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Value Partners set to launch Asia innovation fund

The fund will focus on undervalued stocks of companies that are believed to be transforming their sectors.
Frank Tsui, Value Partners

“We will buy stocks that are trading at a discount to their intrinsic value that we identify as having the potential to grow already strong and stable earnings,” Frank Tsui, fund manager at Value Partners told FSA.

The fund will aim to generate alpha “with a margin of safety”, he said. For instance, it will avoid start-up ventures trading on hefty multiples based on high expectations but with low current revenues of profits.

The Asia Innovation Equity Fund is expected to launch within the next four months and be marketed to private banks and institutional investors. The investment approach is likely to replicate closely the equity portion of the firm’s Asian Innovation Opportunities Fund, which includes fixed income within it mandate, and began selling to Hong Kong and Singapore retail investors in February.

Tsui and his team are searching for companies in Asia (including Japan) that are innovating “products, processes or services, and are able to charge a premium over their peers’ prices”. He would not disclose any positions.

The bottom-up approach incorporates quantitative and qualitative scorecards. The former analyses companies’ research and development expenditures, revenue trends and profit margin trajectories.

The latter encompasses a wide range of factors, including a company’s use of data, the uniqueness of its product, its potential to disrupt the value chain of its industry, its production or distribution models and pricing flexibility, and the amount of time its executives spend on research and development.

“However, it is also important that the company is able to ride the business cycle and make stable earnings throughout,” said Tsui.

Free cash flow generation offers protection during downturns, while finding what he considers high quality, professional management should ensure the business is run in a prudent manner.

Tech headwinds?

The fund faces headwinds in the current political climate. Ongoing efforts by the US aim to end China’s “forced technology transfers” and demand better intellectual property protection. Moreover, several Western countries have banned 5G wireless networks from China’s Hua Wei for reasons of state security. These political moves could slow innovation or hit the R&D budgets of mainland companies.

Perhaps unsurprisingly, Tsui expects IT to make up the portfolio’s largest sector allocation, with a 30%-40% weighting. However, he also sees plenty of opportunities across other sectors, including communication services, consumer discretionary and staples, industrials, materials and healthcare.

Geographically, the portfolio will also be spread across different countries within the region. There is a tilt towards companies in the more technologically-advanced nations of Japan, South Korea and Taiwan, because “internet and e-commerce penetration in south and Southeast Asia — with the obvious exception of Singapore — is still low at about 4% of population”, he said.

Chinese companies will also be prominent holdings, as consumer services content delivery systems continue to evolve rapidly. Tsui is particularly attracted by the healthcare sector in the mainland, where leading bio-tech companies are given strong government encouragement.

The potential investment universe in Asia comprises around 6,000 stocks. However, the Asia Innovation Fund  intends to be concentrated, with core holdings of between 40 and 50 stocks.

Part of the Mark Allen Group.