Physicist's life takes on a new dimension While doing his PhD in physics, Au King-lun, now the chairman of Hong Kong Securities Institute, would dream of winning the Nobel Prize and devoting himself to studying theories about black holes and the Big Bang. But he ended up joining the financial industry in 1987 to use his mathematical and analytical skills in creating investment models. The models he created seemed to be working fine for a while. But 10 months into the job, the market crashed. That, however, hardly jolted his confidence in the financial market or investment models. 'What you need to learn is the limitations and weaknesses of your model,' he said. Dr Au has since applied his strong academic background - a bachelor's degree in physics from Oxford University and a PhD in theoretical particle physics from Durham University in northeastern England - to the investment industry for two decades. Starting out at Baring Asset Management in London, he moved to GMO (Hong Kong) and later joined HSBC Global Asset Management (Hong Kong) as director and head of institutional business for the Asia- Pacific region. Last month, he joined the Financial Risk Management hedge fund as chief executive. FRM is a global fund managing US$15 billion of assets for institutional clients, including sovereign wealth funds and corporate pensions. As HKSI chairman, Dr Au believes better training could improve the quality of brokers, fund managers and the market as a whole. He works passionately to achieve that goal. You studied physics. Why did you become a fund manager? Purely by chance. As I finished my thesis ahead of schedule, I decided to take some time off while waiting for the viva [oral] exam. I came to know that Barings was looking for physics and mathematics PhDs to join its investment banking division to work on investment models. My professor would joke that Barings was possibly trying to find someone to teach it how to spend money. After working at Barings for a few months, I could not go back to academia. Part of the reason was the good [remuneration] package I was getting. Also, I began to find the real world of finance more interesting than the world of physics. Did your investment models work? When I first joined Barings, I was a junior quantitative analyst responsible for implementing portfolio insurance. The model worked well until Black Monday on October 19 that year. Portfolio insurance was blamed for the market crash of 1987. I still feel a chill running down my spine when I look back to that day. It was then that I learned my first valuable lesson - unlike physics, finance or human behaviour cannot be modelled with precision. The only way we can learn from our mistakes in financial markets is through proper training. It did not mean our investment models were a total failure, but we had to improve them. We also had to learn the limitations and weaknesses of investment models through stress tests and incorporate risk-management measures. Do you think proper training can create a perfect broker or perfect investor? I believe in the importance of training. It may not create a perfect broker or perfect investor, but experience is something that can be passed on. By sharing experience, we learn to appreciate the limits of financial models and understand the products we sell. As chairman of Hong Kong Securities Institute, do you find academic knowledge and training to be vital to the intermediaries in the city? Definitely. It is useful to provide technical training for brokers and their back-office staff. The HKSI is introducing the Investment Administration Qualification [for back and middle office staff] and we hope this will help raise industry standards in these areas. What tips do you want to give investors? Investors should always do their homework, understand the macro environment and set a loss limit before investing. There are no free lunches, so everybody should calculate the risks and refrain from speculating. My investment philosophy is simple - being a quantitative analyst by training, I believe in mean reversion theory, or making investment decisions by studying whether share prices are in line with the market average. When share valuations deviate too much from the long-term trend, it is time to become a contrarian. On the other hand, when valuations start to regress to the mean, the trend is your friend. What was your first investment? When I joined Barings in January 1987, I invested in some penny stocks based on rumours of possible takeovers. But eventually, the deals did not go through and the shares were rendered worthless. These were my worst investments. I have since learned to do my homework before any investment. What was the best investment decision you ever made? I purchased Hong Kong Exchanges and Clearing shares at below HK$20 after the Sars [severe acute respiratory syndrome] outbreak in 2003. The decision was based on the mean reversion theory, as I believed Hong Kong stocks were very attractively valued at the time. I do not hold the stocks any more. [Hong Kong Exchanges and Clearing shares peaked at HK$268 last November. They have been hovering around HK$100 lately.] Could you shed some light on your current portfolio? I liquidated most of my equity holdings some time ago when I thought another major mean reversion was imminent. I am into property and hedge funds, and have a monthly investment saving scheme. Are your personal investments affected by your position as chief executive of FRM Hong Kong? Yes. I am more convinced that absolute-return investing, which is basically investing with a stable pre-set targeted return, is the key to sustainable and successful investment. Achieving real returns, which means returns that beat inflation over time, is far more important than chasing relative returns to outperform the indices. I invest more in hedge funds now because they offer more flexible investment strategies than conventional equities and bonds. Some critics mistakenly believe all hedge funds are risky. In reality, there are many different types of hedge funds, with different risk levels. How do you see the current market? Do you think the market has bottomed out or do you expect the Hang Seng Index to go down further? The market is suffering the most serious crisis of confidence since the second world war. It will continue to be volatile, at least in the short term. What do you do when you lose money for your clients and they complain to you? Usually I discuss with clients their objective. If they want long-term investment, I tell them they should not worry too much about short-term volatility. If their investment objective changes, I work with them to design a new strategy that suits that new objective. Can you describe your investment style? Are you a saver, a spender, a speculator or a long-term investor? I am a saver and invest for the long term. I hold my shares for at least a year. Do you see yourself as rich or poor? I am rich in terms of happiness. I get up in the morning every day wanting to do something constructive and spend more time with my family. I strongly believe that a man is rich or poor according to what he is, not according to what he has. As the ancient Chinese philosopher Lao Tze said: 'He who is contented is rich.'