Could Korean equities offer the same chance for high returns as Japanese equities? I have discussed these questions with Chan H. Lee and Albert Yong of Petra Capital Management.
We have discussed the following topics:
- Introducing Petra Capital
- Investing atmosphere in the past 2 years
- Friendly activism
- Competition within Korea
- Example Company: Hyundai Motor Company GDR stock
- Example company: Youngone Corp stock
- Export orientation
- Idea generation
- How entrepreneurial is Korea?
- Good Investing Plus - A warm invite to apply
- Research process and K-pop
- Portfolio construction
- Resilience of the portfolio
- Closing thoughts
- Thank you
- Disclaimer
Introducing Petra Capital
[00:00:57] Tilman Versch: Dear viewers of Good Investing Talks, it’s great to have you back and it’s great to have Albert Young and Chan Lee of Petra Capital back. Albert and Chan, maybe you introduce yourself for a second because people might not know you and they can get to know you with the other interviewers that’s linked above here. So if you’re curious to learn more about investing career watches into you, but now the floor is yours, Albert and Chan.
[00:01:22] Chan H. Lee: Thank you Tilman for having us again. Hi, my name is Chan Lee. I’m the managing partner of Petra Capital Management. Petra is a value-oriented investment manager based in Seoul, Korea.
We manage assets on behalf of selected groups of university endowments, sovereign wealth funds, charity organizations, and family offices. The firm was co-founded by myself and Albert in 2009, but our friendship goes way back to 1995 when we were both graduate students at UCLA.
[00:01:53] Albert Yong: Thanks, Tilman. I’m Albert Young. At Petra, we are committed to creating long-term value for our clients by buying great businesses at undervalued prices. But from time to time we engage with the management to unlock shareholder value.
[00:02:11] Tilman Versch: So the most important question for you two as you have been a while in the game, who’s telling the better jokes? Is it Chan or Albert?
[00:02:19] Chan H. Lee: I think it’s me, but Albert says things otherwise.
[00:02:25] Tilman Versch: We have to find out in the due diligence process, but now let’s get serious. Let’s start with an easy question. Is Korea the winner of the China-US conflict?
[00:02:28] Albert Yong: Oh yes, unless the tension between the US-China escalates into a larger military fight. Many Korean industries and companies benefit from the current tension.
The purpose of the US policy towards China is to exclude China from the global value chains in key industries such as semiconductors, renewables and telecoms, et cetera. In the Three Chips Act, the US is trying to restrict Chinese access to key technologies in semiconductors because China is some years behind the top technologies.
Also through IRA, the US government is trying to ban Chinese EVs and EV batteries in the US market because in that area, China is one of the leaders in the world, and also US government is trying to curb investments in China to limit the advancement of the key technologies there.
[00:03:45] Chan H. Lee: Yeah. So we think that the bottom line is that the US-China geopolitical tension will create more opportunities overall for Korean companies to gain market share in the global market.
As ever mentioned, for example, the EV batteries sector is clearly one major industry that will benefit from this growing economic spat between the US and China. So even without friction, the Korean companies were doing fine. But with this friction, basically, Chinese products are banned in the US, which creates a protective market for Korean companies.
It’s mostly starting in the US, but to a certain extent, I think their policy is also influencing European countries. So I’ll be very surprised if you see any Chinese EV cars being sold in the US.
Also in Europe to a certain extent, there are some Chinese cars are being sold, but in the long term we probably replaced by European cars but the batteries are made in Korea. Basically, it’s now it’s almost inevitable that there’re going to be two economic blocks, one is the western block led by the US.
And then the Western world and the other block is China, which is, which is huge. But basically, before I’ll say there were more free-flowing activities between the two blocks. But because of this tension between the US and China, they’re likely to be two major blocks, and while the interchanges are going to still be there, it’s not going to be as free-flowing as before.
So for Korean companies, basically, they’ll belong to the part of the Western block. And then I think so if you look at the export numbers in the past, it was more to China, but starting a couple of years ago now Korean companies are exporting more to the US. And also forced to do more business in the US because of the IRA and so forth Korean companies are actually moving their factories to the US.
Investing atmosphere in the past 2 years
[00:05:52] Tilman Versch: Let’s switch from geopolitics. It is also important to think about investing more in the depth of investing and how is investing atmosphere in Korea changed in the last two years.
[00:06:03] Albert Yong: So recently the Korean Government has witnessed what the Japanese government has done to improve corporate governance in Japan. That’s probably one of the reasons why the Japanese market performed strongly last year and also early this year.
The Korean Government is also trying to take many measures to improve corporate governance and not just the government but many investors, both local and foreign are actively trying to make the management and many companies improve their shareholder value and return more cash to shareholders that’s why expect the Korean market to perform well this year and going forward.
[00:06:47] Tilman Versch: Is there also more pressure from activists in Korea, or how has activism changed?
[00:06:52] Chan H. Lee: Yeah, I would say that more recently there are more local and foreign activists who are agitating companies, and similar to Japan in the past, the war activism was not socially accepted.
But now, because of what we’ve seen in Japan and how a lot of investors in Korea, even local and retail investors come to the conclusion that Korea discounts are not good for the country, not certainly enough for their wealth, and people are beginning to actually demand some changes.
That’s mostly on the management to change their shareholder policy, paying more dividends and then treating the minority shareholders as if they’re the full owners of the company, rather than just shareholders without any vote.
So I think that is going to have a positive impact and we’ve seen that in Taiwan and more recently in Japan. And so the trend is there. And I think that Korea will go through the same exercise and so in that process, Korea discount is likely to get reduced in the longer term.
Friendly activism
[00:08:04] Tilman Versch: So when I did the research for the interview. You were called friendly activists by another investor. So how do you do an activism career?
[00:08:14] Albert Yong: So we had Petra, we are basically a value investor, but from time to time we try to influence or persuade or convince the management to unlock the shareholder value to improve the shareholder value and return excess cash to shareholders.
So the key to us is to find the management who are willing to change. That’s our style of activism. But we would say we are more of an engagement player rather than hostile activists.
[00:08:45] Chan H. Lee: Yeah, for really hardcore activists, our strategy is not even considered to be activists. We’re more shoulder engagement in a sense that if we think that the company has an opportunity to increase its value by paying out more dividends or you know buying back shares and cashing them, especially if they’re sitting on a large amount of cash that are being unused. That’s the extent to which we’ll get engaged.
We don’t intend to ever change the CEO or try to break up the company because that’s not what we do as investors we are going to get all engaged whenever we see there is a possibility of improving the shareholder value when the capital allocation policies are not being fully utilized.
Competition within Korea
[00:09:33] Tilman Versch: How is your competition in Korea? So what makes Petra Capital stand out compared to other firms in the Korean market?
[00:09:41] Albert Yong: So in Korea, we think that the percentage of value investors is small and even then most of them are not true value investors to us. Most of them are just investors who are buying low multiple stocks and many of the firms are part of the large conglomerate or the big Financial Group and not truly independent.
So that’s how we see the market environment in Korea and also that Petra, we are of course we are located in Seoul. We’ve been investing in Korean stocks for many years, but at the same time, we are also global. That’s the key these days because most industries in Korea and over the world are truly global, so we have to be global at the same time.
[00:10:32] Chan H. Lee: As you know, we met you a couple of times in Omaha. We are really true value investors in the sense of Benjamin Graham and Charlie Munger, meaning that we do all of our investing with the bottom-up approach and we do spend a lot of time on research, performing our own in-depth research as well as fundamental analysis.
And then try to find a price that is cheaper than much cheaper than much discounted to the entry value that we have calculated from the target. So to do this correctly you need to have a really strong research function and then we’ll be willing to spend a lot of time and also willing to be very patient.
But we see that a lot of competitors are investors here in Korea who are not either as patient or rely on the research done by other people. And they don’t go into very deep analysis of the companies.
So I think that’s where we’re different because we’ve lived in Korea for many years. We spent all of our career looking at Korean companies, so we do think that we have some insight and then a deeper understanding of Korean businesses and that we can analyze companies, and appraise companies more correctly than other competitors.
[00:12:02] Tilman Versch: So to follow up a bit, you also seem to have a very patient capital base, which is your advantage.
[00:12:09] Albert Yong: Yeah, that is true. But that’s because our strategy is to buy the stocks for the long-term to create values for the long-term that attract, again, long-term-minded investors, that’s why we have long-term investors mostly as our capital base.
[00:12:29] Chan H. Lee: Yeah. So our investors are slightly different from the typical Korean short-term investors in the sense that they’re all they’re willing to withstand some of the performance on a quarterly basis or even a yearly basis because we really look at our investment horizon to be three to five years.
So we view investing to be more like a marathon, not a sprint. Meaning that you know, we’re not trying to win every one-kilometer yardstick. We want to win the marathon but you know, we pace ourselves and then get to the, you know, being the first place at the end of the marathon rather than try to beat each one-kilometer interval.
So I think that’s the key to the concept of our investment approach. So that means, you know, we’re willing to invest in companies that are maybe not as popular or may be misunderstood by the market at this point. But if we can wait six months, two years, and then, you know, have the right patience, then I think the fundamental value of the company will actually play out at the end.
Example Company: Hyundai Motor Company GDR stock
[00:13:47] Tilman Versch: What are these companies? So can you maybe give one or two examples of companies you’re invested in? Maybe each of you can give an example. So what do you pick, Albert?
[00:13:57] Albert Yong: Yeah, one of the examples is a big company, the Hyundai Motor, but we bought the preferred stock of Hyundai motor. The Hyundai Motor is a global brand and recently it ranks third in terms of volume, but even seven or ten years ago it ranked 7th through 8th and 9th in the global market.
And especially in the EV industries, in the new markets, it’s 5th, and outside of China, it’s even higher. In terms of technology in EV cars and probably thanks to the huge value chains located in Korea, in terms of the EV batteries and if you look at the technology, the range of the EV cars is probably the longest in the world.
One of the reasons the Hyundai cars. If you look at the price between the common stock and the preferred stock, the gap, theoretically, in theory, the gap shouldn’t exist, but the gap has been around about 50% and at the price of the preferred stock, it trades only at two or three times its earnings, and the dividend yields even high at 7%.
And it also owns 1/3 roughly 33% of Kia Motor, which is also done at the main automobile company than Korea. And so we think it’s one of the cheapest stocks in Korea. But if you can say that most automobile companies in the world trade at a lower multiple.
But yes, that’s true, but that is probably because of the uncertainties surrounding the transition to EVs. But we think the Hyundai is likely to survive once the transition is complete. So given that fact and the current profitability and valuation, we think it’s one of the cheapest stocks. Recently this year, especially the previous stock went up a lot and the gap now is still 40% instead of 50%. But still, we think it’s one of the most undervalued stocks in Korea. It’s one of the major holdings for us.
[00:16:20] Tilman Versch: Right. You have no fear that it will get crushed by Chinese competitors like BYD or others.
[00:16:27] Albert Yong: Oh. Of course, I cannot say there is zero risk, but we think that of course BYD is a strong competitor, but that doesn’t mean that BYD will crash all the other competitors. And Korea also, if you look at the EVs and EV batteries, is one of the leaders alongside China, so we never think that Hyundai will be crushed by BYD.
[00:16:50] Chan H. Lee: No, that’s also related to the topic that we discussed earlier, the US-China tension. Meaning you know virtually no Chinese cars are sold in Korea. No Chinese cars are sold in the US, which is the largest auto market. And Germans, you know, obviously they used to make competitive cars, not the EV cars, but they’re likely to use crane batteries. So I think that’s the attention created.
You know already Hyundai is quite competitive, but it creates a protected market and I think Hyundai will benefit from that. And already in the US, they’re number two after Tesla in terms of the EV cars. So I think Hyundai didn’t read this extra protection, but you know sometimes you get lucky and in this case, I think Hyundai will probably survive as one of the legacy players that makes a successful transition into EV cars.
Example company: Youngone Corp stock
[00:17:47] Tilman Versch: Chan, do you also want to share an example of your investing strategy?
[00:17:51] Chan H. Lee: Yeah. So, you know, Hyundai is the brand that everyone recognizes. So I decided to pick this one company called Youngone. It spells it as Y-O-U-N-G and one but has nothing to do with age or being young. But this is a fashion company. It’s a global manufacturer of OEM sportswear and casual outdoor apparel for major brands. May I ask which you wear hood tee but…
[00:18:14] Tilman Versch: Iriedaily. It’s a European brand.
[00:18:20] Chan H. Lee: OK, because Youngone makes it makes the clothes for The North Face, Lululemon, Patagonia, and all kinds of major brands. So nobody knows it because they’re OEM manufacturers, but they’re known in the industry because they designed together with these brands.
So not only do they make clothes for Lululemon or yoga clothes for Lululemon, but they design together. So their margin is higher. And also interestingly, they also happen to be a 51% owner of a company called Scott, which is a high-end cycle brand based in Switzerland and you know they make really expensive bikes including e-bikes.
They’re very popular amongst cyclists and together they make well over 500 million net income, but they’re only trading at a $2 billion valuation, which means they’re only four times its earnings and the good thing about this company is they’re sitting on about a billion dollars in cash because they’re so successful at what they’re doing.
So if you take out the cash, it’s even cheaper. So we think that this is a company that is not that well understood because the name is strange, first of all, nobody follows this small company. But I think sooner or later people will begin to recognize a company and then once people recognize buying the company the start price will likely move, so this company is called Youngone.
Export orientation
[00:19:56] Tilman Versch: You mentioned that Korea is not the largest market. So as an example, how much of the revenue of the companies you mentioned is export or generally how high is the degree of export in your portfolio?
[00:20:09] Chan H. Lee: Yes. So for example Youngone I think is 90% outside of Korea, right? Patagonia Lululemon, they’re a popular brand in Europe, the US, and other parts of Asia. And in Youngone cases, more than 90%. Hyundai is also more like 70%, so we’re not really focusing on exporters only, but a lot of successful Korean companies that are growing, they’re likely to be more global players or at least the regional players because that’s where the growth is coming because domestically Korea is you know the size of all 50 million people, but popularity is not it’s not growing and it’s hard to expect growth within the domestic market.
[00:20:52] Albert Yong: So revenues outside of Korea probably should be the right measure instead of export because, for example, Youngone has factories mostly in Bangladesh. So that’s not the export from Korea.
So overall when we look at our portfolio companies roughly 60% of the revenues come from outside of Korea, that’s more than the average and we think that many Korean companies are expanding outside of Korea even though the Korean economy is not growing fast. So basically buying, the investing in the Korean market is buying expanding global cooling companies rather than betting on the Korean market.
[00:21:34] Chan H. Lee: So what Korea is trying to become is more like a, I don’t know if it’s right the right words to say but, like Germany, Germany or Europe. You’re based in Germany, but you sell all over Europe, you dominate the European market.
Here at least for the time being, because Korean products are very popular, conservative, very high quality and you know you add in the popularity of Korean pop culture. You know, the K-pop, the music, and the movies. You’ll be surprised when you meet any teenagers in Asia, all of them want to buy Korean products.
Well, there’s a Korean car, a Korean phone, or even the food and beverages. So we see that this will be quite an interesting phenomenon that will, you know last for a while. And the Korean companies are benefiting and our portfolio companies are reflective of their success outside Korea.
Idea generation
[00:22:26] Tilman Versch: You’ve been quite some time in the market and for me the question comes up, do we already know all the stocks in Korea or is how is your idea generation process going?
[00:22:40] Albert Yong: Oh, of course we know, not probably all. Most of the stocks in Korea we’ve been investing in Korea for more than 20 years. But again, we look at we use basically our screening tool to screen out to find the undervalued stocks.
But we look at the various factors. We look at the industry we look at the management, we look at each company’s competitors and also the clients and suppliers. And also we meet a lot of industry people and we also talk to people in other management companies and security firms. So it’s just not just one tool. We source our targets in various ways.
[00:23:29] Chan H. Lee: Yeah. Korea is technically an emerging market. That means the market is very volatile. So even when companies fundamentally are fantastic, if something happens in North Korea, something happens in the US, the interest rate goes up.
Then Korean companies are negatively affected, so we always look for, we have a list of very competitive Korean companies, but we are looking for time to buy them cheaply.
So whenever the market tanks because of the macro or other reasons that as I described then we invest in those companies, so you know, we’re not betting on the market as an activist or active managers. We’re picking 20 to 30 names. And so for us, we’re trying to find the best value in paying the cheapest possible for the highest quality businesses.
[00:24:23] Tilman Versch: But you also have these different themes. You look for new opportunities, especially growth themes like K-pop, the specialized engineering and you name the other two in your approach.
[00:24:39] Albert Yong: Oh, of course, yeah. K-pop related that’s mostly consumer brands that benefit from the popularity of the Korean culture, but another one is that we briefly talked about manufacturing and Korea is strong and high-tech manufacturing, especially in semiconductors. And there’s also the EV batteries.
And also, not just manufacturing itself. Korea is strong and has strong consumer brands and technology as well, for example, Samsung and smartphones and home appliances are dominated by Korean companies and even automobiles, as I briefly talked about Hyundai, is one of the global brands.
Also in Korea, it’s not that well known outside Korea, but Korea is very dynamic and entrepreneurial and the size of the VC investment compared to GDP is one of the highest in the world. So we have many new ideas emerging in Korea.
Not many people know many new business models start in Korea, examples are music streaming or user-created content and messaging all studying Korea. Although they fail to dominate the market outside of Korea. So we see a lot of new business models emerging, so we look at new companies. So there are many areas we look at many privacy areas.
[00:26:11] Chan H. Lee: The attractiveness of our Korean market is evaluated. So we look at companies that are misunderstood. So like you know, the typical sum of the parts when you add the three parts four parts together, but it’s only valued like one then like the partial headway as an example.
We look at a lot of the complex structures that the Korean companies have, and some people say I want to stay away because it’s hard to analyze but for us, when there’s a difficulty, then there’s opportunity.
So we think that we’re good at exacting these complex structures and figuring out where the true value is. So we also look at these complex structures and try to figure out where the real value is. So we look at some of the mispriced opportunities and also the engagement is somewhat related to this strategy in that as I described in the Youngones case if the company is doing fine, but they did so well that they built cash, but they haven’t done anything with the cash.
You know, they didn’t acquire a company or they didn’t do anything, then the right thing for them to do is return cash or, you know, buy back shares and cancel. And that’s the new thing that I think the Korean companies are likely to engage in and that’s where our sort of the engagement strategy.
[00:27:41] Tilman Versch: So you write them a nice letter or visit them at a capital market conference and talk to them?
[00:27:47] Chan H. Lee: Yes, very polite letter, and then you know, visit them. But also think about Korea, it’s a small country. So you know basically within one hour most of the companies are, you know based in Seoul but if you stretch out to Busan or Jeju which is more southern, we can still go within three hours.
So for us, we do have an advantage of being able to meet with the management to see what they think about how to shareholders and if they are honest or what they think about the future. Those are sort of sometimes quite important in the engagement type situations as well and I think the qualitative aspect of management is also very important. So we can’t really measure companies just based on the matrix.
How entrepreneurial is Korea?
[00:28:42] Tilman Versch: How entrepreneur is the Korean ecosystem? A lot of new companies coming to the public markets. I think there was some talking about [unintelligible] Korea, which might be quite interesting. What is your take on this?
[00:28:57] Albert Yong: So it’s true that the IPO market is very vibrant in Korea. And one good thing is that many Korean companies go public at an early stage compared to the US. In the US the companies tend to go public at a very late stage, so that’s not good for the public market investors. In Korea most companies go public early, so we can buy the big business at the early stage.
[00:29:25] Chan H. Lee: So if you look at, for example, the top 20 names, top two largest companies in Korea now versus 20 years ago, half of them switched, meaning that they’re newer companies, whether they’re in the newer technology or maybe this old company that actually moving to the Better Business like LG Cam, there are a lot of changes and the Koreans are I think very good at adapting to new environments.
So that’s a good indication. If you look a lot of European once again, I mean, I’m a bit biased here, but you look at the names of the companies, you only recognize all names, you don’t really see too many new names, but in the US, you see so many new names.
If you look at the, you know, 27 companies that they were not, you know, half of them weren’t even around 20 years ago, so similarly maybe not that extent like the US, but Korea, there are multiple new players that have become much larger.
So in the process, the founders became, you know, very rich, billionaires and so forth. And then that is good for society and also good for investors like us because we can always find newer companies and buy at an earlier stage.
[00:30:42] Albert Yong: And another good proxy to look at how entrepreneurial the career the economy is that they look at the top 10 or 20, which is the per people in Korea and more than half of them are entrepreneurs. But that’s not the case in most countries probably, except the US.
[00:31:01] Chan H. Lee: Yeah. So these companies are founders-managed companies like you know, NVIDIA, Meta, and similar, and the good thing about them is they’re different from the conglomerate mentality.
You know, they’re trying to build an empire, buying unnecessary businesses or unrelated businesses, and then, you know, try to maybe screw is too strong of a screw on their shoulders, but they don’t think that way.
They’re compounders, so their interest is very strongly aligned with the minority shoulders. So we like those companies that are founder-managed companies, they have a desire to become big.
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Research process and K-pop
[00:32:24] Tilman Versch: How is your research process going if you discover an interesting idea, maybe let’s take the K-pop example. So do you go to concerts and see what’s coming up there or what is? How do you access interesting companies and research them? in different fields or the K-pop field?
[00:32:44] Chan H. Lee: Yeah, we do get a lot of help as you know, I mean we’re the founders, but we do have other analysts, younger analysts who are more well-tuned into the K-pop. But we meet with industry experts.
For example, the K-pop, we with other musical label executives. You know, we go to the concerts as you mentioned you know and then we also go to the industry gatherings where they exchange ideas and also we meet up with the artists, the former employees, the competitors, and then people in the related businesses like content businesses maybe not necessarily K-pop, but even knowing about how the movies and drama because of the music is a big part of their product.
So we go through the basically 360° research. I think that helps us. I know K-pop has been more interesting, but even semiconductors, I mean we actually visit factories, we meet with the industry experts, the scientists, the vendors, the people that got fired from the company, people that are professors.
So we do try to meet everybody that is relevant so that we can have a better understanding of the industries and the companies.
[00:34:09] Tilman Versch: Do you have something, Albert on the research process?
[00:34:13] Albert Yong: Oh yeah, as Chan mentioned, then we use various activities to try to understand the business. For example, when we analyze the semiconductor business, for example, when we buy memory manufacturers like Samsung and the [unintelligible] we just not just try to understand the memory itself, but we look at, also we are also investing in many smaller companies in the value chain. So we know a lot of them.
So we look at in industry as a whole. We also not just meet the IR people from times but also meet a lot of engineers. I personally know a lot of engineers at Samsung because I also studied electrical engineering in college.
So and also most of the smaller value chain companies, even we have known them when even before they went public. So we just know the in the industry thoroughly. So that’s our approach and just like to win the war you need not just an army but you need the navy and air force. So you need a lot of the angles too.
[00:35:28] Chan H. Lee: Yes. Also because Korea is a big exporter, so you know, we don’t necessarily limit ourselves to just looking at the Korean materials or Korean newspapers, we try to read what other people say about Korean products, you know, try to read the Chinese newspaper. Of course, the Financial Times and all the English publications and also even for concerts. For example, we have like if one of our analysts traveling to Thailand, we ask him to go to concert Blackpink concert in Thailand where the analysts go to the supermarket and try to see if they’re really buying Korean snacks.
And on a recent trip of Albert to China, I think he went to try to buy some Korean ramen and he saw a bunch of them there. So he’s, you know, our research is basically a part of our daily life. I mean we do our work at the office too, but basically, we’re trying to study the business, study the brands, study who’s making money basically.
So I think the advantage that we have is that a lot of our investment team members are bilingual and we tend to travel a lot. So we try to see the views of others outside of Korea.
[00:36:49] Tilman Versch: But Albert was also allowed to eat some Chinese food? Is he only allowed to try Korean food in China?
[00:36:59] Albert Yong: Yeah, but that, yeah, as Chan mentioned even when I travel personally, I always try to find something. So I always visit even small mom-and-pop stores and big supermarkets and also look at the brands of the cars and this is part of the research, it’s just part of our life.
Portfolio construction
[00:37:19] Tilman Versch: How do you construct your portfolio and career? So what mental models do you use? You have this mentioned 20 to 30 stocks, but how do you select them? Is there an idea to have the defensive part more for the offensive part or is it just driven by your valuation?
[00:37:39] Albert Yong: Yeah, of course. The primary criterion is to buy undervalued stocks, stocks with a larger margin of safety. So we try to buy undervalued stocks.
That’s basically how we construct a portfolio, but we also look at the industry waiting because of course we never tried to follow the weighting of the market, but we tried to make sure that our portfolio is somewhat diversified because when we buy just simply buy undervalued stock sometimes we buy only stocks in one or two industries, so we try not to concentrate on one or few industries.
So we try to concentrate, but at the same that we try to be diversified as well. So we try to strike the right balance.
[00:38:40] Chan H. Lee: Because if you just focus too much on value, you know, given the market sentiment or market situation, one sector could be so much cheaper than others, but we don’t want to put everything in that one basket.
That happened maybe a couple of years ago in the semiconductor business. So we do to keep ourselves honest and make sure we’re diversified. We compare our sector composition with the market composition and then we assess the attractiveness of each sector.
So it’s basically a combination of value and then the prospects, but you know we do pay attention to the sector weighting and so forth. So that makes sure we’re not biased toward one sector, you know, although our investors allow us to underperform the market.
We don’t want to put all of our money in one sector, one basket that will be we all say that will be too risky. So you know for us, you know, we want to be strong in offense but we want to stay play strong in defense.
Resilience of the portfolio
[00:39:50] Tilman Versch: How do you make sure that the portfolio is resilient so that, for instance, the factor problem with exports to Thailand and China does not influence you too much or…?
[00:40:04] Albert Yong: So that’s why we try to understand the business thoroughly. Also, that’s why we don’t buy just one or two stocks.
So we think if we understand each business does well, then buying 20 to 30 stocks are fairly diversified, and fairly resilient to any risks, and also we keep monitoring the developments in each of our portfolio companies. So that way we try to reduce risks.
[00:40:35] Chan H. Lee: No, because that goes to buy the highest quality business at the cheapest valuation. So meaning, by definition, once we make a buying decision it is likely that the company has a very high margin of safety, has a very good business model, and offers durable products with brands, and they’re likely to suffer less when there’s an economic downturn.
So it’s bottom up. So it’s company-specific. If you think about the worst situation, what happens if there is suddenly China bans Korean products and we’ll see, you know, are they too exposed to China or are they able to sell their products in India or elsewhere?
You know that kind of stuff. So basically it is a constant review of the potential downfall as well as the vulnerability to macro situations. And when we conclude to buy, that means we think that these companies are likely to, of course, the short-term they could be affected but we always think about the long-term.
Closing thoughts
[00:41:53] Tilman Versch: Is there anything you want to add because I’ve ended my question list for the interview something that’s interesting to know about Korea, something we haven’t discussed? Feel free.
[00:42:05] Albert Yong: Oh yeah, I think it’s a good time. Right now is a good time to invest in Korea because last year the Korean economy slowed down, but it’s turning around and we expect the Korean economy to grow faster than before.
Also, the valuation is cheap. But there is a strong possibility of multiple expansions because of the corporate governance improvement and also a strong possibility, probably not this year, but of upgrading to the developed market in the MSCI index. And also the exchange rate, the Korean won along with most other Asian currencies has depreciated against the US dollar since the pandemic started.
But now we think that once the US Feds pivots to lowering the rate, then probably that will affect all the global currencies and especially Asian currencies, including the Korean currency. So we think that the current market also, as we said earlier we have many promising industries as well. So it’s a good time to invest in Korean stocks.
[00:43:14] Chan H. Lee: Yeah. So also, you know, we started off firm in 2009, but you know since then, I mean, the Korean market actually has done quite poorly. The annualized return since September of 2009 for the market benchmark is 3.4% annualized compared to what has been done.
Only the worst market is probably China, because of the recent downfall. The US did so much better, and India, and so forth. So I think. But you know that type of trend cannot last forever, which means you know if you go back to ten years ago, this is when actually emerging market was doing better than the US market.
So I think given the valuation and given the trend, we think that maybe you know the emerging market, including Korea will come back and I think the good time to invest is when the people are pessimistic.
So as you know, the famous saying that, “Bull markets are born on pessimism” and we think Korea may be the right place to invest. And you add in the factor that governance will improve and you know in Japan it took almost 25 years for them to recover back to where they were.
So you know, compared to that, Korea is not that bad. And also as we mentioned, we’re not really betting on the market. That proves why, you know, despite the lackluster market performance, you know our fund has done over 10% annually in the past 15 years.
So we think that if you can be a little bit more adventuresome and be, sort of, you know, have the courage to look into something different and then spend a lot of time on studying companies. I think there are actually a lot of opportunities for value hunters in Korea.
[00:45:17] Tilman Versch: Maybe last question, because you mentioned this upgrade from developing to developed market, what mean for Korea also in terms of flows because if as a developed market I think it’s more interesting for certain buyers to invest in Korea then.
[00:45:35] Albert Yong: So I think many of course, not all the global investors, just follow the index rating. So that’s why we expect more capital inflows once the market is upgraded to a developed market status.
[00:45:52] Chan H. Lee: Yeah, that’s right. Because the emerging market tends to attract certain types of investors, they’re more volatile whenever there is some kind of a crisis or perceived crisis than people pull out of money.
That’s the sort of right now Korean markets suffered last year compared to other developed markets because of China risk and once we become a developed market. They will attract certain types of more and more pensions and sovereign wealth fund types of investors who tend to have more long-term views.
That means we will be probably subject to less volatility and then also more inflow of the more stable capital. So in that, I think it will be positive. I think some global Investment Banks, I think as Goldman Sachs that if Korea moves to the developed market status then the net flow of 60 billion that that’s how they calculate it. I’m not sure how accurate that is. But they seem to think that it’s that positive.
[00:46:54] Albert Yong: When investors buy emerging markets, their basic idea is to buy growing economies such as China and India, and Korea is no longer growing rapidly. It’s more of a mature economy. So Korea remains in that category is a net negative for the Korean market, I think.
[00:47:15] Chan H. Lee: Yeah. So Tilma, I would encourage you to visit Korea and to see it yourself. I mean, you know, the MSCI continues to create to be an emerging market. But in terms of infrastructure, technology, education, all the numbers, I mean it is the 13th largest in the world. But to put Korea in the same basket with Argentina, Turkey, and South Africa I think it’s, you know nonsense.
As you know, the IMF already classified Korea as be advanced economy. And so that’s Footsie, this is MSCI. It’s the Americans, they’re persistent. But it also has to do with their business as well because the index is a big business career is a big part of emerging market but in the end, any category in the longer term should reflect the reality.
So I think Korea will definitely move to the developed market standards, maybe not next year, but in a few years for sure.
[00:48:14] Tilman Versch: The estimated 60 billion what do they mean in comparison to the current market cap of the Korean market?
[00:48:24] Chan H. Lee: The Korean market is about $2 trillion. So it’s not a huge plus, but it’s a net meaning so it is a positive plus you know we mentioned about the retail getting bigger in Korea.
So at least we won’t see too many people pulling out of money. So for example, since COVID, I think a lot of international investors pulled out of money. I think it’s well beyond I think 50 billion its total amount of net outflow since COVID. So you know you add in, I mean it is a small compared to the large size of the market, but it’s a small number that makes the market move.
Thank you
[00:49:10] Tilman Versch: Then thank you very much for the interview and thank you very much for your sharing the insights on Korea. Thank you very much for the audience listening till now and I hope to see you soon again. And for now, it’s bye-bye. Bye.
[00:49:25] Chan H. Lee: Bye bye.
[00:49:26] Albert Yong: Bye bye. Thank you very much.
[00:49:26] Tilman Versch: I really hope you enjoyed this conversation. If you did, please leave a like in the comment and for sure subscribe to my channel.
Disclaimer
[00:49:36] Tilman Versch: Traditionally, I want to close this conversation with the disclaimer, so here you can find the disclaimer. It says, and please do your own work. This is no recommendation what we are doing here is just a qualified talk that helps you, but it’s no recommendation. Please always do your own work. Thank you and hope to see you in the next episode. Bye bye.