focus on companies with good corporate governance, attractive valuations, and a potential earnings turnaround from distressed value," said Kwong, who majored in accounting at university and began to make his first stock trades when he was 14.
Before he decided to set up his own shop, Kwong held senior positions at a number of large fund houses, including Lloyd George Management, the asset management arm of Citigroup, and Winnington Capital.
Now, he said, he enjoys the freedom to apply his own investment philosophy.
Kwong describes his four investment principles as "the four Cs". "I always stick to my '4C' rule: China focus, corporate governance, consistency, and confidence," he said. Consistency meant avoiding taking aftermarket trends and confidence meant belief in the firms he chose and remaining unmoved by short-term turmoil in share prices.
There are also three criteria that are essential in Kwong's stock-picking process - consistent high dividend payout ratios, cheap valuations and solid earnings growth. A good company should have a dividend payout ratio of no less than 30 per cent and earnings growth of at least 20 per cent to 30 per cent.
To find value in the market, one needs to look for names with price-to-book valuations of below 1.0; forward price-earnings ratios of below 8 times; and offering at least a 3 per cent dividend yield. Most importantly, the company should have good corporate governance, Kwong says.
Another clear "buy" signal is when management purchases its own shares in the open market, which is a "reflection of self-confidence" in the company.
Aside from these "hardcore" requirements, some soft criteria also influence his investment decisions: "Office decoration, headquarters location, the budget in treating visiting investors."
The Hang Seng Index is likely to be 10 per cent higher than its current level at the end of the year, Kwong says, and this year he expects to secure some undervalued stocks with potential to generate more than 50 per cent return by then.